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Potlatch Corporation (NASDAQ:PCH)

Q4 2013 Earnings Conference Call

January 28, 2014 12:00 ET

Executives

Jerry Richards - Vice President and Chief Financial Officer

Mike Covey - Chairman and Chief Executive Officer

Eric Cremers - President and Chief Operating Officer

Analysts

Gail Glazerman - UBS Securities

Mike Roxland - Bank of America Merrill Lynch

Chip Dillon - Vertical Research

Mark Weintraub - Buckingham Research

Steve Chercover - D. A. Davidson

Paul Quinn - RBC Dominion Securities Inc

Operator

Good afternoon. My name is Selena and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Q4 Earnings Conference Call. 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. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Jerry Richards - Vice President and Chief Financial Officer

Thank you, Selena and good morning. Welcome to Potlatch’s investor call and webcast covering our fourth quarter 2013 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer and Eric Cremers, President and Chief Operating Officer.

Before we begin, I would like to remind you that this call contains forward-looking statements. 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 will now turn the call over to Mike to make some introductory remarks. And then I will review our fourth quarter results in detail.

Mike Covey - Chairman and Chief Executive Officer

Thanks Jerry. We are very pleased with our performance as we cap off a very strong year led by the improvement in lumber prices and higher log prices in Idaho. Our Resource segment income increased 48% year-over-year or $24 million on flat harvest levels. Our one challenging resource was the lack of any improvement in Southern pine sawlog prices. They have remained flat in that historically low levels.

Our Wood Products segment continues to perform well above or performed well and posted its highest level of earnings in nearly a decade. EBITDA from our five facilities was $65 million for the year, a $13 million improvement over 2012. Much of this improvement came from our Southern pine sawmill in Arkansas, where we benefit from continued low log prices relative to the overall improvement in Southern Yellow pine lumber prices.

Results for our real estate segment continued to be solid and made a solid contribution to earnings driven by a steady demand for HBU and rural recreational properties. We expect higher earnings from each of our business segments in 2014. According to industry forecast, total demand for North American lumber is anticipated to increase an additional 4 billion board feet of approximately 7% from 2013 levels. The majority of the growth is expected in the new home construction market segment as the U.S. housing market continues its gradual recovery. Factors such as home price increases, the cost of new mortgages, the mortgage approval process and the availability of desirable building lots will continue to play into the pace of housing recovery. Participation by first-time homebuyers has been low to this point in the recovery by historical standards. And if this trend reemerges, it should provide a boost to demand.

Although we expect Southern pine sawlog prices will remain flat in 2014, we believe they will eventually increase as the backlog of deferred harvest declines. Until lumber prices realized by Southern sawmills trade back to the stump, our sawmill in Warren, Arkansas is expected to continue to post profits at record levels. As you are all aware, we have raised our dividend 13% in December. This reflects our Board’s confidence in Potlach’s capacity to generate healthy cash flow to support this higher dividend as well as provide the ability to grow sustainably over time.

Now, I would like to turn the call back over to Jerry to discuss the quarterly results and our 2014 outlook.

Jerry Richards - Vice President and Chief Financial Officer

Thank you, Mike. I am going to start on Page 3 of the slides accompanying this call. Our fourth quarter net income was $13.7 million, or $0.34 per diluted share. This compares to net income of $22.2 million in the third quarter or $0.54 per diluted share. Third quarter results included an after-tax environmental remediation charge that reduced earnings $0.02 per diluted share. As mentioned on our third quarter call, the physical cleanup activities at the site have been completed. Corporate administrative costs, excluding net cash interest expense, were $10.5 million compared to $10.8 million last quarter. Both quarters were higher than our base run rate of about $9 million per quarter due to incentive compensation and mark to market adjustments related to our deferred compensation plans.

Our income tax provision totaled $1.3 million for the fourth quarter, down from $3.2 million in the third quarter as a result of lower earnings generated by our taxable REIT subsidiary. Our effective tax rate for the year was 17% at a consolidated level and 32% at a taxable REIT subsidiary level.

I will now review the results of our operating segments for the quarter. Information regarding our Resource operations is depicted on Pages 4 to 6. The segment generated income of $18 million in the fourth quarter compared to $25.4 million in the third quarter. The third quarter is typically the strongest seasonally for the division because the best harvest conditions during the year occur in the summer. The drop off in the fourth quarter was less pronounced this year partly because some of the harvest planned in the third quarter was pulled forward into the first half of the year to take advantage of strong log markets in Idaho.

Northern region sawlog prices declined 8% as expected largely due to lower lumber prices realized in the third quarter relative to the second quarter. About two-thirds of our sawlog pricing agreements in Idaho are indexed to lumber prices with a lag of one to three months. As you can see on the page 2013 sawlog prices were higher than prices in the prior two years. Sawlog volumes in the Northern region were down 17% from the third quarter due to typical seasonality. Pulpwood production during the quarter was minimized due to weak demand. Southern sawlog prices declined $2 per ton or 5% from the third quarter primarily due to a lower mix of higher priced hardwood sawlogs. Southern pine sawlog prices were essentially flat quarter-over-quarter. Southern region sawlog volumes declined 19% from the prior quarter due to less favorable harvest conditions, which is typical for the fourth quarter. Southern region pulpwood prices and volumes declined 2% and 8% respectively due to a lower mix of hardwood pulpwood and seasonality.

The performance of our Wood Products operation is displayed on Pages 7 and 8. Operating income for the quarter totaled $9 million compared to $11.3 million last quarter. Fourth quarter lumber shipments were 6% lower than the prior quarter, which were elevated as inventory that built as a result of softening markets at the end of the second quarter which were sold in the third quarter. Our average lumber price realized for the quarter continued the upward trend that started in the third quarter and increased 3% quarter-over-quarter. In-field inventories coupled with steady demand continue to provide good market conditions.

The results of our real estate division are covered on Page 9. Operating income for the quarter was $4.6 million compared to $6.5 million in the third quarter. Margins declined slightly due to mix. We sold more non-strategic timberland in the fourth quarter compared to the third quarter, which sells at a lower price per acre than rural recreational and HBU real estate. Interest in our rural recreational and HBU land continues to be robust. We closed 41 transactions during the fourth quarter which brought the annual closings total to an even 200, the highest transaction count in the division’s history.

Turning to Page 10, I will touch on some financial highlights. Our balance sheet remained solid with $57.8 million of cash and short-term investments on hand at the end of 2013. We also have $250 million available on our revolver and do not have any debt that’s coming due in 2014. Capital expenditures were $6.7 million for the quarter bringing the total for the year to $23.6 million. Our pension liability declined $57 million as of the end of the year due to a 95 basis point increase in the discount rate and solid returns on planned assets in 2014. We expect to contribute $3 million to the pension trust in 2014.

Next, I would like to make a few comments about our outlook for 2014. Although we have the ability to sustainably increased harvest to capture stronger log prices, we do not anticipate any material change in Southern pine sawlog prices in our operating area and South Central Arkansas. We are planning to harvest 3.8 million tons in 2014 largely consistent with our 2013 annual harvest that amount is comprised of 2.1 million tons in Idaho, 1.5 million tons in Arkansas and the remainder in Minnesota. We expect quarterly harvest volumes to follow typical seasonal patterns. We expect Northern sawlog prices to increase in the first quarter although the increase will not be as pronounced as the increase in lumber prices in the fourth quarter, while it tend to be heavier due to moisture in the winter. Industry practice in Idaho is to set log prices based on dimensional volume which means log buyers do not pay for the seasonal increasingly.

We expect Southern sawlog prices to decline slightly due to a lower mix of hardwood sawlogs. We do not anticipate any change in the price of Southern pine sawlogs or chip-n-saw logs. Pulpwood prices should be up slightly in North and flat in the South. Logging costs in both regions were anticipated to be comparable with 2013 costs. We expect continued strong earnings from our wood products manufacturing facilities, U.S. housing starts were anticipated to improve approximately 20% with most estimates around 1.1 million starts in 2014.

We anticipate this subsequent increased demand for manufactured wood products would bode well for lumber pricing and expect moderate growth in our overall lumber sales realization which is aligned with most industry forecasts. Consistent with our resource guidance, we anticipate increased log input cost in Idaho which will offset some of the product pricing gains. To-date in 2014 markets for our wood products were improved since year end, local demand is strong, field inventories remain low and our order files were solid.

In our real estate division, we plan to sell between 30,000 and 35,000 acres in 2014 with approximately 70% rural recreational real estate, 20% non-strategic timberland, and 10% HBU. Last week we closed on the sale of 11,000 acres of scattered rural recreation parcels in Idaho that were previously harvested and they closed a larger conservation transaction in Minnesota in the second quarter. These two transactions drive the increase in the number of acres and are expected to result in an overall average price of $1,100 to $1,200 per acre in 2014.

We estimate the basis of lands sold will be 25% to 30% of land sales revenues for the year. We expect a higher proportion of our consolidated earnings to be generated by our taxable REIT subsidiary in 2014 and estimate an annual tax rate of 20% to 25% for the year. Given the seasonality and resource earnings almost all of which were in the REIT and higher wood products and real estate earnings, we expect to be at the high end of that range in the first quarter.

Capital expenditures are expected to total $28 million in 2014. Approximately $13 of capital spending had been earmarked for our resource operations primarily for typical logging road construction and reforestation cost, another $13 million stand for our Wood Products division. We plan to invest in a handful of high return projects that offer improved operating efficiencies and increased production. In conclusion, we are pleased by the results achieved in 2013 and look forward to another strong year in 2014.

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

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Gail Glazerman [UBS Securities].

Gail Glazerman - UBS Securities

Hi, good morning.

Mike Covey

Good morning.

Jerry Richards

Good morning, Gail.

Gail Glazerman - UBS Securities

I guess just to start in terms of some of the first quarter guidance. Can you give us any sort of color on to what the price trends would be based on kind of what you know about lumber prices are versus where they were in the prior quarter?

Mike Covey

Are you talking about lumber price outlook or log price outlook?

Gail Glazerman - UBS Securities

I’m sorry log price outlook given the contractual pass-through in the North, the trend will be - just help us kind of think about that movement?

Mike Covey

Yes, so in the Northern region I think Jerry had mentioned that we’re seeing slightly improved log prices in the first quarter in the Northern region for sawlogs. We’ve seen higher lumber prices but not all of this going to translate due to higher log prices.

Gail Glazerman - UBS Securities

I’m just wondering if you can help us think about the magnitude based on what you know to-date.

Mike Covey

I would guess it’s pretty early in the quarter but I’d say probably low single digits.

Gail Glazerman - UBS Securities

Okay. And stepping back more strategically it’s relatively flat so it’s about thick and harvest. Can you just remind us what your current view as of the long-term sustainable rate, is this still kind of around the $4.3 million range and warehousing activity or Southern log prices to improve this year. How much do you think you could swing it versus your harvest plan I mean are there constraints so what you could pick up?

Mike Covey

Gail, this is Mike. The bulk of our harvest deferral has taken place in the U.S. itself over the last several years. And we have the ability to flex that for a period of time with better markets and we’ve been patient and are waiting for those markets to improve. We don’t feel like there is a huge constraint to our ability to ramp up the harvest related to logging capacity, it’s more an issue of finding customers that are going to take the volume at future attractive prices. So I think that as we begin to see southern markets improve, we have the ability to ramp up harvest over a period of say 4 to 6 quarters pretty quickly.

Gail Glazerman - UBS Securities

Okay. And just any view or anecdotes from speaking to your customers, I mean, you highlighted record margins and performance that you are seeing from your sawmills, what is holding them back, I mean, do they just not have access to capital, have they just been so burnt that they are really have just in that wary and any sense that this momentum is starting to build?

Mike Covey

Well, I think that there are – it depends on what would basket in market area that you are in, but as we focus west of the Mississippi River in the South Central Arkansas, there has been a sawmill or two that have been under discussions to restart. We have not seen that announced yet, but we know that there are buyers in discussions to restart mills. I think there is a lot of very disciplined owners of sawmills in the south now with West Frazer and Georgia Pacific and others that have added capacity on a two-ship basis, but haven’t ramped up beyond that. They are enjoying attractive margins. And I think we will continue on that kind of an operating pace.

Gail Glazerman - UBS Securities

Okay. And just a couple of more quick questions, in terms of the real estate activity and I guess that Idaho transaction, is there any kind of color or detail that you can help us think about as we model the first quarter, I guess as it’s already a done deal?

Mike Covey

Yes. So as you will see our acres for the year as Jerry mentioned 30,000 to 35,000 that will skew towards the first half of the year. And so if I had to pencil in a number, it might be around 13,000, 14,000 acres for the first quarter with the bulk of that being the large transaction that Jerry referred to.

Gail Glazerman - UBS Securities

Okay. And that transaction had been somewhere within the magnitude of the full year guidance, so you have given in terms of value breaker?

Mike Covey

Yes. It will be somewhere around 1,100 bucks an acre is the average kind of number for the year.

Gail Glazerman - UBS Securities

Okay. And just one last question, have you had any impact on operations from some of the crazy weather we have had so far this year?

Mike Covey

Yes. We have – the cold weather certainly is not helping our sawmill operations, in particular. We have seen slower production in those really cold days make it challenging to run the mills, but that being said, we have taken steps to recapture some of that lost volume, if you will. And so far we are back on track, but if that cold weather continues, it will impact first quarter operations.

Gail Glazerman - UBS Securities

Okay. And actually just one last one, I apologize if I missed it, but any more specific guidance that you could give in terms of harvest activity in the first quarter relative to the whole year?

Mike Covey

Yes. So I think Jerry had mentioned 3.8 million tons for the full year. We are looking at roughly 800,000 in the first quarter, that’s down from 900,000 last year, but you may recall in 2013, we push forward some volume for the year to try to capture better pricing opportunities. So our outlook this year is for about 800,000 tons in the first quarter.

Gail Glazerman - UBS Securities

Okay, thanks very much.

Mike Covey

Thank you.

Operator

Our next question comes from the line of Mike Roxland [Bank of America Merrill Lynch].

Mike Roxland - Bank of America Merrill Lynch

Thanks very much. Just one question on Southern sawlog prices, some of your peers have been indicating higher Southern sawlog prices and they pointed out that they are beginning to see some, some will have additional shifts and weather did have an impact to some extent, but they have all started to see, I guess that some sawmills started additional shifts in some areas. Are you just not seeing prices move higher, you are just being conservative with your 2014 forecast?

Mike Covey

Good morning, Mike. It’s Mike.

Mike Roxland - Bank of America Merrill Lynch

Hey Mike.

Mike Covey

I think the answer to your question is both. We are not seeing prices in west of the Mississippi River and South Central Arkansas for Southern pine sawlogs change at all and we have no evidence looking forward that there is a catalyst to make those change this year. So I guess you could say we are conservative, but I think we are fairly practical about that. So if you look at the strength south-wide, the Atlantic seaboard I think has the strongest markets both due to the presence of paper pellet mills and sawlog manufacturers hit the Gulf South across through Texas is probably the second strongest in the heart of the Central South is the weakest and that’s I think largely due to the fact that there is a lot of deferred harvest in that area. And there have been mill closures during the downturn, they haven’t come back.

Mike Roxland - Bank of America Merrill Lynch

Got you. I guess as with real estate, it just depends on your location?

Mike Covey

It does.

Mike Roxland - Bank of America Merrill Lynch

Got it, okay. I appreciate the color that. Can you talk about just a little about the lumber inventories in the channel I think you mentioned that in the opening remarks that’s – they are pretty lean. What – I was just trying to get a sense of what’s been driving the improvement in the lumber prices that we saw through most of 4Q they were – obviously they were more, the increases that we see were more reasonable than we have seen in the last two or three years or in this period of time, but nevertheless prices increased and that actually that trends persisted into the only part of this year, so it’s just dealers were stocking to get ahead of the spring selling season for home construction or is due to mill downtime. I am just trying to figure out what’s really tightened up of if inventories have really tightened sufficiently to drive prices higher?

Jerry Richards

Yes, Mike I don’t know that it’s any one factor that’s driving those prices higher. I mean, at the end of the day, it’s demand is outpacing supply. We continue to see strong takeaway from China for both logs and lumber. I think dealers went into the end of the year with relatively low inventory levels because they didn’t – it’s generally the way they operate through the winter months. I mean now everybody is looking at housing starts moving up 20% more or less year-over-year with pretty strong repair, remodel markets and people are excited about home building for the coming year. So now they are starting to get back out into market and bid again and there hasn’t been a whole lot of new capacity that’s been put in place. So I don’t know that it’s anyone factor, it’s really a host of issues.

Mike Covey

With the outlook that we shared with you for housing starts of around 1.1 million that translates into 4 billion additional board feet of lumber that’s going to be consumed with that kind of a housing outlook that’s a pretty significant ramp up without an attendant increase in capacity in the short-term.

Mike Roxland - Bank of America Merrill Lynch

Got it and I appreciate that. And just a last question on capital allocation, back in December obviously Mike you mentioned that you raised the dividend to $0.35 a share on quarterly basis, now that that dividend increase is behind you, how should be think about allocation, capital allocation obviously your goal as you mentioned is to grow the dividend but how should we think about how you prioritize capital from here on out? And second question is following up just how do you think about dividend going forward I know I have asked this question you before but is there a particular target that you can put around or some mile post to put around the dividend whether it would be a certain percentage of FAD or something similar?

Mike Covey

Paying a sustainable dividend one that we can grow over time is I think the most important priority for us in the Board as we think about capital allocation. So we look to increase the dividend over time. And one of the hallmarks or one of the benchmarks in our business that we are waiting to see is this improvement in Southern pine markets actually that will translate into the ability to support a higher dividend going forward as that materializes over the next few years, several quarters at least. We have stepped up our spending on our capital allocation for expenditures in our mills with a bit of incremental spending up to $30 million lever this year for some higher return capital projects in our mills. And we continue to be focused on acquisition opportunities. We continue to bid on a number of small to medium size deals and hopefully we will have a success this year and the ability to grow the company on the acreage base going forward. So those are kind of how we think about capital and kind of rank order or priority currently.

Mike Roxland - Bank of America Merrill Lynch

I appreciate it. Good luck in the quarter and the year.

Mike Covey

Thank you.

Operator

Your next question comes from Chip Dillon [Vertical Research].

Chip Dillon - Vertical Research

Yes, good afternoon or good morning. Could you first kind of update us on how you think about the real estate program you mentioned at least for ‘14 that we should see 30,000 acres to 35,000 acres sold in your program and how should that evolve over time assuming no radical change in your footprint, is that sort of a steady state number we could see more or less for five years or will it trend up or trend down?

Eric Cremers

Chip, this is Eric. As you know real estate transactions can be really, really lumpy. I think our run rate if you will recall same store sales kind of what we think we can do year-in and year-out is probably in the 20,000 acres to 25,000 acres a year kind of range. But what I would tell you is that from time-to-time we can be opportunistic and take advantage of what we consider to be attractive pricing with our real estate sales. And here in 2014 we have already got one transaction closed and then there is another one that’s there is a strong possibility of closing. We think we are going to obtain pricing that’s far above of the underlying timberland values were. So this year it will be a bit above the normal run rate, but I think for modeling purposes, the 20, 25 is more realistic.

Chip Dillon - Vertical Research

In those transactions, you mentioned not forget, what region are they in?

Mike Covey

The one in the first quarter is in Idaho and the one in the second quarter is in Minnesota.

Chip Dillon - Vertical Research

Got it. Okay, and then I know in the past you talked about I think around 4.5 or maybe 4.2 million to 4.4 million ton sort of a level of harvest that you could eventually get to, is all of that increment over 3.8, would that be in Arkansas or could we see Minnesota and/or Idaho pickup this well in future years?

Mike Covey

The bulk of the increment in future years as we see market opportunities will occur in the U.S. south.

Chip Dillon - Vertical Research

Okay, got it. And then getting back to on CapEx, I know 28, I think that’s more than you have been spending over time on average and as you explained there are high cost or high payback, I should say opportunities in the sawmills. What do you think the CapEx number kind of what will go to as we go out over the next two years assuming times are good? Would you see that – would you see it come back down a little bit or is that sort of a new study stated that in the high 20s?

Jerry Richards

Got it. This is Jerry Richards. I would say that 28 is probably a bit higher than our steady state going forward. Again as Mike mentioned, there are some really little high return projects and quite frankly there is deferred, some spending a little bit into products as well. So, we probably – that will probably moderate in future years.

Chip Dillon - Vertical Research

Got it. Okay, thank you.

Operator

Our next question will come from Mark Weintraub [Buckingham Research].

Mark Weintraub - Buckingham Research

Thank you. I was going to get a little bit more information on the Arkansas business, so would you expect to roughly have about 700 million board feet of saw timber again in 2014 similar to 2013?

Eric Cremers

Yes, Mark, this is Eric. Yes, for the year, we are expecting roughly 700,000 tons.

Mark Weintraub - Buckingham Research

I am sorry.

Eric Cremers

Which is roughly flat year-over-year.

Mark Weintraub - Buckingham Research

Right. And how much saw timber do you actually purchase for your sawmilling operations?

Mike Covey

In the south, you are talking?

Mark Weintraub - Buckingham Research

Yes.

Mike Covey

Roughly half and half more or less, it varies from time of the year from quarter, but it’s more or less in the 50%, 60% range.

Jerry Richards

From fee lands and half of it from the open market.

Mark Weintraub - Buckingham Research

It’s right.

Jerry Richards

The quantity that we purchase is about 700,000 tons.

Mark Weintraub - Buckingham Research

Okay. So you actually purchase about the same amount that you are currently selling?

Mike Covey

Yes, that’s correct. So if you think about price movement for every dollar that’s on that sawlogs growth in the south, we made 700,000 more in the resource business, but we give it back in the wood products business.

Mark Weintraub - Buckingham Research

Okay. So basically the benefit of higher pricing for sawlogs will really flow through to you when you are harvesting more than the 700 that you are doing now and/or if lumber prices were to go up as well?

Mike Covey

Yes, that’s correct.

Mark Weintraub - Buckingham Research

Okay, just thanks so much.

Operator

The next question will come from the line of Steve Chercover [D. A. Davidson].

Steve Chercover - D. A. Davidson

Good morning. Happy New Year everyone. Couple of quick ones. You indicated that Warren is having just record returns, but do you think that its competing mills came online in Arkansas, would they bid up fiber and depressed lumber prices. So in other words, are you kind of agnostic about the recovery in Arkansas?

Mike Covey

Yes. I mean, I think we want to see higher log and lumber prices over time, eventually the rating industry works as higher lumber prices trade back to the stump. We do have an opportunity on the resource side that the ramp up harvest volumes and we are very sensitive to cash flows coming from that volume. So I think today we are probably agnostic, the higher prices would prompt us to harvest more, which will generate a lot more cash flow.

Steve Chercover - D. A. Davidson

I mean, can you cherry pick your customers if GP was to restart Crossett, could you say happy to sell you peeler logs, but not sawlogs?

Mike Covey

Yes, we can certainly do that.

Steve Chercover - D. A. Davidson

Alright. And just switching gears again if I am not mistaken, I think it was already several years ago, you had whittled down Potlatch to the size where you didn’t really want to shrink anymore, obviously it makes sense to sell HBU land for multiples of timber land values, but are you in a position to get back on offense?

Mike Covey

Steve, to a smaller degree we have. The acreage base of Potlatch it is just about equal to where it was in 2006 yet we’ve sold a significant amount of land over that period , we did some acquisitions in 2007, 2008. Last year at the end of or the beginning of 2013, the end of 2012 we purchased more land in Arkansas and we continue to look for opportunities to do that. And in regard to the right size for the company I do think that for land base we have to face more value than what we had in 2006, it happens to be the same size, but it’s a better land base today.

Steve Chercover - D. A. Davidson

Great, thank you very much.

Mike Covey

Thank you.

Operator

Our next question will come from Paul Quinn [RBC Dominion Securities Inc].

Paul Quinn - RBC Dominion Securities Inc

Yeah, thanks very much for taking my call. Just a couple of questions, just following up on the CapEx, you mentioned $13 million spend in the wood product side. Just trying to get a area of magnitude on what the returns are going to be, are they less into your paybacks and in terms of increased production, what kind of increase are we seeing?

Eric Cremers

Yeah so Paul this is Eric. So, yeah we are going above and beyond kind of maintenance CapEx levels of spend for our wood products business this year just like we did last year and our biggest project will be a new in-feed system out of our submill (indiscernible). It’s about a $5 million capital investment. It will increase production roughly $25 million feet going forward per year. You won’t really see much of that in 2014 as the project we hope to get it completed I would say late third quarter. So, you will see that incremental volume starting next year and our estimates return into probably in 25% to 30% kind of range.

Paul Quinn - RBC Dominion Securities Inc

Okay. That’s helpful. And then back to the question about the long-term harvest level, just your ability to ramp up, it sounds from your comments Mike that you’ve got quite a bit of ability to ramp that up over four or six quarters. But in terms of percentage is that like a 20%, 25% harvest increase over that period of time? And then when do you expect to be able to get to that long-term sustainable rate that you had been deferring for a while and is that a 2015, 2016, 2017 event?

Mike Covey

Well given our outlook for Southern pine sawlog prices currently, which we expect to be flat in 2014. Well we’re sitting here today I hope it’s a 2015 than a 2016 event, but we’ll have to wait and see what Southern sawlog prices do at that point. We do have harvest flexibility to go up but it’s not for an indefinite period of time. We’ve always mentioned that we have a lot of harvest flexibility particularly in the South to raise harvest levels but then they’ll have to come back down over a longer period of time as we get into the next decade to manage the amount of sustainable level with our current acreage base, obviously we hope to grow that acreage base over time so that doesn’t became a factor.

Paul Quinn - RBC Dominion Securities Inc

Okay. Last question I had is we’ve seen a material shift in the Canadian dollar basically since the end of 2013. Just trying to understand what you think the benefit will have on lumber prices going forward. Is that - will that bring lumber prices down and you’re expecting additional volumes out of Canada?

Eric Cremers

Yeah, so Paul it’s Eric. We don’t – near-term we don’t see a lot of material change from Canada. If you think about kind of what West side up in BC, what producers up there are - what they are selling and where they are selling it to. It’s really economy – going that the China by and large since priced in U.S. dollars. So we don’t think an exchange rate drop in the Canadian dollar relative to U.S. dollar mix and impact to that business by and large. Now over on the Eastern side of Canada, Canadians will be a little bit more competitive, of course there is allowable cut issues in the Eastern side of Canada. So I think if the Canadian dollar continues to stay week for an extended period of time I think there is an opportunity for Canadians in the Eastern Provinces to put in capital and ramp up production. But again it comes back to is there the timber for them to cut given the allowable cut is coming down.

Paul Quinn - RBC Dominion Securities Inc

Okay. Thanks very much for the help. Best of luck.

Eric Cremers

Thank you.

Operator

And the final question comes from (indiscernible).

Unidentified Analyst

Hey good morning out there guys. Just quickly following up on to the acquisition environment, I don’t know if you guys can talk just a little bit more about what you’re seeing out there as far as competition I know you’ve highlighted that you’re bidding on some different assets, but are you seeing any upward movement in pricing I know last year when we were talking about the potential to go and acquire more timberland you were talking about just your kind of the debt upgrades and more competitive cost of capital. So, I’m just kind of curious how you’re thinking about the deals that you are seeing currently in the pricing environment out there?

Mike Covey

Well, our competitive position has improved over the last recall, I think clearly with an upgrade on the debt. We had a stronger balance sheet than what we had in untapped revolver. If all those things are favorable; on the flipside, the deals that have been closed, I think whether your point to transactions in the west or the U.S. south, the price per acre continues to inch up in our view. And I don’t know if that’s a reflection of people having a more optimistic look at future pricing or if they are just assuming lower discount rates, but whether it’s either one of those factors or both, we think deals are becoming more expensive and more competitive all the time.

Unidentified Analyst

Okay. And then just on that theme, I know one thing that you guys have talked about that’s probably a little bit different than some of the other timber REITs has been a willingness to maybe taken on some timberland that’s also including some wood products facilities as well. Are you seeing any opportunities like that to kind of expand both platforms emerge?

Mike Covey

I wouldn’t say that we have seen anything emerge, but certainly families and other enterprises that own both timberlands and manufacturing operations are enjoying better returns from the wood products manufacturing part of the business. I think they feel a little healthier and a little more optimistic about their business and we continue to pursue opportunities to grow both our converting business and our timberland business simultaneously. I do think that differentiates us from some of the peers.

Unidentified Analyst

Alright. Well, good luck in 2014 guys.

Mike Covey

Thank you.

Operator

And there are no further questions at this time. I will now turn the conference call back over to management for closing remarks.

Mike Covey - Chairman and Chief Executive Officer

Thank you for joining our call today and we look forward to seeing many of you at events this spring. In the first quarter, we are planning to be at the Longbow Conference in New York on the February 25; The Raymond James Conference in Orlando on the March 5; and the UBS Investor Day in Seattle on the March 26. So again thank you for your interest in Potlatch and we hope to talk to you soon.

Operator

Thank you. This will conclude today’s conference call. You may now disconnect your lines.

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