Potlatch Corporation's (PCH) CEO Mike Covey on Q4 2015 Results - Earnings Call Transcript

| About: Potlatch Corporation (PCH)

Potlatch Corporation (NASDAQ:PCH)

Q4 2015 Earnings Conference Call

January 26, 2016 12:00 PM 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

Collin Mings - Raymond James

Chip Dillon - Vertical Research

George Staphos - Bank of America Merrill Lynch

Mark Weintraub - Buckingham Research

Steve Chercover - DA Davidson

Paul Quinn - RBC Capital Markets

Operator

Good morning. My name is Andre and I will be your conference operator today. At this time, I would like to welcome everyone for the Potlatch Fourth Quarter 2015 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, please proceed.

Jerry Richards

Thank you, Andre and good morning. Welcome to Potlatch's investor call and webcast, covering our fourth quarter 2015 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer. This call will contain 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 at www.potlatchcorp.com.

I will now turn the call over to Mike for some comments and then I will cover our fourth quarter results and outlook.

Mike Covey

Thanks Jerry and good morning. In most respects we are glad to put 2015 behind us, although our Resource and Real Estate segments performed well on 2015, the results from our Wood Product segment were extremely disappointing in a major reason our stock fell 28% last year.

Lumber prices were hurt principally by a strengthening U.S. dollar which has gained 43% against the loonie since January of 2013. To a lesser degree, weaker demand from China and a modest growth in the U.S. housing market also put pressure on lumber prices. As a result, our average lumber price realization dropped $56 per 1,000 board feet and EBITDA for the Wood Product segment dropped $56 million year-over-year.

We are encouraged that our Wood Product segment returns deposit of EBITDA in the fourth quarter of 2015.

Resource remains a steady contributor in a significant source of cash to support our dividend. The segment generated over a $100 million of EBITDA for the second year a row in spite of the fact that sawlog prices remained low in the South and rolled over slightly in the North in 2015.

Real Estate also performed well in 2015, opportunistic sales of commercial property resulted in the segment generating more cash than planned.

I’ll now touch based on progress on our strategic initiatives. We successfully integrated the 200,000 acres of timberland that we acquired in Alabama and Mississippi at the end of 2014. We entered into new customer relationships and hired log and haul contractors as part of establishing a business in two new states. The new properties matter of performance goes for the year and we are accretive to FAD for share.

We also completed four large capital projects and spend a total of $18 million of our capital in our Wood Product segment in 2015. These projects were executed well coming in on time and under budget. We’re already seeing the benefits in the form of additional production, better recovery from logs and a higher proportion of premium lumber.

Shifting to a strategy that we discussed on last quarter’s earnings call, we are actively pursuing opportunities to take advantage of the arbitraged between high private market timberland values and this deep discount in which are stock currently trades in the public equity market. Hence we have shifted from being a buyer of timberland to a seller with intend of using sale proceeds before successful to repurchase our share and reduce debt. Our built-in gains tax required by tax rules for ten years after a week election expired at the end of 2015. This greatly increases our flexibility because we can now sell timberlands out of the REIT without paying income taxes.

We believe that our leverage to lumber prices has been a key factor that has resulted in our stock trading at levels we have not seen since 2009. Our stock is currently about 40% lower than analyst’s estimates of NAV are roughly $900 per acre. The resent market volatility and the further decline in our stock prices only increased our conviction at ours that this is an attractive strategy.

Turning to next year, we expect to generate better results than we did in 2015. For planning purposes, we anticipate U.S. housing starts of approximately 1.2 million units in 2016. This represents an increase of a little over 10% from last year’s level and continues the trend of moderate steady improvement.

We expect lumber prices to increase about 15% this year from their current level. This would reverse most of the price decline that occurred in 2015 then results in average annual prices being up about 5% year-over-year.

We plan to harvest approximately 4.4 million tons in 2016. This is the same volume that we actually harvested in 2015 but is down slightly in the self from what we planned last year. We believe that Southern pine sawlog prices will remain flat - will remain at flat levels throughout 2016.

The Minnesota rural recreational real estate market continues to be strong. We expect to sell some conservation properties in 2016 that are depended on government funding. As a result, we anticipate the number of acres that we sell will be a big higher in our long term average of about 20,000 acres per year.

Our dividend is yielding about 6% in our current share price. We continue to believe that the dividend is sustainable and our objective is to grow it overtime.

I’ll now turn the call back to Jerry to discuss the quarterly results and then we’ll take questions.

Jerry Richards

Thanks Mike. Beginning with page 3 of the slide accompanying in this call, our net income was $3.5 million or $0.09 per diluted share in the fourth quarter. By comparison, net income was $0.53 per diluted share in the third quarter. The decline in earnings was largely due to seasonally lower harvest volumes.

I’ll now review the results of our operating segments. Information for our Resource segment is displayed on pages 4 through 6 of the slides. Operating income for the segment was $16.1 million compared to $36.4 million last quarter. We harvested 1.1 million tons in the fourth quarter which is at the low end of the range that we discussed on last quarter’s earnings call and represents a sequential decline of almost 30%. Our highest quarterly harvest volume consistently occurs in the third quarter because of better weather and more operating days relative to the other three quarters of the year.

As presented on slide 5, our Northern sawlog prices declined $9 per ton or 10% in the fourth quarter. About 60% of the price decline was a result of seasonally heavier logs due to higher moisture content with the reminder primarily due to the effect of lower lumber prices on our index sales.

As discussed in prior quarters, log prices were set on a dimensional basis in Idaho, not based on weight.

For the year, our total Northern harvest lines were consistent with our 2015 plan and we’re flat compared to the actual volumes harvested in 2014.

Moving to the South on slide 6, sawlog prices declined $6 per ton or 11%. This was primarily due to a seasonal decrease in the volume of hardwood sawlogs that were harvested which sold for higher prices than pine sawlogs. Pulpwood prices were down 4% in the fourth quarter, largely due to a seasonal decline in hardwood, pulpwood harvest.

For the year, the total harvest volume in the south was 2.2 million tons, which is about 100,000 tons under our plan. Our first quarter volume was behind plan due to wet weather constraining logging operations. We’re able to make that part of the shortfall in the second half of the year before conditions became wet in the middle of the fourth quarter.

The results of our Wood Product segment are displayed on slide 7 and 8. The segment lost $1.3 million in the fourth quarter compared to a loss of $5.4 million in the prior quarter. The sequential improvement was primarily due to lower wood costs and higher shipments.

As Mike mentioned the segment’s EBITDA was positive in the fourth quarter which is an improvement compared to the last two quarters.

Our average lumber prices declined 6% quarter-over-quarter which is a larger change than the drop in lumber priced implied by calculated in the simple average of monthly Random Lengths' framing lumber composite prices. This is primarily because we are more heavily weighted to studs than the index and studs have been disproportionally affected by higher Eastern Canadian production.

We took seven days of market related downtime Gwinn, Michigan lumber mill in the fourth quarter. Log cost continued to moderate in legs days which helped margins. The volume of lumber shipped increased almost 10 million board feet or 6% in the fourth quarter.

The results of our Real Estate segments are covered on slide 9. Operating income for the quarter was $2.5 million compared to $4.2 million in the third quarter. Of the number of acres sold in the fourth quarter were comparable to the third quarter. A larger proportion of the fourth quarter sales mix was comprised the properties with a higher cost basis.

I’ll now turn to slide 10. We use the revolver to pay $22.5 million of debt that matured in December, 2015. We planned to refinance that debt along with $5 million that matures in February in the first quarter of 2016.

Capital expenditures of $32.7 million for the year came in under the $36 million that we budgeted.

Now I’d like to comment on our outlook. We plan to harvest 4.4 million tons in 2016 with total volumes in the north and south comparable to 2015 actual volumes. Approximately 90% of the harvest in the north and about 45% of the harvest in the south including stumpage are expected to be sawlogs.

We expect quarterly harvest volumes to follow typical, seasonal patterns. The first quarter harvest is planned to be between 850,000 and 875,000 tons with a bit over half of the volume in the north. The weather has been unseasonably was in Idaho this month which hinders our ability to haul logs out of the woods. Unless temperatures dropped a little freezing for an extended period of time than your future, some of the log volume that we plan to deliver in the first quarter maybe differed until later in the year.

We expect northern sawlog prices to decline 5% to 10% in the first quarter due primarily to seasonally heavier logs resulting from higher moisture content. We expect southern sawlog prices to decline approximately 10% mostly due to a seasonal decline in the volume hardwood sawlogs in the sales mix. We expect southern pulpwood prices to be flat in the first quarter.

At these volumes in prices, we estimate that Resource earnings in the first quarter will decline by about a third relative to the segment’s earnings in the fourth quarter of 2015.

Turing to Wood Products, we expect to ship approximately 165 million board feet of lumber in the first quarter. Our forecast assumes that our average lumber price realization will be approximately 5% higher in the first quarter. For that to occur, prices need to increase from the current low point as the quarter progresses. Wood Products earnings would be positive in the first quarter at this volume and price.

Shifting to Real Estate, we planned to sell between 20,000 and 25,000 acres in 2016. We expect approximately 70% will be rural recreation, 20% HBU and 10% non-strategic. We estimate that land basis will be between 35% and 40% of revenue for the year.

In the first quarter, we expect to sell about 3,000 acres and estimate that land basis will be at the lower end of the annual range. We expect that corporate expenses will average $9 million per quarter and that increase expense will average a little over $8 million per quarter in 2016. Approximately a-third of our debt is exposed to changes in three-month LIBOR.

We estimate an annual tax rate of 10% to 15% in 2016. Given seasonality and resource earnings, almost all of which are non-taxable, we expect the consolidated tax rate to be about 35% in each of the first two quarter with a tax benefit in the first quarter and tax expense in the second quarter. We have budgeted capital expenditures of $19 million for 2016. Approximately $14 million is for logging road construction and reforestation costs in our resource operations. Most of the remainder is planned in our Wood Products business.

To summarize, we expect our earnings for 2016 to improve over last year. Given the low starting point for lumber prices and the fact that we are in a seasonally weaker part of the year, our consolidated first quarter results will likely be near breakeven. Earnings for each of the remaining three quarters are expected to be higher than the comparable quarters in 2015.

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

Question-and-Answer Session

Operator

Certainly [Operator Instructions] Your first question comes from the line of Collin Mings of Raymond James.

Collin Mings

Hey good morning, guys.

Jerry Richards

Good morning.

Mike Covey

Good morning.

Collin Mings

First question from me just on the land sales front, can you discuss if there are any specific packages you are planning to market or actively marketing right now?

Mike Covey

Collin, are you speaking to our regular real estate business?

Collin Mings

No. As far as speaking to the potential of looking at opportunities that you didn’t take the proceeds to invest in a buyback.

Mike Covey

Okay, well, we’ve been in the process of evaluating land throughout the company’s portfolio both in the south and then the west that would be suitable and attractive to institutional investors. We still think there is a lot of institutional pension fund few more money on the side lines. As we stated on the call, we’re in the middle of evaluating opportunities there and given that’s middle of winter, I think it coupled with uncertainty we’ve seen in many of the markets from the process just takes time. So when we have something to announce we’ll do that.

Collin Mings

Okay. Would you look to wait until you are further down the road with a larger deal before implementing a buyback or just given the current disconnect that you guys highlight would have make sense to go ahead and put one and plate even if it’s just small amount of potential share repurchase you just given that level of discount currently?

Mike Covey

Well from a government standpoint, the board is not authorized a share repurchase yet. We would not ask them to do so until we had the proceeds in hand to support the share repurchase. We certainly don’t have any access or surplus cash on hand today. So the strategy to repurchase shares are paid on additional debt really is hinged on asset sales. So we wouldn’t want to put that kind of cart before the horse here. I think we’ll announce some capital allocation plans simultaneous with an asset sale when and if that does happen.

Collin Mings

Okay. And then I think you kind of addressed this in the remarks but just to clarify, there is not really one region or you might have a bias of completing a transaction whether it be Idaho or the U.S. South as wherever you are able to maybe generate interest that at a price you think is fair?

Mike Covey

I think that’s a good summary certainly in the U.S. South, you know there is strong institutional interest in timberland there, you know it values that I think continued to be quite strong the most recent transactions that Plum Creek executed with Twin Creek’s joint venture. Last year you know point that timberland values for high quality timberlands over 2000 an acre certainly lesser stock lands would fetch a bit less. And in Idaho although it’s not as a dynamic of a market, we certain feel that our timberland there is attractive and highly valued. So we haven’t constrained to one area.

Collin Mings

Okay. Question I guess for Jerry, just more on the capital expenditures, is the 19 million, should we view that more it’s kind of a true recurring CapEx number just given it’s kind of a material step down relative to the last two years where you guys had some bigger projects?

Jerry Richards

I think that’s the right way to look at that Collin that 19 probably is more of a regular run rate. And when you look at you know what comprises it, you know about 14 million to 15 million is kind of the normal resource spend the mix of CapEx and then we always think about what products being in kind of that 5 million or so range for maintenance capital.

Collin Mings

Okay. And then as far as the debt refinance and that you are planning on 1Q, can you maybe just give us some color on the size and pricing and maybe speak to whether or not the recent down grade in credit watch that came out in November, any of those have impacted pricing at all?

Jerry Richards

Yeah, absolutely, Collin, so in terms of what we are planning, we had $22.5 million of debt that matured in December and we have 5 million coming due in early February and we are actively in the process of putting permanent refinancing in place to and then amount would be 27.5, so just refinancing that debt that has always maturing. In terms of tenor, we’re thinking ten years have very limited maturities out in that window and also it’s a great opportunity to take advantage of low interest rates. In terms of a potential of fact of being put on negative watch, really no effect on pricing in fact quite frankly the pricing I was quoted here recently is actually down a bit from when I was quoted last fall. So in terms of you know kind of what that cost is, the existing debt weighted average was a little over 5% and we think net of pattern because we are working with the farm credit system through finances debt, it would be under 4%.

Collin Mings

Okay, that’s a very helpful detail there. One last question from me and I’ll turn it over. Just curious some of the weather conditions here in the south, any impact on your operations either in the fourth quarter into the first quarter?

Eric Cremers

Yes, hey Collin, it’s Eric. If you look at the fourth quarter last year that wet weather that hit us really hit towards the back half of December and it really hit our Arkansas harder than it did Mississippi or Alabama, so harvest volumes were a little bit impacted late in December and that I think Jerry addressed that in the call script we are off a little bit in our tonnage in the south. Really haven’t seen much in climate weather here in the first quarter, so things generally remain on track in the south.

Collin Mings

Okay, great, thanks guys.

Mike Covey

Thank you.

Operator

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

Chip Dillon

Yes, hi, good morning and afternoon. When you look at the guidance you gave for the log pricing in the - for the year succeed in the south you said you thought it would be roughly flat, is that a full year sort of look because I know it seems like prices where their weakest point in the fourth quarter, I didn’t know if you thought that they would stay at the fourth quarter level or maybe recover to the year and there might be a mix issue in there as well?

Eric Cremers

Yeah, Chip, it’s Eric. Yeah generally they are going to be flat year-over-year. There is a flat bit of seasonality in the south particularly as it relates to mix impacting the third quarter. So a lot of a hardwood stands, you really can’t access until you get to drier weather and that tends to occur in the third quarter. So you’ll see our prices pickup as hardwood logs sawlog sell for 70 to 80 bucks a ton compared to pine at 40 bucks. So you can see meaningful changes in our reported prices just from that mix impact. But generally pine prices are flat in the south.

Chip Dillon

Okay and did you give a sort of a full year guide on the northern timber price that you saw for ‘16 versus ‘15?

Jerry Richards

No, I don’t we did in the call script that we went through Chip but they generally should be flat year-over-year.

Chip Dillon

Okay. And when you call for the 5% increase in lumber, I guess I’d sequential and you’re obviously expecting I guess the forces of normal seasonality plus any improvement housing over offset whatever currency impact we are seeing from Canada?

Jerry Richards

Yeah, I think there is a number of reasons to be optimistic about lumber pricing heading into this year Chip, you know the first thing is there is a lot of volatility at the star of the year. I kept dealers on the sideline, so we think field inventories are relatively low levels. That’s some of the anecdotal evidence for picking up in conversation with dealer.

The second thing is if you look at the demand factors that are out there, I mean we are talking about higher housing starts, we are talking about improved repair remodel markets, we’re talking about non-residential construction doing well. The only think that’s really holding back the industry is weakness in China which ultimately is causing the Canadians to push lumber away from China towards the U.S. That’s the only real negative factor. But if you collectively take all those things into consideration, there is reasons to be optimistic. And we’re talking about 5% improvement in pricing year-over-year and that’s right in line with where the fund it’s forecasting as well.

Chip Dillon

Gotcha and I mean if you think about Canada just real quickly, are they - we talking of sort of what kind of proportion that change you think that diversion from China is that maybe you now there sure the market goes up a few percent or is that something more substantial in that?

Mike Covey

I am not sure I understand your question.

Chip Dillon

Well, we say Canada supplied I don’t know roughly 35% of our market, you think that goes to like 50 or does it go to 36 or 37 because I never saw them as massive you know exporting massive amounts to China in the first place?

Eric Cremers

You know just to give you a sense that I think last year they shipped I don’t know 10.8 million board feet to the U.S. and maybe prior year was 10.2, so they’ve moved about 600 million-700 million board feet and all that production has come out of China and it’s now come to the U.S. So you can think about incremental you know 600 million-700 million board feet out of a market size of I don’t we call it 50 billion board feet, so it really isn’t a monumental shift in market share but that is the equivalent of four of five new lumber mills being constructed. So it’s have a meaning -

Chip Dillon

I am sorry, go ahead.

Eric Cremers

So I am just saying that it’s having a meaningful impact, those 700 million-800 million board feet that used to go to China they are now coming to the U.S. It’s having a material impact.

Chip Dillon

Okay and then if you look at the - your plan for the year, you mentioned in the first quarter where we near breakeven, I guess for the tax benefit that would be slightly less than zero and then you would looking for improvements in the subsequent three quarters. Is that consistent with I mean if you hit sort of your plan as you are thinking about it, how should we think about the dividend. In other words I would assume you plan to keep it where it is, you might want to verify that but how much off of that plan would it need to come off before you would consider you know reducing it of course it could go ahead of your plan and you might raise it, but let’s think about you are reducing it. And are there other leverage you might pull to keep the dividend or would you willing to pull you know maybe up in the real estate sales slightly?

Mike Covey

Chip, this is Mike, just too kind of to set some parameters. In 2015, we paid $61 million in dividends and we think about our funds available for distribution after adjusting for the kind of one time discretionary capital investment that in made in Wood Products, our FAD was about 56 million, so basically we’re distributing about a 100% of you know dividend of our FAD. We think that will improve a little bit this year, certainly the CapEx spending in our Wood Products grew early as way down. We don’t have any plans to decrease the dividend or to increase it at this point in time. The board typically evaluates that in the fourth quarter and they held the dividend flat in the fourth quarter of 2015 at our last meeting. You know it certainly it’s got entitled, but I feel pretty confident about it. We think business is going to continue to pick up, our long term outlook for the rise in Southern log prices, we still think it well keeps getting - the can keeps getting kicked on the road a little bit, we still think Southern log prices will rise overtime. Our Wood Products business we think it will get back to more mid-cycle earnings than the level that we had in 2015, so we feel quite good about the dividend and certainly we’ve got you know our real estate assets that we can either accelerate or in a market if we need to, but I feel good about the normal run rate we are on.

Chip Dillon

Gotcha, thank you.

Operator

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

George Staphos

Hi everyone, good day. Thanks for talking my questions. I guess first question I had guys if you think about the north versus south, I think you got it timber price to be flat for both regions. Which of the two would you see as perhaps having more upside or downside risk over the course of the year? And you know to the extent that you can answer that question what would be the drivers of that upside or downside risk?

Mike Covey

Well I’ll take a step at it and Eric can just in. But I think the volatility in pricing probably is more likely to occur in the north where we as recall we index a portion of our log sales to customers to the price of lumber. So the degree that we get a positive upside surprise in lumber prices that should drift over to the log side of the ledger. So I’d look for any upside you really come from that. I think we feel like there is much downside risk, lumber prices you know we feel like we’re going to fall. So I think the ball before was pretty well set, but we’re hopefully we would see some upside. I don’t know Eric?

Eric Cremers

Yeah, the only think I’d add is, you know in the south George, you know the industries went through some really tough times over the past four of five years. And across the entire south, you’ve not seen southern yellow pine sawlog prices drop below 40 bucks a ton on a deliver basis. So clearly the worst of times are behind us in the south. There is stability there and you know if anything there is probably upside in the south as demand continues to improve.

George Staphos

You know Eric just taking that one for a minute and I hear what you are saying and I am sure the most likely scenario but could you see a scenario where you’ve had four or five years where there hasn’t been much appreciation and your timber owners you know progressively get more frustrated and just say you know what I need to monetize that timber for whatever reason realizing we are not you know in the middle of a credit crisis per se where people would need to raise funds but do you see that as perhaps the scenario where really you’d see that as a very low probability that people would just get frustrated to monetize the timber now despite the fact you really haven’t had much of an uplift?

Eric Cremers

You know George, I think most people think that timber asset class is a very long term investment and they don’t make very short decisions on such a long term asset. So I frankly don’t see that. Most people talk about as we get into higher levels of lumber demand in North America, more and more that demand is got to come from the South, that’s really the only wood basket and supported. So I really don’t see a scenario where lumber log prices could move lower.

George Staphos

You know look I appreciate the answer obviously timber isn’t a short term asset but four to 45 years is 45 years, but we’ll it there. When we think about the Wood Products business, you know you mentioned housing starts, obviously everyone is forecasting 1.2, stocks are higher, most every is, repair a model should be growing, I want to come back to that I a minute. Why you think distributers are keeping their inventories so low to start the year if in fact that’s your view?

Jerry Richards

Well they generally tend to run their inventories down towards the end of the year, a lot of them pay taxes on the amount of inventory they have at the end of the year so they just naturally run them down at the end of the year. When you get into January and February, you know what happened this year all this market volatility low oil prices you know concerns about debt levels in China, stock market selling off 10% or 11%, a lot of fed talk about raising rates, you know that scares people and so they hold off on buying inventory.

Meanwhile, construction continues to happen, so those inventory levels get pulled down. Now as you get into February and as you get into March, people start thinking about the coming building season and they start thinking about those higher levels of building activity continues pretty robustly. It just naturally - it just naturally you are going to see demand pick back up again and that off to pick prices back up again.

George Staphos

Okay, and always the inventories get run down in the fourth quarter but early in the year that’s what I was getting, so you think it’s basically a feedback effect from what we’ve seen thus far in terms of what it might mean for demand levels down the road which is keeping inventories relatively low at the distributor level, you’d agree with that?

Jerry Richards

Yeah.

George Staphos

Now, are you seeing any signs thus far of lumber prices picking up which they should be? And then if you could give us some view on what you think repair a model and non-res construction, not the non-res is huge for lumber, what you think those growth rates are going to be this year?

Eric Cremers

Yeah, so I would say we’ve seen pickup in pricing yet, it’s still too early in the year George. I wouldn’t expect to see it frankly until we get out into maybe mid-February. It’s now like you can pinpoint one day and say okay, this is the day that the prices turns. So far no, we’ve not seen prices turn.

As it relates to the growth in market segments, yeah I think repair a model that continues pretty nicely. Home equity levels are pretty high in the U.S. right now, people have recovered from the housing crisis that we had a few year ago, so people are willing to invest in their houses. And so repair a model market should be up 6% to 8% this year.

If you take a look at non-residential construction, I don’t know the latest forecast I’ve got is that non-residential construction should be up 5% to 7% this year over last year. The only segment that’s really holding things back is industrial production. The strong U.S. dollar is crimping demand in that segment but still market should be up for lumber about 1% in 2016.

George Staphos

Okay, guys, I appreciate the rundown, I’ll turn it over.

Eric Cremers

Thanks.

Operator

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

Mark Weintraub

Thank you. I was hoping if possible to get a little bit more color on what you are seeing in the timberlands market, I should say little sensitive given that you are potentially going that to market yourselves with some acreage. But just generally speaking, did you sometime seem to be in a whole lot of liquidity of late when it comes to the types of private transactions that we have been seeing previously, but maybe that’s not right, so if there is any color you could provide that would be helpful?

Mike Covey

Well Mark, the higher profile transactions that have occurred have been for what I would think of is not typical timberland assets the fully transaction, its North Florida was not a classic timberland package, the Campbell sale that happened in Louisiana. Last fall had a lot of impairments around it with leased acres, that wasn’t really a typical classic one. I think the - you know the best examples of kind of clean transactions have been the Plum Creek, Twin Creek’s joint venture announcement that was you know the fall of 2014. I think that was probably the cleanest timberland deal that was authorized what hasn’t closed yet, those prices were around $2,100 an acre. But there’s been several smaller transactions that I think have been indicative.

But I’d agree with you it’s not been as robust as maybe it was a couple of years ago, but I think having said that our discussions with teams in particular I think there is still fair amount of money. It’s been allocated to the asset class and people are looking for good assets to purchase.

Mark Weintraub

And is there any way you can give us a little sense of timing expectations as you go through the process of trying to identify timberland sales opportunities?

Mike Covey

Well, we’ve had our eye on this strategy for couple of quarters now and we said in the past that we’re not going to execute in anything until we get pass this capital gain or this built-in gains window on the reconversion which happened in January of this year. So we’re certainly pass that and we’re actively working on a strategy, but you know given the volatility in the markets and everything that’s been going on. We’re reluctant to give you a point forecast on the time. Rest are sure we are working on, that’s as far as we can go.

Mark Weintraub

I appreciate that. Thank you.

Mike Covey

You’re welcome.

Operator

Your next question comes from the line of Steve Chercover of DA Davidson.

Steve Chercover

Hi, good morning, everyone. So Mike as I recall back in the great recession, I think once that you said timber REIT becomes kind of uneconomic if it approach a million acres in size. So should we infer that you could sell up to 600,000 acres over the next several years?

Mike Covey

Well, you’ve got - I don’t recall that conversation but we may have talked about that. I think certainly you know CatchMark is an example of a timber REIT, that’s only got 400,000 acres and certainly it’s you know got a market care up and their trading level that seems adequate to exist. So I am not sure that I think you have to be cautious of the amount of public company overhead they can come down on any public company and that’s certainly is something we’re mindful of. But we haven’t targeted a specific amount of acreage for sale other than in the last earnings call, we spoke to the fact that we would execute a strategy and hope to purchase between 5% and 10% of our outstanding shares, which you know puts that in the kind of that $100 million of core for round figures.

Steve Chercover

Sure. But I mean if the arbitrage opportunity persist and in the logical with ultimately you know that you sell the whole thing, I am not trying to put you for sale but?

Mike Covey

Well, let us execute on the strategy and see what happens. We’re hopeful that obviously that the stock price recovers closer than net asset value and we don’t have to go down that path. But you know we’ll take it a step at a time, we said for a long time that you know we’ll do anything including selling the whole company if that’s the best think for investors and this is one small step in that direction.

Steve Chercover

Sure. Well, we don’t want to lose companies, we’re already losing some. So with respect to NAV since you brought it up, you indicated hopefully my short remember is not that bad, so you are about 40% below, the analysts’ estimate of NAV, do you think that those estimates are reasonable?

Mike Covey

I think that Jerry can jump in, he probably works on closer to that, I think what you and other analysts continue to tweak those a little bit up and down, I don’t think any of the timber REITs have filtrated up to NVA on a kind of daily basis, but I think the Plum Creek transaction with Weyerhaeuser is a great example where Weyerhaeuser transacted an offer for Plum Creek that I think was probably above its NAV. So I think we feel pretty good about it.

Jerry Richards

I think the only think I would add Steve is you know we certainly have our own view internally, we don’t share that publically. But we have very detailed and kind of the best information around the very detailed discount cash flow analysis to have a point or reference. And you know I am not looking to pack folks on the back but we do think that even though the approaches are very simplified that they gets to you know you guys do a good work in timberland.

Steve Chercover

Alright, thank you. And then final question, I think we were supposed to be near the point where the beetle killing British Colombia was going to constrain lumber shipments and you know that’s part of the reason why Canada cultivated China was because the quality was going down. But do you have a sense that’s the things are getting tight there and if with the couple of hundred thousand more starts from the U.S. we might actually be in flexion point?

Eric Cremers

Yeah Steve, this is Eric. I think some of the things we are starting to hear and see in British Colombia would suggest that we’re kind of a peak number at this point for BC. Now you have seen higher levels of production come out of the Eastern provinces of Canada and there is no doubt that this strong U.S. dollar is influencing some of that production. But to answer the question, yeah we do think BC is topping out.

Mike Covey

There is more - every year we see mill closures announced in BC you know water due that keeps continuing.

Steve Chercover

I appreciate you answered my questions. Thank you.

Operator

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

Paul Quinn

Yeah, thanks very much. Good morning, guys. Just a question, just on lumber markets, if I can get an idea of sort of seen a difference in pricing especially in the U.S. south between two by fours, two by tens and two by four pricing just seems to be very robust. Just wondering what your mix is on your southern mill and then how do you describe the reason for the up ticking price on two by fours?

Jerry Richards

It’s a tough one to get your arms around Paul but yeah I would say our two by four production out of our southern mills and the 5% to 10% kind of range. It is a mill designed more for wider dimensions, but as said we do have like I said 5% to 10% of two by four. You know as why we are seeing two by four price spikes you know could be one of a number of different reasons, but a lot of two by four lumber goes into trusts and for a lot of markets the trust manufactures will tend to prefer to stick with one type of species, you won’t see substitution. So SPF for example have a hard time competing with southern yellow pine in that trust manufacturing.

So as those trust manufactures look to buy wood, they don’t think of SPF being a substitute for southern yellow pipe for those trusts. So that will tend to support southern yellow pipe two by four pricing.

Paul Quinn

Okay, do you really believe that you able to take two by eight and split it into two by four or is that just not exist your facility?

Mike Covey

Well, we have the ability to do it, but the challenge is especially in southern pine, especially with the larger log size that we run at our facility is not size, so you end up with a knock that’s suitable for two and better - two by eight and you go to split and you end up with the number four, two by four because it’s not too big.

Paul Quinn

Yes, very good point. Okay, and then just on your strategic plan, to maybe to look to monetize some timberland, is there - do you see a bigger disconnect in the U.S. South versus sort of market values in what you attribute to the market determining your values of your timberland or is that - is it more homogeneous between both areas?

Mike Covey

I am not sure I really understand the question exactly.

Paul Quinn

Let me try it again. Do you see a bigger disconnect between where you think timberland value should be in the South or in the North?

Mike Covey

I don’t - we haven’t as a company transacted very much in the North. I am certain that we haven’t sold much timberland in Idaho in quite some time. And what we have sold in the past has been fairly small amounts and there are very many other transactions in Idaho that we would consider representative. So you know I feel like we - there is probably less known about the North, I think Southern values kind of depending on the quality, the timberland consistently between you know $1,600 or $1,700 an acre and $2,100 and $2,200 an acre all depending on stocking. So I think there is pretty good bookings in the South, there is probably a little bit less of booking around the Northern property.

And the Northern property at least certainly in our case can be quite different. We always got Northern Idaho timberland that is very well stocked and highly productive and we’ve got timberland in Central Idaho down to McCall which purchased in 2007 for more of a real estate investment than a timber investment. And the stocking levels there are substantially lower and so from a timberland standpoint, Central Idaho is not worth as much as Northern Idaho. So it depends on stocking levels and where you are at.

Paul Quinn

Okay, so does that suggest because of the number of transactions that we’ve seen in U.S. [South] that if you were to monetize some of your timberland to take advantage of this arbitrage that more of the proportion would be in the North to realize that difference?

Mike Covey

No, I don’t think that - I don’t think it suggest that. I think our arbitrage opportunity really comes from the fact that I think the stock is trading at around $900 an acre for the company and we think Southern timberland is worth as I said $1,700 to $2,000 an acre and our Northern Idaho timberland we think it worth $2,000 an acre. So there is the arbitrage opportunity.

Paul Quinn

Okay, fair enough. And then just on Southern yellow pipe log prices which it seem to be flat pretty much flat for last few years. When - and everybody is anticipating a pull up at some point, what is it really going to take in your mind, are you seeing any signs that in terms of regional mix that suggest that prices should be moving up in 2016 or ‘17?

Jerry Richards

It’s a difficult question to answer Paul, you know this is all about supply and demand in an individual wood basket. And certainly if you look across the U.S. South, you have seen increases in pulpwood pricing as a result of all the mills that have gone particularly pellet mills consuming pulpwood. So there clearly is a supple demand response from the marketplace. And thus far, we’ve started to see increased capacity in lumber mills in the U.S. South. In our own three wood baskets in the South, and estimated 3.5 million tons of capacity that’s coming in over the next couple of years. So at some point that incremental demand will cause prices to move higher and exactly when that happens is up for debate.

Paul Quinn

Okay, great, that’s all I had. Thanks.

Jerry Richards

Thank you.

Operator

You have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

George Staphos

Hi guys, just a quick one. To the extent that you can comment, if we held wood prices constant for right now, would have a view in terms of what rough EBIT or EBITDA range you’d have within the Wood Product segment? And then maybe the related question maybe an easier one for answer, if you could just remind us or remind me what the return on the capital products expected to be in terms of ‘16? Thanks very much and good luck in the quarter.

Eric Cremers

Yes, so - George, it’s Eric. Yes, so the four projects that we completed last year the four large projects each were roughly $4 million to $5 million in size, each of those projects had a return of between 20% and 25%, those are IRRs. We have done post project reviews, early post project reviews on a couple of them and in fact we are getting those expected returns. So we feel our capital was well spent.

Just coming here we only have one large project is that our Southern mill and it’s a log bucking optimization project and it’s a couple of million dollars. And it too carries a return between 20% and 25%. So we are constantly on the lookout for those higher return projects that makes sense for us regardless of the lumber market environment that we find ourselves in.

George Staphos

So as a starting point then should we be assuming that you know again holding product pricing constant and assuming no changes for that matter and five, you are looking maybe a $5 million or $6 million improvement in EBIT and EBITDA year-on-year?

Eric Cremers

Yes, so I think that’s a fair way to characterize it George.

George Staphos

Okay, thanks very much, I appreciate the help.

Operator

Your next follow-up question comes from the line of Collin Mings of Raymond James.

Collin Mings

Hey thanks for taking the follow-up guys. Just wanted to go really quickly back to Mark’s question, I am just curious how do you think about the risk that Timberland value actually fall over the next few years just give where is all our pricing is and it really had that moved up as people maybe would have underwritten call two or three years ago, so just kind of what your thoughts on that as far as the underlying asset value?

Mike Covey

You are speaking the Southern timberland values?

Collin Mings

Yes, yes.

Jerry Richards

You know Collin, I don’t think there is a lot of risk in those prices coming down. Timberland provides a nice cash on cash return. And certainly you are seeing large pension funds, you will take a look at the Twin Creek’s joint venture you know they are taking a sizable amount of money and they are sticking it in a relatively low return investment but why are they doing that, it’s because it provides a very nice stable cash on cash return. So I don’t think there is in this uncertain economic environment, I don’t think there is a lot of downside risk.

Collin Mings

Okay, thanks guys.

Operator

Ladies and gentlemen, we’ve [indiscernible] questions. I would now turn the call back to management for any additional or closing remarks.

Jerry Richards

Thank you, Andre and thanks to all of you for your interest in Potlatch. I am available the rest of the day to answer your detail questions.

Operator

Thank you for participating in today’s conference call. You may now disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!