Potlatch's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Potlatch Corporation (PCH)

Q2 2012 Earnings Call

July 24, 2012 12:00 pm ET

Executives

Eric Cremers - EVP and CFO

Michael Covey - Chairman, President and CEO

Analysts

Gail Glazerman - UBS

Mike Roxland - Bank of America

Chip Dillon - Vertical Research Partners

Joe Stivaletti - Goldman Sachs

Joshua Barber - Stifel Nicolaus

Steve Chercover - D. A. Davidson

Joshua Zaret - Longbow Research

Presentation

Operator

At this time, I would like to welcome everyone to the Potlatch second quarter 2012 earnings conference call featuring Eric Cremers, Executive Vice President and Chief Financial Officer; and Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation.

(Operator Instructions) I would now like to turn the call over to Mr. Eric Cremers for opening remarks.

Eric Cremers

Well, thank you and good morning. Welcome to Potlatch's investor teleconference covering our second quarter 2012 earnings.

Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also please note that segment information as well as a reconciliation of non-GAAP measures can be found on our website, www.potlatchcorp.com, as part of the webcast for this call.

I would now like to turn the call over to Mike Covey, our Chairman and CEO, who will make some introductory remarks, and then I'll review our second quarter results in more detail. Mike?

Michael Covey

Thanks, Eric. Good morning. We are pleased to report second quarter results that have exceeded our expectations. In our Resource business we experienced modestly higher sawlog prices compared to the first quarter, and we expect prices to continue to increase in Q3.

Our Wood Products segment considerably outperformed our expectations, posting its highest operating income in over five years. Much improved lumber and plywood prices in Q2 justified increased production levels in order to capitalize on pricing and margin opportunities.

Our Real Estate segment continued to be a solid performer in the second quarter of this year with consistent demand for rural recreational and HBU real estate, especially when excluding the impact of two significant land sales in the second quarter of 2011. In total, our quarterly and year-to-date results were stronger than anticipated.

Our outlook for the near term continues to be favorable as we believe we are in the very early phases of our Wood Products recovery evidenced by recent pricing gain. Pricing and demand are improving for a wide variety of reasons, including low levels of inventory found throughout the supply chain, strong industrial and commercial markets, firm repair and remodel markets as well as solid year-over-year improvement in new home construction, though still low by historical measures.

June, U.S. annualized new housing starts increased 7% to 760,000 units, the highest level since October of 2008. Over the long term, we believe continuing Chinese demand, higher U.S. lumber manufacturing capacity utilization and diminished Canadian harvest will result in improved market conditions and profitability for Potlatch.

Though optimistic, we remain patient and we'll wait for sustainable sawlog market improvements before increasing our harvest level. As discussed on previous calls, we are currently managing harvest levels considerably below sustainable rates.

In the current sawlog pricing environment, it is our advantage to protect our greatest financial asset, our timber, by continuing to grow our forest and defer harvesting in order to capture the upside for better pricing in the future. We believe sawlog prices will continue to advance over the coming 18 to 24 months as the U.S. housing market continues to recover.

A continuation of the recent improvement in the wood products industry is critical as it is a prerequisite to the return of stronger sawlog pricing and thus resource profitability. Our very mature forest profile will eventually result in higher harvest levels, which is completely within our control. When coupled with what we believe will be higher sawlog prices over the next couple of years, the company's cash flow should significantly improve.

Finally, the recent Forest Capital sale to Hancock and the Molpus Woodlands Group confirms investor interest in the long-term outlook for the timber asset class.

I'll now turn the call over to Eric to discuss the quarter, and then we'll take questions.

Eric Cremers

Well, thanks Mike. As shown on Page 3 of the slides accompanying this presentation, we reported second quarter 2012 net income of $5.1 million or $0.13 per diluted share. This compares to net income of $8.4 million or $0.21 per diluted share for the second quarter of 2011 and net income of $5.1 million grew $0.13 per diluted share for the first quarter of this year.

I'd now like to review our second quarter results broken down by segments. Slide 4 exhibits operating income and margin trends in our Resource segment. Operating income was $6.7 million for the quarter, which compares to $7.5 million in last year's second quarter and $8.7 million from the prior quarter.

The second quarter is typically our weakest quarter due to seasonality. The variance from Q2 of 2011 is caused by decreased harvest volume consistent with our previously announced harvest deferral, primarily in Arkansas, where sawlog and pulpwood pricing remains unfavorable.

Page 5 reviews volume and pricing trends for the Northern region of our Resource business. Comparing Q2 of this year to Q2 of last year, sawlog volume increased 9%, which is attributed to unusually wet weather experienced in Q2 of last year that delayed logging activity. Sawlog prices declined 2% year-over-year driven by a modest product mix shift with less feet are being harvested in this year's Q2.

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