Potlatch posts Q3 net earnings of US$25.6M, up from US$18.1M a year ago; CEO attributes increase to stronger demand in Northern region, leading to higher harvest volume, prices

Wendy Lisney

SPOKANE, Washington , October 24, 2011 (press release) – Potlatch Corporation today reported financial results for the third quarter ended September 30, 2011.

“Each of our business segments posted improved results during the third quarter compared to the same period a year ago,” said Michael Covey, chairman, president and chief executive officer of Potlatch Corporation. “Total harvest volume and pricing was higher due to strong demand in our Northern region. This strength was partially offset by continued weak demand for sawlogs in our Southern region that impacted harvest volumes and prices and led to the deferral of some of our planned harvest in Arkansas during the second quarter. We did receive some benefit from increased thinning operations in our Southern pine plantations, which generated higher sales of pine pulpwood. In our Wood Products business, prices for wood products declined modestly over the quarter, but were offset by increased lumber shipments. Our Real Estate segment recorded solid results, completing 33 land sales transactions during the quarter,” concluded Mr. Covey.

Q3 2011 FINANCIAL SUMMARY

Net earnings for the quarter were $25.6 million, or $0.63 per diluted common share, compared to $18.1 million, or $0.45 per diluted common share for Q3 2010. Included in Q3 2010 results was a non-strategic timberland sale of approximately 41,700 acres in Wisconsin and Arkansas for $28.7 million, which provided $0.12 of positive EPS impact.
Cash provided by operating activities from continuing operations was $33.9 million for Q3 2011 compared to $51.6 million for Q3 2010.

Q3 2011 BUSINESS PERFORMANCE

Resource

The Resource segment posted strong results for the third quarter, which is seasonally the Northern region’s strongest production quarter. Operating income for the segment was $25.6 million, compared to $7.5 million in Q2 2011 and $24.3 million in Q3 2010.

Northern Region

Total fee harvest volume for the Northern region for Q3 2011 was more than three times greater than Q2 2011, due to normal seasonality, the shift of a portion of the harvest from the Southern region to the Northern region to capture better pricing opportunities, and the late spring break-up in Idaho that pushed some Q2 2011 volume into Q3 2011. Total fee harvest volume for Q3 2011 increased 15 percent over Q3 2010, primarily due to the shift of a portion of the harvest to the Northern region and increased demand for pulpwood in the Pacific Northwest resulting from a shortage of residual chips.
Sawlog harvest volume more than tripled in Q3 2011 over Q2 2011 due to the factors mentioned above. Sawlog prices increased 5 percent sequentially, driven by a general improvement in demand for all sawlog species in Q3 2011 coupled with a mix improvement that included more Idaho sawlogs.
Sawlog volume increased 13 percent in Q3 2011 over Q3 2010 as a result of a shift of a portion of the harvest from the Southern region to the Northern region to capture better pricing opportunities. Sawlog prices increased 7 percent year-over-year.
Pulpwood volume more than tripled in Q3 2011 over Q2 2011 driven by normal seasonality and the effect of the late spring break-up in Idaho in Q2 2011. Pulpwood prices increased 4 percent in Q3 2011 over Q2 2011, primarily due to increased demand for pulpwood in the Pacific Northwest resulting from a shortage of residual chips, as well as the higher valued pulp species harvested in Q3 2011 in Minnesota.
Pulpwood volume and prices increased 41 percent and 13 percent, respectively, in Q3 2011 over Q3 2010 due to increased demand for pulpwood in the Pacific Northwest resulting from a shortage of residual chips and better market conditions in Minnesota.

Southern Region

Total fee harvest volume for the Southern region increased 33 percent in Q3 2011 over Q2 2011 as a result of an increase in pine plantation thinnings and the Q2 2011 deferral of a portion of the Southern region harvest. Total fee harvest volume increased 2 percent in Q3 2011 over Q3 2010 as a result of the plantation thinnings.
Sawlog volume increased 39 percent in Q3 2011 over Q2 2011 due to the harvest deferral of pine sawlogs and chip-n-saw logs in Q2 2011. Sawlog prices increased 1 percent in Q3 2011 over Q2 2011 driven by a higher mix of hardwood sawlogs in Q3 2011.
Sawlog volume and prices decreased 12 percent and 8 percent in Q3 2011 from Q3 2010, respectively, due to weak demand for pine sawlogs.
Pulpwood volume increased 27 percent in Q3 2011 over Q2 2011 due to an increase in thinning operations in our pine plantations, however, widespread availability of fiber in the region caused pulpwood prices to decrease 2 percent in Q3 2011 from Q2 2011.
Pulpwood volume increased 19 percent in Q3 2011 over Q3 2010 as a result of the thinning operations mentioned above, while sales prices decreased 18 percent due to excess fiber availability.

Real Estate

Real Estate segment revenues totaled $14.8 million in Q3 2011 compared to $19.0 million in Q2 2011 and $32.3 million in Q3 2010. Operating income for the segment was $9.9 million in Q3 2011 compared to $11.0 million in Q2 2011 and $9.8 million in Q3 2010. The third and final phase of a non-strategic/rural real estate sale in Idaho occurred during Q3 2011. This phase of the sale was 5,912 acres, resulting in revenues of $9.1 million. In Q3 2010, a large sale of approximately 41,700 acres of non-strategic timberland in Wisconsin and Arkansas resulted in revenues of $28.7 million. Demand for real estate remains steady, as a total of 33 rural recreational, HBU and non-strategic timberland transactions closed in Q3 2011.

Wood Products

The Wood Products segment reported operating income of $2.9 million in Q3 2011 compared to $2.8 million in Q2 2011 and an operating loss of $0.6 million in Q3 2010. A positive mark to market adjustment in Q3 2011 related to lumber hedges offset the impact of lower sales prices compared to Q2 2011.

Lumber shipments in Q3 2011 were 9 percent and 2 percent higher compared to Q2 2011 and Q3 2010, respectively, due to increased demand between the periods.
Lumber sales prices in Q3 2011 decreased 2 percent from Q2 2011 due to continued weak demand for building products. Lumber sales prices in Q3 2011 increased 10 percent over Q3 2010, primarily due to a Q3 2010 drop in prices after a strong price increase in Q2 2010.
In Q3 2011, the segment recorded a $2.0 million benefit from lumber hedges, compared to a $2.4 million benefit in Q2 2011.

Corporate

Corporate expenses, including interest expense, were $11.2 million in Q3 2011 compared to $12.1 million in Q2 2011 and $12.9 million in Q3 2010. Included in the Q3 2011 corporate expense is a non-cash benefit of $0.9 million for a mark to market adjustment for company stock in our deferred compensation plans, compared to non-cash benefits of $1.3 million in Q2 2011 and $0.1 million in Q3 2010. The remainder of the favorable variance in Q3 2011 was due to generally lower corporate administrative expenses compared with both prior periods.

Dividend Distribution

During the third quarter, Potlatch paid a regular quarterly cash distribution on the company’s common stock of $0.51 per share.

OUTLOOK

“We continue to experience the impact of the weak domestic housing market that is limiting demand for both our logs and manufactured wood products,” said Mr. Covey. “Unfortunately, a large customer in Arkansas recently idled its facility at the end of the third quarter, which will further lower sawlog demand and corresponding pricing in our Southern region. Fortunately, excluding cedar sawlog pricing and demand which are under pressure, the mixed sawlog market in Idaho generally remains firm, as the region continues to indirectly benefit from Chinese demand. In total, we now expect our 2011 harvest to be approximately 4.1 million tons, as we have elected to defer roughly 100,000 tons of Southern sawlog harvest this year due to weak market conditions. In our Wood Products business, we expect lumber prices to soften through the end of the year due to typical seasonal factors. Nonetheless, we expect the segment to remain cash flow positive for the fourth quarter. We expect results from our Real Estate business to remain solid and see continued strong demand for our recreational real estate, HBU and non-strategic timberland properties. Our balance sheet remains strong with $81 million in cash and short-term investments,” concluded Mr. Covey.

CONFERENCE CALL INFORMATION

A live conference call and webcast will be held today, October 24, 2011, at 9 a.m. Pacific Time (noon Eastern Time). Investors may access the webcast at www.potlatchcorp.com by clicking on the Investor Resources link or by conference call at 1-866-393-8403 for U.S./Canada and 1-706-679-7929 for international callers. Participants will be asked to provide conference I.D. number 14080455. Supplemental materials that will be discussed during the call are available on the website.

A telephone replay of the conference call will be available until October 31, 2011, by calling 1-855-859-2056 for U.S./Canada or 1-404-537-3406 for international callers. Callers must enter conference I.D. number 14080455 to access the replay.

ABOUT POTLATCH

Potlatch is a Real Estate Investment Trust (REIT) with approximately 1.45 million acres of timberland in Arkansas, Idaho and Minnesota. Potlatch, a verified forest practices leader, is committed to providing superior returns to stockholders through long-term stewardship of its forest resources. The company also conducts a land sales and development business and operates wood products manufacturing facilities through its taxable REIT subsidiary.

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