Potlatch Corporation (PCH)
UBS Global Industrials Conference
September 17, 2012 03:30 PM ET
Mike Covey - Chairman, President and CEO
Eric Cremers - EVP and CFO
Gail Glazerman - UBS Securities
Gail Glazerman - UBS Securities
All right. So we’re going to continue and finish the theme of the conference on the housing side of the industry and as I cut Paul off before he could get into the fiber supply dynamics, I think, I’ll let Potlatch management, Mike Covey and Eric Cremers address that. So with us today, we've got Mike Covey, Chairman and President and CEO of Potlatch; and Eric Cremers, EVP and CFO, for those of you that might have missed the press release a couple months ago, Eric has recently assumed a few operating responsibilities as well, I believe in-charge of Idaho.
So, with that, and I apologize for anyone on the webcast for the delay. I'll turn it over to Mike and Eric.
I know many of you sat through Paul’s presentation few minutes ago. I did and I won’t spend much time on the housing part, since I already covered it very well, painted a pretty accurate picture.
For those on the webcast, there are forward-looking statements in the presentation which you can refer to on the website as well as our printed material.
Potlatch is one of four timber REITS as you probably know. Enterprise value of about $1.8 billion today, we are the smallest of the four timber REITs. Painted a very attractive dividend of $1.24 per share with the yield of just under 3.5% today. And we’re the fourth largest, as I mentioned with ownership in three geographic regions, which I’ll cover in just a minute.
Those are depicted here. We are the largest land owner in the State of Idaho, one of the largest owners in Arkansas, a significant land owner in Minnesota. We have manufacturing operations in each of those states, as well as in Gwinn, Michigan, the upper peninsula of Michigan.
We make lumber and plywood in five manufacturing facilities around the country and with the timberland ownership here of 1.4 million acres gives us, we think excellent exposure to different markets both geographically and in species diversity mix in each of those areas.
Three business segments of Potlatch the largest and most important component of that is our resource business, our timber business, the growing and harvesting of trees, our small Real Estate business where we sold raw wood, undeveloped recreational land, a very high margin business because Potlatch is a 110 years old. Timberland has been on the books for a long time at a very low basis, so when you sell an acre of land, it’s got an extremely high margin.
And then our wood products business which I mentioned, and the cash flows from each those businesses in the last few years are depicted in the lower turn in this graph and I think one of the things that is most unique about this is despite the economic downturn, through a combination of land sales and timber harvesting, we’ve been able to hold our EBITDA fairly constant through the downturn.
I will cover housing starts, Paul just did that a minute ago very well. We certainly feel like the recovery is underway and we’ll benefit from that.
Interestingly though and I think it is really important distinction for Potlatch. These are two trend lines on one page. Slide seven, two really important things here, the trend line in green represents our long-term trend from the mid-70s for Pacific Northwest log prices and in the red line a Southern saw log prices. The very bottom of the graph are pulpwood prices. You can see pulpwood's been relatively flat. It doesn’t matter, doesn’t change much nor does it matter much, when it does, we don’t saw, we don’t produce much pulpwood.
The log prices in the Pacific Northwest begin to bounce back a couple of years ago as the dynamics started to play out in Canada and with China, and log pricing has come up closer to this long-term trend line in the Northwest. But in the US, South just the opposite has happened. Log prices weakened. They continue to be weak and in fact, finally we think we have kind of reached the floor but it’s been a sequential period of three or four years here downturn in Southern log pricing. And for this reason, Potlatch decided to reduce our level of harvesting activity in the South, let the trees grow biologically and wait for a stronger market to cut those trees and bring them to market in the US, South. And that was one of the large drivers behind our decision to reduce the dividend in October of last year.
And this is really what I’m referring to in these next couple of slides cover that, you can see we harvest about around 4.5 million tons of logs in a kind of a sustainable log market, log period. We've reduced that from the mid 4 million ton range all the way down to 3.5 this year.
And on the saw log component, now I’m striping out the pulpwood piece which is the lower margin least valuable piece, just thinking about saw logs only. We’re only going to be at about 2.5 million tons this year with a longer term potential to raise that up to about $3.3 million tons. That incremental uplift and additional saw log harvest of 800,000 tons will contributed an additional $25 million in EBITDA and we think overall pricing in the industry, not just the volume increment, but the pricing increment, could add potentially another $40 million in EBITDA over the next few years. So a combined $65 million in cash flow improvement just from our resource business alone or about $1.50 a share.
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