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Potlatch Corporation (NASDAQ:PCH)

Q1 2013 Results Earnings Call

April 23, 2013 12:00 PM ET

Executives

Eric Cremers - President, Chief Operating Officer and CFO

Michael Covey - Chairman and CEO

Analysts

Mike Roxland - Bank of America

Gail Glazerman - UBS

Chip Dillon - Vertical Research Partners

Josh Barber - Stifel, Nicholaus

Steve Chercover - D.A. Davidson

Matthew Dodson - JWest LLC

Mark Weintraub - Buckingham Research

Joshua Zaret - Longbow Research

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch First Quarter 2013 Earnings Conference Call featuring Eric Cremers, President, Chief Operating Officer and Chief Financial Officer; and Michael Covey, Chairman and Chief Executive Officer for Potlatch Corporation.

All lines have been placed on mute to prevent any background noise. After the speakers 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

Well, thank you and good morning. Welcome to Potlatch's earnings call to discuss our first quarter 2013 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'll make some introductory remarks, and then I'll review our first quarter results in more detail. Mike?

Michael Covey

Thanks. Good morning, everyone. First quarter results were a bit stronger than we expected. Our wood products division continues to post impressive earnings as the significant recovery in lumber prices has benefited the division immensely.

Our resource division continues to performance favorably as well, especially in light of our harvest deferral strategy and our real estate segment results were solid once again and we are seeing steady demand translate into slightly higher pricing for rural recreational and HBU properties.

Positive macroeconomic trends are also favorably impacting our business, housing starts predicted to be at 1 million start level just a quarter ago are already being considered conservative by some economic forecasters.

Lumber demand for 2013 thus far is proving robust, despite challenging winter weather conditions across much of the nation. The expected year-over-year increase in lumber demand of $3 billion to $4 billion board feet appears likely based on a continued and accelerating housing recovery. And although the housing market remains a key drive all end use markets are expected to contribute to increase U.S. lumber demand in 2013.

Given these demand drivers existing supply has been stressed as as well known the industry is not operating at full capacity due to temporary and permanent mill closures, but our view as the demand growth over the next 12 to 18 months we’ll exceed the ability by which existing idle capacity can be effectively brought online to meet such demand. In combination these factors should lead the continued strength in lumber pricing that in time will eventually result in higher priced sawlogs in all regions.

Overall, we look to both the near-term and long-term prospects for our business with optimism and confidence. With the appropriate pricing environment comes to pass we look forward to increasing our sawlog harvest volumes from their current restrain levels which is essential to delivering significant cash flows and increasing shareholder value.

Our proactive decisions to restructure our credit facility at the end of last year and retire several debt issuances before the redemption date have contributed to our operational flexibility.

I’ll now let Eric discuss the quarterly results in detail and then we’ll take questions.

Eric Cremers

Thanks Mike. As shown on page three of the slide accompanying this presentation, we reported first quarter net income of $15.5 million or $0.38 per diluted share, as compares to net income of $13.9 million or $0.34 per diluted share last quarter and $5.1 million or $0.13 per diluted share in Q1 of 2012.

Please note that a $750,000 accrual related to EPA proceedings regarding the cleanup of one of our properties in Northern Idaho is included in our Q1 results. I’d now like to review the results of our operating segments for the quarter.

Page four highlights operating income and margin trends for our resource segment. For the quarter, operating income was $15.5 million, compared to $10.5 million in the fourth quarter and $8.7 million for Q1 of 2012. Our improved results were primarily driven by increased harvest volumes over both prior periods, as well as some price improvements.

Page five highlights volume and pricing results for the Northern region of our resource operations. Sawlog prices rose 2% from the prior quarter and 14% from Q1 of 2012, as improved lumber prices are clearly working their way into higher sawlog prices in the Northern region.

As we have indicated on prior calls, roughly 65% of our Northern region sawlog pricing is formally index to the price of lumber but it lags the market by one to three months depending on the customer.

For example, in Q4 of 2012, our average lumber price advanced 1%, which resulted in our Q1 of 2013 Northern region sawlog price advancing a similar 2%, given our average lumber price increase of 15% here in the first quarter, we expect our Q2 Northern region sawlog price to advance by roughly 11%.

Sawlog harvest volume increased 1% from last quarter and 34% from Q1 of 2012. Though the first quarter is usually a lower harvest volume quarter due to seasonality, favorable marker conditions prompted us to shift some harvesting activity into the first quarter that would have originally been harvested in the second half of the year. In the Northern region pulpwood demand remains sluggish and consequently pricing remains under pressure.

Page six reviews volume and price trends for our Southern resource operations. Comparing the first quarter of 2013 to the first quarter of 2012, sawlog harvest volumes are up 4% and pricing is up 5%.

Though we have continued with our current harvest deferral strategy of approximately 800,000 tons per year, harvest volumes in our Southern region are higher than last year's first quarter due to two recent land acquisitions.

Improved sawlog pricing between the periods is attributable to improve lumber markets and adverse weather conditions experienced during the first quarter of 2013 as compared to the first quarter of 2012.

Comparing Q1 of 2013 to the fourth quarter of 2012, sawlog volume increased 9% while sawlog prices decreased 4%. Again the increased sawlog volume stands from the two tracks of land acquired in late 2012.

A sequential price variance is related to product mix issues, primarily a decrease in hardwood, sawlog harvesting and a shift toward smaller and less value pine sawlog as compared to last quarter.

Southern region pulpwood pricing improved 3% from Q4 2012 and 9% from Q1 2012, primarily due to stronger OSB markets increased hardwood demand and unfavorable weather conditions that have impacted logging activity thus far in 2013.

Page seven covers revenue results for our real estate segment. For the quarter, real estate posted revenues of $4.6 million and closed 41 transactions. Current quarter revenues of $4.6 million compares to $19 million last quarter and $8.2 million in Q1 of 2012.

Included in fourth quarter 2012 results are two significant real estate sales, one in Minnesota for $11 million and another in Central Idaho for approximately $5.1 million. Also, the large sale of HBU acres in Minnesota impacted Q1 of 2012 results.

Page eight provides an overview of real estate operating income and margin trends. The segment reported operating income of $3.1 million for the quarter compared to $13.8 million last quarter and $6.3 million in Q1 of 2012.

Acres sold by product type were depicted on page nine. We continue to experience steady demand especially for our rural recreational and HBU properties. We are further encouraged by the pricing trends shown on page 10.

Pricing for rural recreational and HBU properties are both showing noticeable increases over prior periods, excluding the effect of $11 million Mississippi Northwood sale that heavily impacted our HBU price in Q4 of 2012. We anticipate our real estate division will continue to experience firm pricing as the economic recovery progresses and more buyers recognize the value of rural recreational property.

Page 11 highlights our wood products segment operating income and margin trends. Our wood products segment posted exceptional results in Q1, producing $18.9 million of operating income for the quarter, which compares to $13.5 million last quarter and $5 million in Q1 of 2012.

Price and volume trends for our wood product segment are shown on page 12. Our overall lumber price reached $412,000 for 1000 board feet for the quarter, an increase of 15% from last quarter and 35% from Q1 of 2012. Shipments for the first quarter were down 5% from both last quarter and Q1 of 2012 primarily related to seasonal factors and timing. Moving forward, we expect quarterly lumber shipments to approximate to $150 million board foot levels experienced throughout 2012.

Overall, our mills are well-positioned to capitalize on favorable market conditions that we believe will persist throughout 2013, executing our continued strategy focused on productivity improvements, select high return on capital expenditures and tactical additional operating hours.

Looking back to page three, total corporate administration cost excluding net cash interest expense were $11.1 million for the quarter compared to $11 million last quarter and $8.3 million in the first quarter of 2012. A $2.8 million variance from last year's first quarter is primarily due to non-cash mark-to-market adjustments related to our deferred compensation plans.

As mentioned earlier, during the quarter, we incurred $750,000 accrual related to EPA proceedings regarding the cleanup of one of our properties in Northern Idaho. The decrease in our book tax provision compared to Q4 2012 is related to lower net income generated in our taxable REIT subsidiary primarily related to lower income in our real estate division.

Conversely, the increase in our tax provision from last year's first quarter as a result of higher net income generated during the quarter in our tax REIT subsidiary mainly associated with our wood products operations.

Our balance sheet continues to improve along with our improved operating results. During the quarter, we retired three debt issuances totaling $27.7 million with cash on hand and yet, still end of the quarter with $59.7 million of cash and short-term investments. Another $9 million of debt will be retired in the second quarter.

Our forward debt issuances were selected for early redemption based on the small call premiums and relatively high interest rate, which average around 7.3%, which compares to negligible earnings on our available cash deposits.

In total, our annual interest expense will decline by about $2.7 million per year as a result of this action. Furthermore on April 2nd, Standard & Poor’s upgraded our corporate credit and senior unsecured ratings to BB+ from BB with a stable outlook. And we were just upgraded by Moody’s to Baa3 which in investment grade, a level the company has not seen in about a decade.

Next, I’d like to make a few comments regarding our outlook for the remainder of 2013. As indicated in our last call in our resource segment, we plan to harvest products in about 3.8 million tons in 2013, about 800,000 tons below our run rate potential, with most of this deferral occurring in the south, where log prices remain relatively weak.

In the northern region, given the strong run-up in lumber prices we saw in Q1 and the fact that log prices lag lumber prices as discussed earlier, we expect Northern region sawlog prices to be up approximately 11% in Q2. Those are reminder harvest volumes will be somewhat lower in Q2 due to typical seasonality.

For our wood product segment, we have continued optimism for the remainder of 2013 and beyond based on simple supply and demand fundamentals. We believe that North American demand is increasing roughly 3 billion board feet to 4 billion board feet a year and that capacity is struggling to keep up. It’s just 2 billion board feet of capacity additions have been announced thus far in the recovery.

Given this in balance, we expect strong lumber pricing and wood products earnings throughout 2013. Our real estate segment performs slightly ahead of expectations in the first quarter. Our current outlook remains generally consistent from our expectations at the beginning of the year as we now expect to sell at the high-end of our 18,000 to 20,000 acre range and for average pricing per acre to remain at approximately $1400 per acre.

In closing, we are off to a great start in 2013. And our confidence has improved since the start of the year, as favorable market conditions continue to translate into improved financial results.

That concludes our prepared remarks. Jennifer, I would now like to open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mike Roxland with Bank of America.

Mike Roxland - Bank of America

Thanks very much. Congrats on a very good quarter.

Michael Covey

Thanks.

Mike Roxland - Bank of America

Just the first question, can you give us a sense on your outlook for lumber pricing? Despite some recent softness that we've seen the last few weeks, lumber pricing general has approached levels last seen during the housing boom without having the same kind of level of housing demand in place. So ultimately, what’s the main driver behind it? Because it sounds from our commentary that it’s really being supply driven at this point and where do you think lumber prices can go from here?

Eric Cremers

Yeah. Mike. This is Eric. Yeah, there is a fundamental imbalance between supply and demand here. We think supply is trying to keep up with demand, but it’s struggling to do so. With regard to where we see pricing going, I think we do see it little bit stronger here as we move through the second quarter. Even though we’ve seen a little bit of selloff here lately, that selloff is relatively small and it happened after a good month, month and a half of results have occurred for the quarter.

So we feel pretty good about where we are going to wind up in the second quarter and that’s with higher lumber prices. We do see pricing coming down a little bit in the third and fourth quarter, as more supply will be coming to market. Let me just give you one anecdote about how hard it is for -- in spite of these high prices, how hard it is for volume to come to market.

In our wood basket down in Arkansas, there are five mills that are currently down that could start up. None of the five have started up. One recently, we understand sold to another party. That party has indicated to us that they intend to start that mill up sometime over the next 12 months.

But it’s certainly is not an event that’s going to happen tomorrow, but it’s something that is going to happen over the next several quarters. So, again, it’s just an indication that yeah, pricing is strong, margins are strong but getting the supply to come to market is very challenging and that’s what keeping these prices relatively high.

Mike Roxland - Bank of America

Got you. Given what sounds like a fundamental shift in the supply chain and really there is lots of supply base. I mean, where do you see longer-term? If you look out past 2013, where do you think lumber prices could trend in ’14 and beyond?

Eric Cremers

I think our -- we don’t have a crystal ball here. But I think most people think prices are going to stay at these relatively high levels. And we are starting to see a little bit of product come down from Canada. We are starting to see a little bit of product coming from Europe. We are seeing a little bit of slowdown in China.

So we are seeing a response here of these higher prices. But given the increase in housing starts that most people see, the repair remodel markets remain firm. There is issues with supply coming from Canada. It's hard to see there being much of a selloff at all. So we think prices are gong to stay relatively elevated.

Mike Roxland - Bank of America

Got it. And then there is two quick remaining questions. How much additional flexibility do you have to continue to pull forward your harvest in the North? Yeah, you mentioned 65% to be long hunt contracts of tide and then there is a tidal on the pricing. So given where lumber prices are and the potential as you outlined enforced some softness in the back half of the year. Do you have the ability to pull forward anymore of our harvest to capture the better pricing that we were seeing in the first half?

Eric Cremers

Well, we were running pretty full in the Northern Region. The most of the customers that we supply are running their mills pretty full. So while there is an opportunity for us to increase volume a little bit, it is not a huge opportunity. And right now, our plans in the Northern Region are not to increase volumes in second half of the year.

Mike Roxland - Bank of America

Got you. And then there is quick last one. Can you just review for us what the metrics, another fact is you need to see to get more comfortable on the sustainability of the dividend than potentially increasing it?

Mike Covey

Mike, this is Mike Covey. The dividend is being set and sync with our current harvest levels, which we are very comfortable with that. Our FAD in 2012 exceeded our distribution in the dividend. And going forward, we will have to look at a number of factors. The most importantly, increase in harvest levels, particularly in the South that will be one of the mechanisms that we look to review with our Board and considering the dividend. So there is a number of factors to consider and later in the year, we will be reviewing that our Board, especially as we see how this recovery continues to unfold.

Mike Roxland - Bank of America

Got it. Thanks very much. Good luck for the balance for the year.

Mike Covey

Thanks.

Operator

Your next question comes from the line of Gail Glazerman with UBS.

Gail Glazerman - UBS

Hi. Good morning.

Mike Covey

Good morning.

Gail Glazerman - UBS

I guess following up on the anecdote you gave about the sawmills in Arkansas, what do you think the bottleneck is from getting those to restart and can you possibly tie that into what that means for your view for sawlog pricing in the South?

Eric Cremers

Well, there's several constraints, Gail, for getting those up and running. This mill that I’m referring to is not been purchased by large, well-capitalized public companies. It’s being bought by another relatively small operator. So think about balance sheet constraints. It takes anywhere from $5 million to $10 million of working capital to get one of these mills up and running. Think about the employee base, these are small towns and these mills employ some levels of skilled labor. While the downturn of that skilled labor scatters, we have to find a way to get it back to the mill again.

And then finally, this machinery, its equipment has been sitting there. I will use the term rusting away for the past several years. So getting it in good, working condition is not a simple task, particularly for small mom-and-pop kind of operator. So, I think there are a lot of constraints to getting these mills that were turned off to get them turned back on again.

Regarding the outlook for pricing, we've recently undertook a study, a consultant came in, a well-regarded consultant that covers timberland operations in the South. They reviewed our wood basket and their belief is that demand today is around 7, 7.5 million tons in our wood basket. And over the next four years, they are expected to get up to 11 to 11.5 million tons in that wood basket and we see a number of things that can happen to make that demand for sawlogs increased.

And as that happens, pricing should move up. Not this year but it will start to move up next year and then more firmly the year after. So these things just take time and frankly that same consultant, out five, six years as pricing getting up to around 60 bucks a ton for $40, $41 a ton we are seeing today. So we're very optimistic long-term. You're not going to see these results quarter-to-quarter, but over a longer period of time you will see higher volumes and you will see higher prices.

Gail Glazerman - UBS

Okay. Thank you. And can you give a little bit more color on what the underlying price trend was in the South during the quarter? Or kind of if you take away the mix impact, is it fairly stable, up, down?

Eric Cremers

Yeah. It was pretty. It was flat. Sawlog -- southern yellow pine sawlog pricing has been very flat.

Gail Glazerman - UBS

Okay. And going back to Mike's question a little bit about the North, you kind of referenced that you only see I guess in the second quarter, I can't remember the word used that is relatively modest, harvest change in the second quarter. Normally, seasonally you would see a pretty big harvest change. Can you give maybe a little bit more detail or color on kind of what your guidance is for the second quarter?

Eric Cremers

Yeah. So, our harvest volume -- projected harvest volume today for the second quarter in the Northern Region is around 360,000 tons. And that compares around 600,000 tons we had in the first quarter. So it's a meaningful drop and then of course in the third quarter it ramps back up and our expectation is it will be up around 800,000 tons in the third quarter.

Mike Covey

So as a reminder that’s due to seasonal factors, not due to market conditions.

Gail Glazerman - UBS

Yeah. I know. I just want to check back on first quarter volumes versus strong. And can you talk a little bit about what you’re seeing on the cost side, I don’t know, if it varies by region or just, in general, is there anything that you’re seeing in terms of silviculture, the harvest is actual harvest, diesel, is any part of that?

Eric Cremers

No. We’re seeing very little impact on fuel cost. There is a little bit of price pressure in logging and hauling cost. They’re -- I think the latest forecast I saw they’re going to up about 4% in the North, year-over-year, and up about 5% in the South year-over-year.

Now, as a reminder, we’re going to have a little bit stronger mix this year in the South. So overall, logging and hauling cost year-over-year only going to up 1% if you include mix effects. So it’s small at the end of the day.

Gail Glazerman - UBS

Okay. Thanks very much.

Eric Cremers

Thanks.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners.

Chip Dillon - Vertical Research Partners

Hi, there. Good morning.

Eric Cremers

Good morning.

Chip Dillon - Vertical Research Partners

Hey. First question, actually you gave the harvest expectations for the Northern region. Could you give us what you would see for the South, in the second and third quarter, and may be, even for the year?

Eric Cremers

Yeah. So, in the South, in the second quarter, it will be very very comparable to what we’re going to see in the North around 367,000 tons, more of less. And for full year in the South [forward] around 1.5 million tons with pretty evenly split between sawlogs and pulpwood.

Chip Dillon - Vertical Research Partners

Got you. Okay. And then also, it seem like the basis of the land that you sold in the first quarter was pretty low. I think, it was, at least versus, I mean, for -- if you recall that your basis would be, may be this is my guess, but 20% range for this year. Is that -- 15% of revenue -- is that still a good guess going forward or where would you sort of put the basis on the acres you’re going to sell?

Eric Cremers

Yeah. That’s a -- it’s a good question, Chip. Basis was 13% in the first quarter. We expected full year to be at around 21%. So we do think it’s going to drift up, in the back half of the year. We expected second quarter basis to be relatively low as well at around 13%. So the third and fourth quarter will be up in the 25%, 26% range.

Chip Dillon - Vertical Research Partners

Okay, got you. And, as you look at the -- you mentioned, I think Arkansas where you had some potential restart. I just wanted to be clear that, you’re talking to solely lumber mills, you weren’t talking about any potential plywood restarts that you heard about, have you?

Michael Covey

May be you’re correct.

Eric Cremers

Yeah. That’s correct.

Chip Dillon - Vertical Research Partners

All of that would be nice in your case?

Eric Cremers

Correct.

Chip Dillon - Vertical Research Partners

Okay. And then lastly, noticing the improvement in the resources, in earnings, especially in the Northern sawlog prices. I know, obviously, this encompasses Minnesota and Idaho. And I believe a material amount of your Idaho timber is somewhat indexed to what lumber is doing. Could you give us an idea of how much that influenced your realization. And then, I’m guessing there is some lag effect so that, how much of that could -- may be that was in your comment, that why you saw the pricing going up further in the second quarter?

Eric Cremers

Yeah. So, we’ve measured -- well, first of all, not all of the harvest volume in the Northern region is indexed to the price of lumber. It’s just mix sawlog. For example [seeder] is not included, chip-n-saw is not included. And so there are some products that are not included, but it’s roughly 65% of the harvest volume.

So, we can now look at what happened to all, we see better index to the price of lumber. We can also see what happened to them in the first quarter. And we have pretty firm expectations, given the index pricing contracts that we have and the fact that the other 35% of our customers that are not indexed get similar pricing. We can pretty accurately forecast what that mix sawlog pricing is going to do, here in the second quarter.

So based on the index, customers pricing is going to go up 15%. While based on all of the other products that we have, that make up Northern regions sawlog like seeder, like chip-n-saw, et cetera. Pricing is going to up about 11% across the entire Northern region sawlog harvest volume. Is that helpful?

Chip Dillon - Vertical Research Partners

Okay. That’s very helpful. And may be you heard this, I have and I don’t understand it really, but I’ve heard people tell me that when they look at your company, the -- Idaho is the weak, the weak link and I -- and there may be reasons for that versus the South, but my goodness, if you have -- if you believe in a strong lumber prices don’t you actually have some advantage. Because, obviously these types of indexed opportunities, I don’t think exist in the South. Is that a fair response and a reflection and do you think -- I know you had some appraisals done in the Idaho region, do you think some of those could be stale now, given, if one assumes that the lumber pricing we see is somewhat sustainable.

Michael Covey

Chip, it’s Mike. We haven’t updated on our appraisal on our Idaho lands in the couple of years. We’ve had some transaction evidence with small transactions, but we think people under appreciate their productivity and exceptional value of the Northern Idaho forest, as well as, the strength of the lumber customers that are this market. We have some of those various strongest and best manufacturers in the U.S. here and a very strong log market.

So, we’re -- compared to the South where, because of the shortage of logs and the tightness of the market, where we’re able to work with customers on indexing basis was in the South. There are currently is an over supply of logs in our wood basket and there is just no opportunity to make that kind of an arrangement.

Chip Dillon - Vertical Research Partners

Got you. Okay, thank you.

Operator

Question comes from line of Josh Barber with Stifel, Nicholaus.

Josh Barber - Stifel, Nicholaus

Hi. Good morning.

Eric Cremers

Good morning.

Josh Barber - Stifel, Nicholaus

Most of my questions have already been asked. Just a quicker one, especially with your share is doing exceptionally well and seeming to have a lower cost to capital today. Where would you be thinking about spending incremental capital, given that you probably have some headroom under the retest. Would you be more likely to compete on timberland or would you potentially be looking at, may be expanding some of your wood product businesses, given that you can always find some better opportunities there today?

Michael Covey

We will reiterate what we’ve consistently said is that, we seek to opportunities to grow our timberland business. And if that happens to include wood products, manufacturing operations, we’re happy to look at those. If we believe we can fold them nicely into our business, and certainly there is no problems with retest. But, standalone wood products, manufacturing opportunities are not something that we’re pursuing.

Josh Barber - Stifel, Nicholaus

Fair. When we look at, I guess, the South and Pacific Northwest versus Idaho, would you say, to seeing how logs prices have really valued in the Pacific Northwest and in the Idaho regions so much in the last four five months, whereas that doesn’t seem to be happening as much of the South. Do you think there is a still giant log oversupply in the South that’s just taking a little bit more time to work through or has there been more foreign buyers or something else that may be at work in the Pacific Northwest that’s been pushing that a little bit more.

Michael Covey

Well, certainly the Pacific Northwest has the benefit of tension from the China and Japan log market for export, which doesn’t exist in the U.S. South, any large degree. Secondly, the South is a very -- going to be specific and talks specifically about the central U.S. South in the Arkansas log market where we do currently have an oversupply due to mill closures and other things that have happened in that region.

That said, is that accommodated in earlier we believe that demand for sawlogs and plywood logs will increase in the South over the next two to three years by several billion board feet and this we view as interim or temporary oversupply situation will correct itself.

Josh Barber - Stifel, Nicholaus

Great. Thank you very much.

Michael Covey

Thank you.

Operator

Question comes from the line of Steve Chercover with D.A. Davidson.

Steve Chercover - D.A. Davidson

Good morning, Mike. Good morning, Eric. Couple of quick questions. First of all there has been in some recent transactions although they are not directly in your jurisdiction and they seem to suggest that timber values are kind of back to I guess pre-recession levels, would you concur with that and do you remain in the market for more?

Eric Cremers

Well clearly we are in the market for timberland. We made two very small acquisitions in the fourth quarter of 2012. I think given the shape of our balance sheet and upgrade from rating agencies and other things we certainly in an unutilized revolver we are certainly in the market for just some more timberland.

I don’t think timberland is in its pre-recession levels. I guess high water mark for Southern timberland was probably $1,900 per acre. Transactions now seem to be in the $1,500 to $1,600 range, so I don’t think we are back to that level, but certainly the trend seems to be up and we believe that discount rates the [Timos] and other are using are quite low.

Steve Chercover - D.A. Davidson

Okay. And if I am not mistaken, your objective is to get back to a 4.6 million ton annual harvest, would that be above your sustainable harvest level or is that -- is that something that you can do for three to five years or is that the run rate?

Michael Covey

We look at this in sequences that are groups of years. We think that the 4.6 million harvest -- 4.6 million ton harvest level is sustainable for up to a decade depending on how consistently we hit that every year. We have the flexibility to go up to 5 million tons in a given year, but will have to back off of that pace to kind of keep it at a sustainable level.

Steve Chercover - D.A. Davidson

So I mean on a -- given your current land base, what would you say is the sustainable level of kind of in perpetuity?

Michael Covey

We haven’t given guidance on that Steve and we are not prepared to do that today. I think we try to give investors an outlook for about the next decade and we think that as another log prices improve, we will approach the 4.6 million ton harvest level and hold that for a number of years.

Steve Chercover - D.A. Davidson

Okay. Thanks Mike.

Operator

Your next question comes from the line of Matthew Dodson with JWest LLC.

Matthew Dodson - JWest LLC

Hi congratulations on a great quarter. I just have a couple questions for you. You guys talked about a mill coming back online in the South may be in the next 12 months, if that happens this year, is that upside to your volume?

Michael Covey

Not necessarily. It’s just a -- its a market indicator in the wood basket of tightening of supply but one mill is not going to make a big difference in terms of any activities that we would have with our harvest levels.

Matthew Dodson - JWest LLC

Got you. And then there has been research and reports out there that are talking about sawlog prices can go up 50% to 100% in the next couple of years, if that becomes a reality can you kind of help us frame where your dividend could go?

Michael Covey

Well, you know we view the dividend as something that we don’t want to jerk investors around with quarter by quarter changes in prices or volumes in any of our business segments. So working with our Board, we look at the long term harvest plans. Our view of pricing in each of the business lines that we have and then set the dividend on a sustainable long term rate. So that would really be how we look at it.

Eric Cremers

One thing you might do is take a look at our supplemental materials. We reference the financial impact of an incremental harvest and the total impact is around $45 million of cash flow. So that might be one way to sort of connect some dots as assuming the next $45 million of cash flow comes in the company, but then you also have to take into consideration what’s going on in the wood products business and what’s going on in the real estate business. So there is no simple answer to the question and so we look at it every so often.

Michael Covey

But we do view the dividend as an important way to return value to shareholders and certainly it’s high on the Board’s list of priorities.

Matthew Dodson - JWest LLC

And then my final question is can you kind of help us understand why you guys think the lumber price is kind of going to decline in the back half of the year?

Michael Covey

Well, we are seeing some capacity come back in the market here like I mentioned earlier, we are seeing some European shipments with the U.S. We are seeing Canadian exports increase here to the U.S. Everybody is working to try to get more volume out of their existing mills and existing mills that are closed down, people are trying to figure out how to get them back up and running again.

So while we are seeing increased demand, we are seeing increased supply as well, but it’s going to take these higher prices to keep -- to stimulate that demand if you will. But in general we do -- we do as do most forecasters envision a little bit of a sell off and I am talking of small sell off later in the year, not significant by any stretch or imagination.

Matthew Dodson - JWest LLC

Perfect. Thank you very much and congratulations.

Michael Covey

Thanks.

Operator

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Mark Weintraub - Buckingham Research

Thank you. Can you guys remind us as you go over time to the 4.6 million ton relative to where you are likely to be this year? How much of that would be sawtimber?

Eric Cremers

Oh! It’s around 800,000 tons incremental sawlogs Mark.

Mark Weintraub - Buckingham Research

So basically all sawlogs?

Eric Cremers

Primarily yes.

Mark Weintraub - Buckingham Research

And presumably that is largely in the South, is that pretty much all the South or how would you break that?

Michael Covey

It’s predominantly in the South, yes.

Mark Weintraub - Buckingham Research

Okay. And on that mill, I realize it’s probably as you said it’s just an indicator, but roughly what size was that one mill you were talking about in Arkansas?

Michael Covey

It’s around $100 million Board fee.

Mark Weintraub - Buckingham Research

$100 million Board fee and then -- and so the -- to get to that from that $7 million to the $11 to $11.5 million tons, that the consultant was suggesting could happen, what type of timeframe did that think that might happen and kind of what are the key variables that need to take place for that to happen?

Michael Covey

Well, the consultant doesn’t drill down and look at mill by mill and say, gee, if this will increase its operating rate from 75% to 85%, that would add this much volume, this mill that would increase volume by that much. There was a top down view of what do they expect housing starts to be. Going forward, what do they expect repair model exports et cetera.

And then say, okay, that creates lumber demand of X and then participate -- partition that lumber demand, split that lumber demand across the different producing regions. So, it gave a portion of that to the South and then it further took the portion of the South down to our wood basket.

So they didn’t drill down and go mill by mill, what we did is we triangulated and we said, okay, they see demand at 7.3 million tons in this wood basket in 2013 and they see demand of 11 million tons in 2016, that's about an increase of 4 million tons per year in our wood basket. And we said what are some things that have to happen to go from the 7 to 11 and we've got, I don't know 5 or so things that we think are going to get us from 7 million tons to 11 million tons that are very doable, things like people running second shift, instead of just on a one shift basis, things like mills that are close started back up again. Things like that. So it was two different approaches to how do we get from 7 million tons to 11 million tons but they both got to the same place.

Mark Weintraub - Buckingham Research

Interesting. And can you help us how many order of magnitude, how much of it is -- would be driven by mills restarting as opposed to the second shift? Is it all the mills that are down restarting, half of them, I don't necessarily expect specifics or just one or two?

Michael Covey

No. It’s -- I don't know three quarters of the market…

Mark Weintraub - Buckingham Research

Okay.

Michael Covey

… existing mills running harder.

Mark Weintraub - Buckingham Research

Okay.

Michael Covey

Mills that are already running putting on a second shift, put it that way.

Mark Weintraub - Buckingham Research

Okay. Thank you.

Operator

Your next question comes from the line of Joshua Zaret with Longbow Research.

Joshua Zaret - Longbow Research

Thank you. Two questions, the first, I just want to explore your timber acquisition strategy and the question is, how important is it for you to remain in the three regions, where you currently operate? In other words, would you go by 40,000, I’m just roughly using that number and let's say, Louisiana? And the reason I ask that is there cost to infrastructure that makes you uncompetitive in bidding in the sense that you have to put in your management team, put in an office, et cetera, et cetera or is your strategy really to stay block where you are now?

Michael Covey

Our first priority is to bolt-on acquisitions in our existing operating areas, partly due to the cost effect, at the end of the day that's not an enormous consideration, the bigger concern and consideration would be our acknowledgment and access to markets in different regions, different than where we’re at.

But we look at the Central U.S., South Mississippi, Louisiana, Arkansas kind of as an area that we consider kind of we have familiarity and certainly looked add-on acquisitions. But to go to a standalone acquisition in South Carolina, 40,000 acres would be I think a large stretch for us because we just don't have market experience there.

Joshua Zaret - Longbow Research

Okay. And along the same line with the strategy, would you stay with sort of merging the both tracks like you just had, the two you just purchase, where you can harvest immediately? You wouldn’t buy pre-merge, would you and even though if there's a great value there, given you are a public entity or how do you view that?

Michael Covey

Well, certainly, as a public entity in REIT with the dividend obligation, we have to be buying nothing but pre-merged timber could be very dilutive I guess to our ability to cover the dividend. So, certainly, we can tolerate some but typically a mixture of both mature and a mature timber and H classes that are across the entire H class spectrum is of interest to us.

Joshua Zaret - Longbow Research

Okay. And then my second question, going back to the convert side, everyone is looking at, like a shift, et cetera, but there have been a lot of announcements of new capacity, Georgia-Pacific last month announced $400 million for plywood and lumber operations, other companies have announced a sawmill here, a sawmill there, big money, big sizes, are any of these been announced for your timber basket that you're aware of?

Michael Covey

We'll its hard to say, Georgia-Pacific is a large customer of ours and we service a number of supply logs to a number of their mills. But they have not -- to our knowledge they've not made a pinpoint determination that a particular plant is going to be the recipient of some of their capital expenditures in plywood for example. So, it's impossible for us to answer that specifically.

Eric Cremers

Yeah. Mark, it’s Eric, Josh, they came out and said, they are going to spend $400 million and mentioned the states that they are going to spend and if I recall correctly, one of them was Arkansas, but they didn't say specifically which plants the capital is going to.

Joshua Zaret - Longbow Research

I see. And, okay, great, but nothing else, you're not aware of any other new greenfields in your region?

Michael Covey

No. Not in the -- not in sawlogs, as you know there have been a number of announcements around the pellet and kind of the biomass supply chain in different market areas, but not in solid wood.

Joshua Zaret - Longbow Research

Okay. Great. Thank you.

Michael Covey

You're welcome.

Operator

We have a follow-up from the line of Chip Dillon with Vertical Research Partners.

Chip Dillon - Vertical Research Partners

Yeah. Thank you. Just I know you can't give us an exact answer, but do you have a rough idea how the, I think your try, your plan is to sell 18 to 20,000 acres this year, sort of how that might flow through the year. Is your quarter looks more obvious than not that it might be a high quarter or low quarter?

Eric Cremers

Yeah. There we will be seen seasonality in our business Chip, the first quarter was probably the low quarter for the year, we expect so around 5,000 acres in the second quarter, maybe around 7 in the third and then maybe around 5 in the fourth, this compares to 3,500 acres in the first quarter.

Chip Dillon - Vertical Research Partners

Got you.

Michael Covey

The third quarter.

Chip Dillon - Vertical Research Partners

Okay.

Eric Cremers

You bet.

Chip Dillon - Vertical Research Partners

Okay. And got you. That's very helpful. Thank you.

Operator

There are no further questions at this time.

Michael Covey

Thank you, Jennifer, and we look forward to talking everyone next quarter.

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