Potlatch Corporation Q2 2008 Earnings Call Transcript

| About: Potlatch Corporation (PCH)
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Potlatch Corporation (NASDAQ:PCH) Q2 2008 Earnings Call July 24, 2008 11:00 AM ET

Executives

Michael J. Covey - Chairman, President and Chief Executive Officer

Eric J. Cremers - Vice President, Finance and Chief Financial Officer

Analysts

Gail Glazerman - UBS

Hamzah Mazari - Credit Suisse

George Staphos - Bank of America Securities

Mark Weintraub - Buckingham Research

Steve Chercover - DA Davidson

Richard Paoly - APG Investments

Ross Galardi - Merrill Lynch

Operator

Good morning. My name is Tina. And I will be your conference operator today. At this time I would like to welcome everyone to the Potlatch Second Quarter Results Conference Call. Your speakers for today are Potlatch Chairman, President and CEO Michael J. Covey and Vice President, Finance and CFO, Eric J. Cremers. (Operator Instructions).

I would now like to turn the call over to Mr. Cremers. Please go ahead sir.

Eric J. Cremers - Vice President, Finance and Chief Financial Officer

Well good morning. This is Eric Cremers. And joining me here in Spokane is Mike Covey. After taking you through our quarterly results Mike will provide some comments regarding the outlook for the company.

Before we begin, let me remind you that this call may contain forward-looking statements within the meaning of the U.S. Securities Laws. These statements include statements about the company’s future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the company undertakes no duty to update them. Although these statements reflect management’s expectations today they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch’s recent filings with the SEC.

Also please note that segment information as well as a reconciliation of non-GAAP measures can be found our website, www.potlatchcorp.com as part of the webcast for this call. I would now like to discuss our first quarter results.

We reported second quarter 2008 net income from continuing operations of 22.3 million or $0.56 per fully diluted share as can be seen on page 3 of the slides accompanying this presentation. This compares net income of 35.5 million or $0.91 per fully diluted share in the second quarter of last year and $24 million or $0.61 per share in the first quarter of 2008.

I’d now like to shift gears and talk about or second quarter results broken down by segment. Our Resource segment results for the second quarter were below both the prior quarter as well as the second quarter 2007. Operating income for this segment in the second quarter totaled 12.2 million compared to 19.9 million in the second quarter of last year and 17.2 million last quarter. In comparing the second quarter of 2008, with the second quarter of 2007, both lower volumes and lower prices contributed to the earnings decline.

Lower harvest volumes were the result of three factors. First, we experienced a relatively late break up in Idaho this year, making it challenging to resume post-winter harvest operations. Second, demand for saw logs in Arkansas was down due to the difficult lumber market. Finally, deep snow and the subsequent wet logging conditions in the Lake states made it difficult to harvest in both Minnesota and Wisconsin. Although our harvest levels were indeed lower this quarter, nothing has altered our view of increased harvest levels going out over the next several years. As noted, lower prices contributed to the negative earnings variance in comparing to the second quarter of last year but were a positive earnings variance in comparing the second quarter of 2008 with the first quarter of 2008. Prices were firm in the northern region but we experienced weakness in the southern region in both saw logs and pulp wood. However, some of the decline in overall pricing is due to a mix shift towards higher volumes of lower-priced pulp wood, which remains relatively strong. While prices haven’t dropped enough for us to defer harvest activity, we will continue to carefully monitor prices and will consider harvest deferrals should prices drop more.

Our Real Estate segment closed sales totaling $15.3 million during the second quarter, producing $11.3 million of operating earnings. This compares favorably to last year’s second quarter operating earnings of $7.4 million but below the first quarter’s earnings of $16.7 million. Included in the second quarter results is the second phase of a sale of nearly 43,000 acres in northern Minnesota. The first phase consisted of 23,500 acres and closed in the first quarter, and the second phase consisted of nearly 19,400 acres. This non-core land sale produced sales and operating earnings in the second quarter of $7.4 million and $6.7 million, respectively. Excluding this relatively large land sale, we sold 5,100 acres and 39 other real estate transactions in the quarter at an average price of approximately $1,550 an acre.

Needless to say our Wood Products segment continues to experience weakness with operating losses of approximately $200,000 for the quarter in comparison to operating earnings of $6.6 million in last year’s second quarter but better than the first quarter of 2008 loss of $10.1 million. The improvements seen over the first-quarter results was largely due to a 15% increase in average lumber selling prices, coupled with higher prices for sawmill residuals. The negative comparison to last year’s second-quarter was driven by both lower lumber volumes as well as lower lumber selling prices.

The Pulp and Paper Board segment had operating earnings of $6.2 million during the second quarter of 2008 versus $17 million in last year’s second-quarter and $11 million in the first quarter. Favorable pricing was more than offset by increased wood fiber, energy and chemical costs, which negatively impacted earnings by $9.9 million, $6.4 million and $4.6 million, respectively. As a reminder, we have planned downtime at our pulp and paper board mills in the third and fourth quarters. At the start of the year we expected the total cost impact to be $18 million, $15 million of which would fall in the third quarter and $3 million in the fourth quarter. We continue to expect the total cost to be $18 million but it will be split differently with roughly $12 million in the third quarter and $6 million in the fourth quarter.

Consumer Products reported second quarter 2008 operating income of $6.9 million versus $4.1 million in last year’s second quarter and $3.3 million in the first quarter. Our recently implemented price increases have resulted in record net selling prices, though this is somewhat offset by higher fiber, energy and freight costs. We continue to see strong demand for our private label tissue products, especially given the weak economic backdrop. Eliminations had a $5.4 million positive effect on operating income during the second quarter compared to a positive $1 million impact last quarter and a positive impact of $4 million in last year’s second quarter.

The main driver for the positive elimination entry in the second quarter was the seasonal log inventory decrease we typically go through this time of year in our Idaho sawmills as it gets more challenging to harvest during the winter and spring months, and therefore we typically draw down log inventory. We anticipate building our log inventories back up again in the second half of the year and therefore expected the elimination to have a negative impact in each of the next two quarters. Corporate Administration, including interest expense, totaled $19.9 million for the quarter compared to $22.7 million in the first quarter and $17.2 million in last year’s second quarter.

The second quarter 2008 expense includes approximately $1.8 million of costs associated with the spinoff of Clearwater Paper, which is the name of the pulp-based company we expect to spin off later in the year. Net interest expense totaled $8.5 million for the quarter compared to $6.8 million in last year’s second quarter and $8.2 million last quarter. Our interest expense has increased as we utilized our revolver on the central Idaho acquisition. EBITDA totaled $50.1 million in the second quarter versus $67.6 million in last year’s second quarter and $47 million in the first quarter of 2008.

Funds from continuing operations or FFO for the quarter totaled $41.8 million versus $54.5 million a year ago and $46.3 million in the first quarter of 2008. The lower EBITDA and FFO results and the comparisons are directly attributable to lower operating earnings. The Company paid a normal distribution of $20.2 million during the quarter compared to $19.1 million in the second quarter of last year. Pages 4, 5 and 6 of the accompanying slides provide additional details by segment for the variances I have described. Our balance sheet remains quite healthy, with net debt to capital at 40.7%. Our last 12 months net debt to EBITDA from continuing operations was at 2.1 times and our interest coverage ratio was in excess of 5 to 1.

Next I would like to spend a minute discussing the anticipated capital structure of Clearwater Paper. We recently completed a series of meetings with the debt rating agencies and now anticipate that Clearwater Paper will initially be capitalized with $175 million of senior unsecured notes. This should give Clearwater a relatively conservatively capitalized balance sheet, which is important given the economic backdrop.

At spinoff, the proceeds from that note offering will be paid to Potlatch in exchange for Potlatch’s assumption of existing debt at the subsidiary to be spun off. We are still reviewing what the post-spinoff capital structure for Potlatch will look like. So it’s premature to comment on that at this point in time. In addition to the $175 million of unsecured notes we anticipate that Clearwater will have, at spinoff, an untapped $75 million asset-backed revolver for short-term liquidity needs. We are making excellent progress on the spinoff and expect to have it completed sometime in the fourth quarter. I would now like to turn the discussion over to Mike to provide some additional comments about our operations and markets as well as give you an update on our expected spinoff of Clearwater Paper.

Michael J. Covey - Chairman, President and Chief Executive Officer

Good morning. As Eric mentioned in his remarks, we have made significant progress on the planned spinoff of Clearwater Paper, which will include all of our pulp, paperboard and tissue businesses as well as one sawmill. Gordon Jones joined us on July 1 and will serve as President and CEO of Clearwater Paper. He has deep industry experience in both tissue and paper manufacturing most recently a bluish paper print count in North Carolina and prior to that, as a senior executive was stone container in the late 90s. Over the next few months he will be rounding out his management team, which will include both current Potlatch senior leadership as well as key external hires. We have also made progress forming the Board of Directors for Clearwater Paper. Three current Potlatch Directors will serve on the new Board and two of these directors will resign from the Potlatch Board upon the effective date of the spinoff. One of the Directors will continue to serve on both the Potlatch Corporation and Clearwater Paper Corporation Boards for a limited period of time.

There is currently a search process underway, led by Russell Reynolds & Associates, to identify and recruit three new Directors for Clearwater Paper. Upon completion of this search, seven Directors will serve on the board of the new company. The Potlatch Board will be reduced in size from 10 independent directors to 8 upon the date of the spinoff. As previously noted, the private letter ruling request was made to the IRS on June 5, 2008. Within the next two weeks we will submit the Form 10 document to the SEC. Pending final Board approval, successful debt raising efforts by Clearwater Paper and the establishment of a record date, the spinoff is expected to be complete by mid-November.

That day may change based on regulatory clearances and access to financial markets later this fall. Now that we have established a capital structure for Clearwater Paper, we will determine the appropriate capital structure for Potlatch, post-spin. As the timing of the spinoff and market conditions become clearer over the next few months, we will be able to provide more guidance on these important matters. Now I would like to spend a few minutes discussing current market conditions and the outlook for each of our core businesses, beginning with the assets that will be part of Clearwater Paper.

As noted in Eric’s comments, cost pressures for wood, energy, chemicals and transportation continue to erode margins in our paperboard business during the period of very strong demand. During the past two quarters we have implemented price increases for most grades and end-use applications of our bleached paperboard product line. In total, price increases will amount to approximately $34 million by year-end. These increases however have not kept pace with the cost inputs partly due to yearly pricing contracts on certain paperboard products, including cub stock and liquid packaging in both the US and Japan. In the last few weeks we have seen indications that energy-related cost inputs related to oil and natural gas have begun to moderate. Wood costs have also seemed to have peaked. Our expectation is that full year EBITDA from our Pulp and Paperboard operations will be roughly 20% below the 2007 performance.

The outlook for our Consumer Products business remains favorable and we expect year-over-year improvement in earnings due to price increases in private label tissue products earlier this year, following more than two years of flat pricing in 2006 and 2007.

In addition, we continue to improve our product mix and optimize our transportation cost with additional capacity at our Ellwood Illinois facility. We recently ordered another napkin converting line to complement our bath tissue line, which started production in 2007. At this point in the year, we are expecting flat to slightly improved earnings from our tissue business compared to 2007.

Shifting focus from the product lines that will be part of Clearwater Paper, I’d like to address market conditions for Potlatch’s core Timberland and Wood Products businesses. At the beginning of 2008, we provided harvest level guidance that was 8% to 13% above 2007, consistent with an 18% increase in acres under management, in our view that many of our timber stands are financially over mature and ready for market today.

We also noted that second-quarter results would be highly weather dependent, especially in the West and the Lake states. We still expect our 2008 harvest levels to be in line with our original estimate in pricing by region and by product is consistent with what we expected at the start of the year. Much of our volume for the remainder of the year has already sold at prices consistent with current market.

Earlier this year, we also indicated a plan to sell approximately 20,000 acres of rural recreational land and noted that business results for this segment vary considerably quarter to quarter, depending on the timing of land sales. Excluding the large, non-core land sale in Minnesota that Eric discussed, we have sold $21 million of land year to date or about 11,000 acres at an average price of approximately $1,900 per acre.

We are seeing early signs of weakness in demand in most market areas. However, every contract we’ve entered this year has moved through to closing as scheduled. Pricing of rural recreational track remains in line with our expectations at the start of 2008. We will have a much better feel for demand and our full-year outlook by the end of the summer period.

The good news in our Wood Products business is that we generated positive EBITDA of $2.8 million in the second quarter and expect positive cash flow again in the third quarter. The bad news is that there is little reason to believe that lumber prices will improve enough over the remaining two quarters to earn a meaningful operating income in this business. We do not anticipate any material changes in operating schedules or output from any of our facilities at this time. The cedar lumber market along with our specialty industrial plywood business remains strong.

That concludes our prepared remarks and we will now take questions from the call participants. Tina, if you will take questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Gail Glazerman of UBS.

Gail Glazerman

Hi, good morning. I was wondering if you could maybe give a little more color on that comment you made about land seeing some weakness and land values. Is that really focused on any region or any type of land first of all? And then, second of all, is it anything dramatic enough to make better acquisition opportunities for you?

Michael J. Covey

Well, what I -- good morning Gail -- what I indicated was that we are seeing a weakness in demand not a weakness in values for land. We are seeing that across most market areas that we are active in, including the Lake states, Idaho and Arkansas. We gauge that by our MLS listings and other activity in these rural markets, where we are just seeing the number of transactions diminish, which is an indication of lower demand. We have not seen a corresponding decrease in price but we by no means are pushing product onto the market, either. So as it relates to acquisition opportunities I don’t think that what’s happening in the rural recreational land market really transfers at all to what we would think of as the broad landscape for timberland acquisitions.

Gail Glazerman

Okay, but it’s more the rural recreation. And a little more color also on the weakness in southern pulpwood. Is that more, just better harvest conditions? Is it more supply as more people swing and try to get something from pulpwood or is it on the demand side?

Michael J. Covey

I think demand remains strong. It’s really related to the springtime. There is more access. The weather has been favorable, reasonably good in the South and I think there is just more product on the market. So, we have seen a little bit of weakness but it’s still quite strong.

Gail Glazerman

Okay. Then finally just in terms of tissue, with the improvement -- I was impressed with the cost of inflation that you have had going on to see that type of improvement. I mean, is the market share gains that you are getting in terms of private label; is that really the main driver there? Because even pricing going through, given the cost escalation there I wouldn’t have thought you would have done quite so well on a year-over-year basis.

Michael J. Covey

Well we had record performance in tissue production in each of our facilities in the quarter. Our converting lines are operating 24/7. We have extraordinarily strong demand. The price increases from private label tissue have been pushed through that were implemented earlier in the year. And really the cost inputs into tissue are not quite as severe as they are in paperboard. Really the cost inputs that the most -- the one we feel the largest in the Consumer Products business is in energy. But pulp hasn’t moved that much in the last quarter. So, I think that explains part of the reason why the margins are better.

Gail Glazerman

Okay. Alright, that’s all I have thank you.

Michael J. Covey

Thank you.

Operator

Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Hamzah Mazari

Thank you. Just a couple of questions. On your Pulp and Paperboard business, do you have the ability to execute surcharges and that kind of mechanism to try to limit some of the cost pressures besides just your annual price increase?

Eric J. Cremers

Well you know, Hamzah, we go through pricing discussions with our customers on a regular basis. So, I don’t know that we have the opportunity to pass through price increases as energy costs go up like that. But we just occasionally, will renegotiate prices. The whole industry does from time to time. We participate in price increases as well.

Hamzah Mazari

Okay. The weakness in demand in recreational property that you touched on in terms of transactions slowing down, is that across all markets? Or are you seeing some markets much weaker than others and if so, which ones are they?

Michael J. Covey

Well, Hamzah, this is Mike. As you know, we don’t have a large footprint. Our recreational real estate business is really concentrated in Idaho and in the Lake states and to a lesser degree in rural Arkansas. Certainly the Lake states and that would be Minnesota and Wisconsin in our case and in Idaho. We are seeing less demand kind of equally in those two areas.

Hamzah Mazari

Okay. And just one last question, the operating profit from the Eliminations was $5.4 million. That is historically pretty high. What is in that number?

Eric J. Cremers

Well, Hamzah, what is in that number is, so operating income line, we generate income in the resource segment when we harvest. When we build inventory that profit, since it wasn’t sold, it didn’t leave the Company, the product didn’t leave the Company. It’s basically an inner-Company Elimination to take it back out. So, when we finally do process the log it goes from being profit that we had realized previously. It actually does wind up flowing through the P&L. It’s a little bit larger than normal. But recall we had tough conditions harvesting. So we might have drawn our inventory down a little bit lower than normal. That’s not an abnormally high number.

Hamzah Mazari

Got it, got it. Thank you.

Operator

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

Mike Roxland

Hi everyone. This is Mike Roxland in for George Staphos. I just wanted to follow up really quickly on some of the trends that you are seeing within the tissue business. Can you describe really what is happening in the category? Are there any other price increases on the table?

Michael J. Covey

Well, this is Mike. As a private label tissue supplier we certainly pay attention to what the three large brand-name producers do, Kimberly-Clark, Procter & Gamble and Georgia-Pacific. Each of those companies from time to time announces price increases that they intend to implement in the market. Kimberly-Clark recently did that. And at the appropriate time we visit with our customers about whether we can implement those on our private label tissue products as well. Demand is strong, especially in the private tissue category. I think the margins for the brands, for the big three that I mentioned, over time the margins have eroded a bit. So I think they feel like this is an opportune time to raise pricing. That certainly translates to our bottom line when it happens.

Mike Roxland

Got you. In terms of the harvest profile, what should we expect given the mix of pulp, paper and wood product trends? Should we expect any changes in the harvest profile going forward?

Michael J. Covey

By harvest profile do you mean the quantity or the mix of different pulp wood and saw logs?

Mike Roxland

With the mix.

Michael J. Covey

No. We don’t anticipate anything different going forward than what we have been doing. We have opportunistically focused on pulpwood in the South when we thought we had good pricing and we still do. But we have most of the wood, as I mentioned, for the year already committed to customers, pretty much the mix that we have had year to date.

Mike Roxland

Got you. The last question is following up on your comments on the weak demand. Do you expect at some point the weak demand to translate into weakening land values? Even though you are not seeing that currently, at some point do you expect to see that, given that demand has softened?

Michael J. Covey

Well yeah. I think it depends on, I think that’s a logical conclusion that if demand is down over time, people will be getting reduced pricing. Our point of view is that we made very conservative assumptions about the price of land that we might sell for the acquisitions that we’ve done. Certainly from the portfolio of land that we’ve identified, the couple of hundred thousand acres within the Company that we would sell over the next decade, we are in no hurry to do that. This is not a huge part of our business. If we don’t think the pricing is attractive, it’s a little bit like how we think of our timber business. We’ll wait and sell it at a later date.

Mike Roxland

Got you. Thanks very much.

Michael J. Covey

You’re welcome.

Operator

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

Mark Weintraub

Thank you. First, on the timber business, post the spin, have you or when will you conclude what your dividend policy will be? Is this going to essentially just continue at the current dividend level? What are the factors that are going to determine whether you keep it there or make a change to it?

Eric Cremers

Mark, this is Eric. We have only recently concluded what the capital structure of Clearwater Paper is going to be. So we haven’t gone through the analysis of what the dividend policy is going to be. We expect to do that over the next quarter or two. As you know, we’ve got a pretty strong harvest profile going out over the next couple of years, which should support the distribution going forward. But we frankly have not gone through that math yet.

Mark Weintraub

Okay. So we’ll find out post the spin most likely? Or pre the spin?

Eric Cremers

I would expect over the next quarter or two.

Mark Weintraub

Okay. And, curiosity, since this is going to be a tax-free spin, are there any constraints that would be placed on either of the entities regarding what you might -- for instance if you were to choose to sell a business, quite often post-tax-free spin there are constraints on what you can do. Would that be the case here? And if so, for both or for neither? How should we think about that?

Eric Cremers

Well first, we have applied to the IRS for a private letter ruling as a tax-free spin. It’s not a given. We haven’t received that permanent ruling from the IRS. But assuming that we do, we are successful in achieving that, like any spinoff transactions there would be certain prohibitions and tax consequences if either entity entered into certain transactions following the spin, if there were certain events that had occurred before the spinoff. So once we get the ruling from the IRS, assuming that we do, and then we’ll be in a better position to say what it is we can and can’t do, post-spin.

Mark Weintraub

Okay. Then lastly, on the Pulp and Paperboard business you indicated that this year EBITDA might be about 20% below last year. If I have my numbers right, last year for this business was about $77 million. Is that right just as a starting point?

Eric Cremers

Yeah, that’s correct.

Mark Weintraub

Okay. And, what are you assuming on energy and things like freight in making that projection? Connected to that, what type of hedging do you have in place? Clearly we have seen for instance net gas in the last week or so starting to come down quite a bit. So I guess I ask that question could we actually have a pleasant surprise here if the trends in energy continue what we have seen in the most recent past?

Eric J. Cremers

Well, there are a lot of different pieces to your question, Mark. What I can tell you is that on the hedging side we regularly buy forward gas contracts. Right now we have bought about 15% of our gas needs both for the remainder of this year as well as 2009 and 2010 at prices that are in the 6 to $8 BTU range. So, that gives you an idea of our forward buying for energy. Our forecast for pulp and paperboard that we just gave you was assuming relatively firm energy prices, prices that are not inconsistent with where we are at today. So I think if you saw prices come down from here, yeah, you could see a boost potentially to earnings. Higher energy costs are going to impact pulp and paperboard nearly $20 million this year versus last year. So, if we can get prices to come down a bit more it could benefit pulp and paperboard.

Mark Weintraub

Okay. Not wanting to be overly focused on short-term swings, but when you say -- because that gas was 13 plus two weeks ago and now it’s below 10. So, it’s a pretty big swing that has taken place. So when you said today, did you mean as in below 10 or as in 12, 13?

Eric J. Cremers

As in below ten.

Mark Weintraub

Okay. Okay. Thanks very.

Operator

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

Steve Chercover

Thanks and good morning. Couple of quick ones. First of all, with respect to the capital structure at Potlatch, is it fair to say that you might refinance the legacy company as well, because it clearly is not just subtracting $175 million from your current debt load? And do you have a sense of what the coupon at Clearwater might be?

Eric J. Cremers

Yeah, Steve. This is Eric. I think there is going to be a review of the overall Potlatch balance sheet. We have those credit sensitive notes due at the end of next year a $100 million. We may take a look at refinancing those. We have got about, at the end of the quarter we had about $129 million drawn in our revolver. That’s going to come down here in the next quarter or two. But we will need to put permanent financing in place for that. So, yes, there are some moving pieces here for us to consider as we move forward.

Steve Chercover

But with respect to the coupon that Clearwater is likely to pay, do you expect that it will be investment-grade?

Eric J. Cremers

No, we don’t expect it to be investment-grade. I mean Potlatch today is a BB. We expect this Clearwater to be capitalized with a similar sort of credit rating BB, BB- perhaps. We will know more as we get closer to the spinoff day. But with regard to the coupon, it’s probably in the 9% to 10% kind of range. You know it kind of depends upon when you go to pull the trigger, where is the market at that point in time. But it’s in that kind of range.

Steve Chercover

Sure. And then with respect to the land basis or the basis of land sold was $2.6 million in the quarter. Is that embedded in the $16.9 million depreciation for the whole Company?

Michael J. Covey

No, it’s separate Steve.

Steve Chercover

Separate?

Eric J. Cremers

Yeah.

Steve Chercover

So, where does that show up? Is that show up in cost of goods sold?

Eric J. Cremers

Yeah. Yeah. Yes it does.

Steve Chercover

Okay. Thanks. And then at some stage will you introduce Gordon Jones to us perhaps on the next conference call just so I don’t know if we can all get out to Spokane -- just to get a little sense of the man and why he’s taking the opportunity and his outlook?

Michael J. Covey

Yeah, our expectation is we will do that at the next earnings call.

Steve Chercover

Okay.

Michael J. Covey

Gordon has just started with the Company so we didn’t feel like it was appropriate to put him on the spot quite yet.

Steve Chercover

Understood. Last quick question, is it naive or too simplistic to say that because Potlatch’s initial dividend as a REIT was predicated on earnings from timber and land sales that it really doesn’t necessarily have to change that much, since those are the businesses that remain?

Michael J. Covey

Well, we have said from, I think from the time I started with the Company, Steve, that we had a dividend policy that was based on support from our timber and land business. The increase that we made in December of 4% to our policy was based on our forward-looking outlook for our harvest profile in our timber and land business. And we felt the increase was supported by that. So nothing has changed with regard to that policy. I’m not going to presuppose what the dividend is determined to be for Potlatch post-spin. That’s the discretion of our Board. But our philosophy has not changed\

Steve Chercover

Sure. But I’m a simpleton and I’m going to say what’s going away was never part of it. So maybe I will draw that conclusion. Okay, thanks so much.

Eric Cremers

Welcome.

Operator

Your next question comes from the line of Richard Paoly with APG Investments.

Richard Paoly

Hi guys. Just a follow up on the, and I know you can’t speak to on the capitalization of Potlatch post-spin. And, then I just have another question on the Clearwater Paper capitalization. Could you just, thanks for the color on what you think the pricing on the interest rate on the $175 million might be. What do you expect, I guess say on a trailing 12 months or at least on a simple recent quarter debt to EBITDA at spin co would be? Then remind me, I know you mentioned it; I just couldn’t jot it down what the debt to EBITDA was for Potlatch this quarter? Then what options are you exploring aside from refinancing a debt. Is it more equitization? Or is it more levering up? What are the things that are on the table for Potlatch, post-spin?

Eric Cremers

Well on the capital structure of Clearwater, you’re probably looking at, I don’t know, at the end of the day probably $100 million or so of cash flow. We are not through the year yet. So it’s tough to call. But it’s in that sort of range. So if you’re talking $175 million in debt, it’s 1.75 or so to one. With regard to Potlatch, it’s just too early to comment. We’ll look at all the alternatives to be honest with you. We are enjoying the 3.5% interest we have got in our revolver right now, that’s for sure. But we don’t want that to be a permanent part of the capital structure. So we’ll look at all the options I guess is the best way to describe it.

Richard Paoly

Okay, then just remind me, what was the debt to EBITDA? Or I guess you decided debt to cash flow number for spin co? What is that for Potlatch? Somebody made a comment that it’s not simplistically taking one from the other but the way I am thinking of it is you have a pie and you are splitting up cash flow on one side and you are splitting up debt on the other, and I want to see how the relative portions could be changing?

Eric Cremers

It’s too premature to comment on that, Rich, until we’ve gone through this with the Board. We are going to take that $175 million in proceeds and we are going to do analysis and try to decide what is the best use of those proceeds, and we just haven’t sorted through that yet.

Richard Paoly

Right. Okay. What was that cash flow for the Potlatch maybe this quarter?

Eric Cremers

Are you referring to the 2.1 times? Is that what you are referring to?

Richard Paoly

You referenced a number and I didn’t jot it down quickly enough.

Eric Cremers

Yes. Net dept EBITDA from continuing operations was 2.1 times total Company.

Richard Paoly

Okay. Is the spin co stuff included in that continuing operations quote?

Eric Cremers

Yes, yes it is.

Richard Paoly

Okay, 2.1 to one. Thank you.

Eric Cremers

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Ross Galardi with Merrill Lynch.

Ross Galardi

Good morning. Thank you. I was just curious to hear, are you seeing any signs of reduced interest or reduced competition for larger tracts of timberland acreage, which would be more indicative of overall demand for the asset class. I know you had some comments on some softening in the recreational land market. But, I was wondering if you could comment there.

Michael J. Covey

Well there are a handful of large timberland transactions on the marketplace from everything that I know. This is Mike, from everything that I know, the demand and the competition remains fierce for those. There is still a lot of capital allocated to the timber sector that I don’t think has been placed. We think the demand still for large transactions is very strong and the price will be very competitive.

Ross Galardi

Thank you.

Michael J. Covey

You welcome.

Operator

At this time there are no further questions. Presenters, are there any closing remarks?

Michael J. Covey

No thank you. We’ll talk to you next quarter.

Operator

Thank you. This concludes today’s conference. You may now disconnect.

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