Potlatch Corporation (
Q3 2010 Earnings Call
October 28, 2010 12:00 pm ET
Eric Cremers - VP of Finance and CFO
Mike Covey - Chairman, President and CEO
James Armstrong - Credit Suisse
Gail Glazerman - UBS
Michael Roxland - Bank of America Merrill Lynch
Dan Cooney - KBW
Steve Chercover - D. A. Davidson
Mark Weintraub - Buckingham Research
Previous Statements by PCH
» Potlatch CorporationQ2 2010 Earnings Call Transcript
» Potlatch Corp. Q1 2010 Earnings Call Transcript
» Potlatch Corporation Q3 2009 Earnings Call Transcript
» Potlatch Corporation Q2 2009 Earnings Call Transcript
Good morning. My name is [Chasidy] and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Third Quarter 2010 Earnings Conference Call featuring Eric Cremers, Vice President of Finance and Chief Financial Officer; and Michael Covey, Chairman, President and Chief Executive Officer of Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer-session. (Operator Instructions). Thank you.
I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.
Welcome to Potlatch’s investor teleconference covering our third quarter 2010 earnings. Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the disclaimers regarding forward statements and 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 the reconciliations of non-GAAP measures can be found on our website www.potlatchcorp.com as part of the webcast for this call.
I would now like to turn the call over to Mike Covey, our Chairman and CEO, who will make some introductory remarks and then I’ll review our third quarter results in more detail. Mike?
Thanks Eric, good morning. Let me begin by stating that business conditions in each of our three business segments are better than one year ago. Moreover, for our largest business segment Resource, operating income margins improved 1% over the second quarter and was higher than any quarter since Q3 2008. Log prices and demand have held steady since the second quarter especially in Idaho despite a downturn in lumber prices following the unexpected run up and prices earlier this spring.
There are a few bright spots as we look at the macroeconomic environment for wood products. Offshore demand for lumber and logs is increasing, which support stronger pricing in Idaho. The Canadian dollar remains strong and the mountain pine beetle epidemic in British Columbia is slowly impacting the supply chain.
However, it is becoming increasingly clear that housing starts will languish until job creation improves and the backlog of existing homes for sale is reduced. Until that time, we expect the wood products industry to operated approximately two-thirds of capacity with little price improvement likely to occur in lumber, plywood, and OSB.
With that overarching theme in mind, we start fourth quarter with little optimism that business conditions are going to improve meaningfully over the winter months. However, customer demand is adequate to maintain our current rate of harvest, which we expect to be around $4.1 million to $4.2 million tons for the year, which is well below our maximum sustainable harvest rate.
We will continue to defer our sawlog harvest through the fourth quarter of 2010 and most likely into 2011 and reevaluate business conditions next spring. Before Eric comments on variances and the key drivers behind our Q3 results, let me comment on our balance sheet and the dividend.
After closing on the final phase of the land sale to RMK, an Atlanta-based TIMO, earlier this month, we now have a cash balance of approximately a $105 million. Combined with the completely undrawn revolver as well as expected 2011 earnings in cash flow, we have confidence we can support our current $2.04 per share annual dividend.
In fact this past quarter, we generated funds available for distribution or FAD of approximately $44 million, well above our quarterly payout of approximately $20 million. Similarly over the past 12 months, we have generated FAD of approximately $78 million compared to our dividend payout of approximately $81 million. We continue to be creative about finding ways to generate cash to cover the dividend.
While we are disappointed that the recovery in housing starts is not imminent, nor does it appear that it will be robust, we expect a stronger demand, higher pricing, an increased harvest levels will more than cover our dividend, once the housing recovery is further along. Nonetheless, our board reviews our dividend, our financial position, and our outlook each and every quarter.
I will now turn the call back to Eric, comment on the third quarter results.
Thanks Mike. As shown on slide 3, of the slides accompanying this presentation, we reported third quarter 2010 earnings from continuing operations of $18.2 million or $0.45 per diluted share. This compares to earnings from continuing operations of $46 million or $1.15 per diluted share in the third quarter of last year.
As a reminder, our year ago results included a timber deed transaction on about 50,000 acres in Arkansas which provided $1.04 of EPS impact. Excluding this transaction, EPS in the last year’s third quarter would have been $0.11. Note that in my review of our quarterly results, I will exclude the impact of the timber deed to make comparisons more meaningful.
I’d now like to review our third quarter results broken down by segment. As shown on page 4 of the webcast slides, our Resource segment results for the third quarter of 2010 were significantly better than the second quarter of this year and versus the third quarter of last year. Operating income in the third quarter totaled $24.3 million compared to $15 million in the second quarter and $13.9 million in the third quarter of last year.