Potlatchdeltic Corp (PCH) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 Potlatch earnings conference call. My name is Francis, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Eric Cremers, Chief Financial Officer. Please proceed.

Good morning. This is Eric Cremers, Chief Financial Officer for the Company, and joining me this morning by phone is Mike Covey, our Chairman and CEO. Following my remarks on the quarter, Mike will provide comments on our 2008 outlook.

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 a 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 on our website, www.PotlachCorp.com, as part of the webcast for this call.

I would now like to discuss our fourth-quarter results. We reported fourth-quarter 2007 net income of $11.2 million or $0.28 per fully diluted share, as can be seen on Page 3 of the slides accompanying this presentation. This compares to net income of $41 million or $1.04 per fully diluted share in the third quarter of 2007, and $45.3 million or $1.16 per fully diluted share in the fourth quarter of last year.

It is important to note that our fourth-quarter 2006 net income included two nonrecurring items. First, we had $39.3 million of non-recurring pretax income, or $24 million after tax, from the settlement of the Canadian softwood lumber trade dispute. Second, we had a $3.9 million increase in our tax provision, resulting from a transfer of assets from the REIT to the TRS. Netting out the two nonrecurring items, fourth-quarter 2007 net income was $25.2 million, or $0.65 per share. From this point forward in this discussion, when I refer to recurring earnings, it will be without onetime items such as the Canadian lumber settlement.

I'd now like to focus on our fourth-quarter results, broken down by segment. Our Resource segment results for the fourth quarter were below both the third quarter of 2007 and the fourth quarter of 2006. Operating income in the fourth quarter of 2007 totaled $10.6 million compared to $38.2 million in the third quarter and $22 million in the fourth quarter of last year.

Lower fee volume was the primary contributor to the negative comparisons, with fee volume down 14% in the Northern region and down 12% in the Southern region versus the fourth quarter of 2006. Compared to the third quarter of 2007, volume was down 34% in the Northern region and down 40% in the Southern region.

Pricing has been relatively stable. On a sequential basis pricing was down 7% in the Northern region, but down just 2% in the Southern region. Compared to the fourth quarter of 2006, pricing was down 1% in the Northern region, but was up 26% in the Southern region, due to the strong pulpwood market. As our recent results suggest and as Mike will discuss in a minute, we have yet to see material weakness in log pricing despite the weak housing market.

Now let me comment on why we reduced our fee harvest volume in the fourth quarter of 2007, specifically in December. We chose to curtail harvest and defer deliveries, primarily for three reasons. First, log inventories at our own mills were high and we saw no reason to tie up additional working capital at year end. Harvesting conditions had been ideal throughout the third quarter as well as in October and November, resulting in log sales and deliveries that were well ahead of schedule.

Second, many of our Resource customers were planning reduced operating hours through the holidays, and they welcomed the opportunity to defer deliveries into the first quarter of 2008. We did not curtail harvesting due to weak pricing, but the slowdown certainly helped ease pressure on log prices as we negotiated first-quarter pricing.

Finally, going into the fourth quarter, our REIT net income was running well ahead of our planned distributions for the year, due to our exceptionally strong harvest levels in the third quarter. So rather than pay excise taxes on undistributed REIT net income, we elected to defer some volume into 2008.

We think it's important for investors and analysts to compare full-year 2007 harvest volumes to full-year 2006 harvest volumes to get an accurate view of our planned harvest-level growth. Quite simply, comparing quarterly volume can be very misleading.

Comparing full year 2007 with full year 2006, total Potlach fee volume was up 20%, with fee volume up 7% in the Northern region and 47% in their Southern region. Adjusting for the impact of the 200,000 tons we deferred in the Southern region in 2006 but harvested in 2007, fee volume growth was still a robust 7%. As Mike will discuss in a minute, this total Company year-over-year increase in the harvest level is consistent with our long-term view of anticipated harvest growth.

Our real estate segment closed sales totaling nearly 7,000 acres for $11.8 million during the fourth quarter of 2007, resulting in operating earnings of 7.9 million. These land sales consisted primarily of rural recreational land located in all three regions -- Arkansas, the Lake States, Minnesota and Wisconsin, and Northern Idaho. The $7.9 million of operating earnings compares to operating earnings of $2.4 million in the third quarter of 2007 and $9.1 million in last year's fourth quarter.

Last year's fourth quarter included nearly $7 million from a conservation easement sale. Importantly, we set a goal at the start of the year to sell at least 15,000 acres in 2007 and we're proud to announce that we hit that goal by selling over 16,000 acres. Further, and as Mike will discuss later, we're optimistic about the outlook for our real estate program in 2008.

Our Wood Products business had a disappointing fourth quarter due to poor lumber pricing and lower shipments, as well as market-related downtime at our two Southern mills. Wood Products had an operating loss of $9.1 million in the fourth quarter of 2007, below the $2.4 million of operating income in the third quarter of this year, and below the $5.7 million operating loss in the fourth quarter of 2006. The decline in sequential performance was primarily due to low lumber prices, a decline in shipments, and the costs related to taking downtime at our two Southern lumber mills.

The Pulp and Paperboard segment had operating earnings of $15.7 million during the fourth quarter of 2007 versus $17.6 million during the third quarter and $9.2 million during the fourth quarter of 2006. Our earnings declined sequentially due to major maintenance costs at our two mills during the fourth quarter, which amounted to $3 million. As you are aware, in prior years we accrued major maintenance costs over the course of the year, which had the effect of leveling quarterly earnings. We no longer accrue for these costs and now simply expense them when incurred.

In 2008, we anticipate major maintenance in the third and fourth quarters at our two mills, and they're forecast to cost $15 million and $3 million, respectively. So in total our major maintenance costs at our two Pulp and Paperboard mills are forecast to increase from $11 million in 2007 to $18 million in 2008. Our Pulp and Paperboard segment continues to perform very well due to excellent production volumes and a very favorable pricing environment.

Consumer Products reported fourth-quarter 2007 operating income of $5.2 million versus $5.1 million last quarter, and $7.2 million in last year's fourth quarter. In many respects, our Consumer segment had an exceptional quarter, with record production in finished goods sales volumes. Further, this segment has been successfully undergoing a product mix shift away from relatively low margin parent roll sales towards higher margin finished good sales.

And I'm happy to report that in the fourth quarter, we were successful in that we had no parent roll sales. Importantly, our finished goods sales tonnage increased approximately 3% sequentially and increased 12% versus the fourth quarter of last year. The slippage in earnings compared to prior year was largely due to high pulp and energy costs.

Comparing fourth quarter of 2007 to the fourth quarter of 2006, higher pulp costs negatively impacted operating earnings by $2.6 million and higher energy costs negatively impacted earnings by $2.3 million. As Mike will discuss shortly, we expect higher operating earnings from our consumer segment in 2008 due to price increases we have recently announced.

Eliminations had a $1.3 million negative impact on operating income during the fourth quarter of 2007 compared to a negative impact of $8.5 million last quarter and a positive impact of $1.1 million in last year's fourth quarter. The main driver for the negative elimination entry in the fourth quarter was a result of higher cedar and pulpwood log inventories, which also resulted in a negative LIFO adjustment.

Corporate administration, including interest expense, totaled $22.2 million for the quarter compared to $18.6 million in the third quarter and $17.6 million in last year's fourth quarter. Interest expense totaled $8.4 million in the fourth quarter of 2007 compared to $7.4 million in the third quarter and $7.2 million in last year's fourth quarter.

Two comments as to why our administration costs were relatively high in the fourth quarter. First, our interest expense has increased as we took on debt to pay for the central Idaho acquisition. And having now closed on the second phase of the acquisition, we currently have roughly $158 million of our revolver being utilized.

Second, we had several onetime costs in the fourth quarter totaling roughly $4 million. I won't get into the detail on all of those onetime expense items, but they include things like relocation of approximately 20 employees from our Lewiston Mill to our corporate headquarters in Spokane, as well as significant litigation expense related to an OSB antitrust lawsuit, which will be coming to trial in mid 2008. Some of these expenses are expected to spill over into early 2008, but then should begin to diminish.

Note that we had a $4.7 million tax benefit in the fourth quarter of 2007, which came as a result of lower earnings in our taxable REIT subsidiary than we had been accruing for, primarily due to higher corporate expense, coupled with poor results from our Wood Products segment.

Recurring EBITDA totaled 35.4 million in the fourth quarter versus 65.8 million in the third quarter and 52.5 million in last year's fourth quarter. Funds from continuing operations or FFO for the quarter totaled $31.7 million versus $62 million sequentially, and $47.6 million a year ago.

As we announced on December 7, we increased our quarterly distribution 4.1% to $0.51 per share per quarter, up from $0.49. As a result we paid a normal distribution of $20 million during the fourth quarter. It is important to note that we increased the distribution because we believed, and continue to believe, that the long-term sustainable cash flow from the Company can readily support the increased distribution. Given our outlook for increased harvest volumes going forward, we're optimistic about continued, measured increases in the dividend. Pages 5, 6 and 7 provide additional detail by segment for the variances I have described.

Despite having just completed the $215 million central Idaho acquisition utilizing debt and available cash on hand, our balance sheet is in great shape. Net debt to capital at the end of the year was just 42%, and if we include the debt from the second phase of the central Idaho acquisition on our year-end 2007 balance sheet, debt to capital still is just 44%.

I would now like to turn the discussion over to Mike to provide some additional comments about our outlook for 2008.

Thank you, Eric. Looking ahead to 2008 we expect improvement in cash flow from three of our five core businesses. I will briefly describe our outlook for each of them, beginning with our Resource segment.

As we've discussed, the driver behind cash flow generation in our timber business is harvest volume and quality. As Eric indicated our year-over-year harvest increase in 2007 was 643,000 tons, or 20%. Again in 2008 we're planning to increase harvest levels by 300,000 to 500,000 tons, or an additional 8% to 13% over 2007. This increase is driven by three factors.

First, as Eric mentioned, we deferred volume in December, which we anticipate harvesting in 2008. Second, we completed two acquisitions in 2007, which added more volume in our Northern region. Finally, we have planned harvest increases in our Southern region, where we believe the optimum harvest stage can be reduced from forest stands in their mid to late 30-year-old age class to the mid to late 20-year-old age class. These steps maximize net present value and will result in increased harvest for the next several years.

Now an important caveat about our planned harvest activity. If the continued weakness in housing starts and weak lumber pricing results in a significant deterioration in log prices, we will defer a portion of our planned harvest volume into 2009 or beyond. As Eric discussed, log pricing has slipped 2% to 7% since mid 2007, depending on supply/demand in each region. We anticipate an additional 9% erosion in log pricing in our 2008 budget. However, this amount is not significant enough to stall or defer planned harvest of over-mature trees in Idaho or Arkansas.

If we see prices fall more than what we have anticipated, we will consider harvest deferrals beginning in the second half of 2008. We have completed the sale of all of our first quarter 2008 volume at pricing levels that were in line with our expectations. Second quarter is seasonally our lowest harvest period due to the spring thaw, so we will evaluate our second-half harvest plans in late spring. In total, we expect our 2008 Resource segment performance to be in line with our 2007 results, with most of the planned volume increase being offset by price erosion.

In our Wood Products business, we generated 2007 operating income of $1.9 million, which was slightly better than our 2006 results when putting aside the $39.3 million Canadian settlement we received in the fourth quarter of 2006. We're fortunate to have niche markets in cedar lumber and industrial plywood, which have been somewhat insulated from the housing market downturn. We expect these product lines to be strong again in 2008. However, the capacity overhang in North American lumber production will likely hold pricing down for most of 2008. We do not expect material improvement in our Wood Products business in 2008.

We have three businesses that we expect will generate higher cash flow in 2008 -- our Real Estate segment, Consumer Products and Pulp and Paperboard. In 2008 we plan to increase the number of acres sold 20 to 30% from the 16,000 acres we sold in 2007. As we discussed in December 2006, we identified about 18% of our ownership at the time, or 250,000 acres that would be sold over the next decade. With our two acquisitions in 2007, the pool of land identified as nonstrategic for sale will grow.

We completed about 140 real estate transactions in 2007 at an average price per acre of nearly $1500. This year we expect a greater mix of higher valued HBU versus noncore lands, and therefore our expected price breaker in 2008 should be 25 to 30% higher. Our real estate revenues are forecast to increase over 50% in 2008 as a result of increased acres sold combined with higher prices per acre. As in 2007, we expect this to be a lumpy business, with 30 to 40% of the sales closing in the first half of the year.

We have not seen a decline in the demand or price for the typical rural recreational parcel that we plan to sell in 2008. As we approach late spring and summer, which is our most active period for prospective buyers, we will have a better gauge of price trends and demand. 2007 was an exceptional year for our Pand Paperboard business, which earned $44 million of operating income in 2007 compared to 24 million in 2006. We benefited from strong pricing and outstanding improvement in our operating results at both our Arkansas and Idaho mills.

Regarding our outlook for 2008 for Pulp and Paperboard, the industry continues to operate at high capacity utilization levels, and thus we expect continued improvement, primarily due to announced price increases but also anticipate continued production increases of nearly 2%.

Sales realizations are forecast to improve $16 million, or 2%, due to price increases that have already been negotiated and are in the process of being implemented, as well as continued paperboard mix improvements. Although we expect higher wood costs at our Idaho mill due to the decreased output of wood chips from area sawmills, these should be more than offset by improvements in yield and paperboard price increases. In late 2007 we completed a chip screening capital project in Idaho at a cost of almost $3 million, which will allow us to shift more sawdust and pin chips into our M&D digesters, reducing our raw material costs while improving pulp yield and production.

By nearly every measure our Consumer Products business improved in 2007. We achieved record sales of 25.8 million cases of finished goods with a net selling price of $2348 per ton, which was also a record. Our four tissue machines, which included our TAD machine in Las Vegas, also achieved record output of 213,000 tons. However, much of this was overshadowed by the rise in pulp costs, which Eric already addressed. We have announced price increases of 4% to 7% on selected products effective April 7th. We are expecting additional increases in pulp costs in 2008, but these costs should be more than offset by the price increases mentioned above, resulting in stronger financial results in 2008.

Capital spending for the Company, excluding acquisitions, is expected to be $50 to $60 million in 2008 with $11 million of that earmarked for our Resource segment, which is primarily for reforestation costs. The remainder is dedicated to our TRS businesses, mostly to improve productivity, reduce costs and improve quality.

In summary, we had strong performance in 2007 and are optimistic about 2008. Excluding nonrecurring items, operating earnings from continuing operations before taxes in 2007 were $87 million, up from 69 million in 2006. Our Resource and Real Estate business generated $115 million in EBITDA for the year, which was an 8% increase over 2006. We expect combined cash flow from these two business segments to improve again in 2008. We generated $173 million in funds from continuing operations compared to $155 million in 2006. And after completing our second year structured as a REIT, I believe our model for delivering value is working well.

In December, we raised our dividend by 4.1% to $2.04 per share per year, an amount we feel is sustainable and fully supported by our Resource and Real Estate business. We grew our land base through acquisitions by 18% in 2007 and expect additional increases in our harvest levels. We believe our REIT structure provides investors with liquidity in a tax-efficient way to invest in the timber asset class.

Before we take questions I want to mention that Eric and I are both dialing in to this investor call from different locations due to travel schedules. So we will do our best to coordinate answers to your questions. Francis, we will now begin the Q&A session, please.

(OPERATOR INSTRUCTIONS). Gail Glazerman, UBS.

Thank you. You gave very clear guidance on why you see your harvest picking up and what's been going on. I'm just wondering if you could go into detail. Are there any particular markets and regions that are giving you concern, where you're seeing kind of more weakness than you might have expected?

Gail, this is Mike. Not really. We don't have any exposure to the West Coast, Oregon and Washington timberlands, where I think there has been a larger decline in log pricing. In the inland markets in Idaho, I think there is a lot of installed capacity, and I think markets are behaving about as we expected. If we have a surprise it's probably on the upside, the pulpwood market in the South has been very, very good, and has helped our results there significantly. So there is no place that gives us a particular concern now.

As I mentioned, when we finish the traditional spring breakup period, at least in the West, and I get through the rainy spring in Arkansas we will reevaluate where we're at and talk about that in June.

Okay, and also, can you just talk in a little more detail about your pulp volume in the fourth quarter and I guess how sustainable that is moving into 2008?

In terms of --?

And it (multiple speakers) seem particularly strong; I mean I know you've been raising it, but it was almost 30,000 tons.

There's a couple of things there to speak to. The acreage base is growing, and that supports more pulpwood harvest particularly (multiple speakers)

I'm sorry, I'm talking about actual pulp sales, not pulpwood.

So rephrase your question, if you would then please.

Your volumes were very strong in the fourth quarter, almost 30,000 tons. And I'm just wondering how sustainable that is, moving into 2008, what type of rate should we be looking at specifically for pulp sales.

I think we'll have to get back to you or do some research on the sustainable rate and if we want to give some guidance on that. Obviously, with pulp prices as strong as they are, we've tried to maximize the throughput of our pulp dryer in Lewiston, Idaho, where that's the only place that we sell market pulp. So it's obviously in our interest; we have a good margin to sell as much as we can and increase the output of the mill. But 30,000 tons in the quarter sounds like a little bit above what our annual expectations would be going forward. We will look into that.

Okay, and on the consumer tissue side, I guess your increase isn't till April, but I believe some of your larger competitors have actually gone out more for February. I'm just wondering if you have any read in the market on how that initiative is being accepted and how the market is responding.

I really don't at this point. I don't have any feedback to offer there.

And just finally, last question. You made some healthy acquisitions in 2007. I'm just wondering what the markets look like. Are you seeing any kind of better opportunities of acquisitions moving into 2008, given the uncertainty related to housing or not really, it's still a pretty tough competitive market?

By all indications from publicly reported transactions it still remains very competitive. And we certainly have not seen any evidence from transactions that we've looked at that, like we reported, that the price of timberland is dropping due to the weakness in the housing market. So we expect the landscape to be very similar in 2008 to what it was in 2007.

Thank you very much.

George Staphos, Banc of America Securities.

Good morning. A question on maintenance spending -- you noted that I think this year will be up something like 7, $8 million from the 2007 level. You might have mentioned it, but I missed it if you did. What are the reasons for that large ramp-up this year on a relative basis, and where might you be putting some of your maintenance dollars? And then similarly, within the TRS businesses, where is some of that CapEx going?

Down in our Arkansas mill we take a biannual outage. It's every other year. And what we're looking at, we didn't have that outage in '07; we are going to have that outage in '08, and that describes the major difference of '07 to '08.

And on the CapEx side, relative to our earlier question?

I'm sorry, I missed the CapEx question.

The question that I had mentioned was in your TRS businesses, were you deploying capital?

I think it's spread around the Company, it's not in any one business segment versus another. We are obviously watching our capital very closely, particularly as it relates to the Wood Products side. But I don't think it's skewed to any one business segment versus another.

I guess just to add a little bit to that, there is no single large project. The capital spending levels that we've got in our budget for 2008, almost all reflect projects that are less than 2 or $3 million, most of them less than $1 million, that are almost all aimed at productivity and yield or cost recovery or quality initiatives that spread really throughout all three TRS businesses.

Okay, that was more what I was after. Thanks, Mike.

And then just a question, I know you probably run it through your models, but I was curious why with the potential for log pricing to come off a bit, I know from your vantage point not a necessarily alarming pace, why you wouldn't be deferring your harvest a bit more. I'm curious, you know, you have volumes up, pricing down, contribution the same. Why not defer a bit more if your expectation might be that prices recover?

I guess the important caveat to mention again is we may do that after we get through this. Our plate is kind of already set for activities here for this quarter, and early into spring. I think coming out of this traditional slowdown we have in the spring with weather, we will revisit that decision. But on a net present value basis, as you mentioned, we run all these scenarios through the models that we have, and we think that going ahead with the planned increases still makes sense.

I would also mention that some of the uplift, to remind, again, that some of the uplift in harvesting comes from acquisitions that just add more volume to the plate. And finally the other thing to mention is the pulpwood market both in the West and in the South is very attractive. And so some of the initiatives are around capturing pulpwood volume as well.

I understand, and, again, there's some granularity here that obviously you can't share or provide us with. But if it's positive from an NPV basis, but this first period here that we're measuring, leads to a net wash versus 2007, as we think about it, how is it positive for an NPV basis on a going-forward basis?

Without going through the granularity, as you mentioned, to kind of go through the details of the modeling, I think when we look at commitments that are in place, contractor capacity that's in place, planned initiatives with different species and log commitments, all those things lead us to believe that we ought to stay about where we're at. But we're very prepared to cut back as we did in the month of December, if I think we get to the spring period and look at things and say we ought to do that. The log market -- we set our plans in late fall of last year, the log market so far has behaved about like we expected.

But on the other hand, if anything, I would say the lumber market has maybe behaved a little bit worse than expected. So that probably puts a little more pressure on the downside than we anticipated earlier.

I appreciate the color. Thanks, guys.

Mark Weintraub, Buckingham Research.

First, curious, how much would have the deferred December volume cost you in the quarter, roughly?

I'm sorry, your question was how much did it cost us?

Yes, the deferral of the December volume.

I think we deferred roughly 80,000 tons, something like that.

And do you know roughly that would have translated to value-wise, or relative to on an earnings basis?

It's probably in the $5, $6 million kind of range.

Second question is -- you stated that your dividend is fully supported by your timber and your Real Estate businesses.

And if you look out there, obviously, a lot of investors value your Company on a yield basis. In fact you also are trading at a higher yield than the other timber REITs out there. So I guess the question I have is, do you think investors -- or are you running the business and paying out the dividend in such a way that investors are getting paid for the value of the manufacturing assets? Are you concerned that running it in the fashion that you are, you might not be getting the value for the manufacturing assets in your stock?

Mark, I guess -- there's -- that's a complicated question. I guess the best answer I can give you is we try to optimize the performance of every business that we have and to do it as tax efficiently as we can in the REIT model that we've got. I guess the market decides what the valuation of the Company is. On a yield basis, we're certainly smaller than the -- on a market cap basis, smaller than the other two larger timber REITs, and that may have something to do with it as well, not so much the manufacturing piece of it, but just sheer size. I feel pretty comfortable with the way that we're structured today. We continually look at opportunities to unlock value with our manufacturing businesses or other businesses that don't have a fit in the Company. I think we've got a track record of doing that.

And just in curiosity, you mentioned that there were some onetime costs related to relocation of folks from Lewiston to Spokane. Curiosity, what was that about?

It's kind of an interesting situation. When I arrived here, almost my entire finance staff and IT staff was down in Lewiston, Idaho, which is about 100 miles from our corporate office here in Spokane. There can't be too many large public companies in the United States where the CFO is separated from his staff. So we undertook a project to relocate those folks up to our corporate offices in Spokane.

Okay. And then lastly, on the real estate for '08, as you indicated, the revenues will likely be better than 50% higher than in '07. Would it be fair to say that the profits then there would be at least that size of an increase in all expectations, or would there for some reason be a big difference in the cost of real estate sales for '08?

You will see the acreage that we're going to be selling in '08 is going to have a higher basis than the acreage that we sold in '07. I want to say basis was roughly 20 percent of sales in '07, and it's going to move up into the 30% range in '08. Some of that acreage is going to be from the central Idaho acquisition. So I wouldn't expect all the sales increase to flow through the P&L.

Obviously, the cash does, but not necessarily at an earnings basis.

Correct.

Thank you.

(OPERATOR INSTRUCTIONS). Steven Chercover, D.A. Davidson.

Good morning. First question, it seems that avoiding REIT or excise tax is a great reason for harvest. Did you have an inkling that that was going to happen during the fourth quarter?

As we got into the fourth quarter, yes. We had an inkling that was going to happen. Our harvest volumes, as I mentioned, were exceptionally strong in the fourth quarter. And as we gauge where we were at relative to the distribution moving through the fourth quarter it became apparent that we had excess income in the REIT.

I suppose that's something that we should be able to figure out on our own going forward, just given --

Yes, with the caveat that you don't know what our planned distribution increases are going to be. So that's one thing to bear in mind.

We'll just count on you doing it once a year.

Second question, lumber prices for the whole industry I think are below cash costs. It seems that no one can raise prices. Is the only recourse for lumber producers to bid down log prices? Is that what you're facing, and do you see an end to this?

Well, Steve, this is Mike. Obviously, there will be an end to it. I think it's clearly coupled to the housing start situation, and there is various estimates whether this is going to be 2009 or what quarter in 2009 as to when the housing situation will begin to turn around. We're very optimistic about long-term housing starts. I have a lot of reason to believe that over a decadal period the country is going to build something like 18 to 20 million houses over a decadal period and that will return us to more normal levels.

I do think that there's not a lot of options that are left; if log prices do not come down, then I think you'll see producers curtail or stop production, which we have begun to see. So it's clear where the pressure is and I don't think that will happen on a pro rata basis equally around the country. Every region is unique; logs don't move more than 100 or 150 miles from where they are growing, and we will see how the pressures [unmount] on log pricing over the next 12 to 18 months.

Thanks. Just a couple more clarifications. Mike, did you say that in Pulp and Paperboard, you expected 2% higher volume, and then $16 million higher contribution due to price; is that correct?

Yes, we did.

Okay, and then the lumber business will be flat to down in '09?

That's correct.

Thanks very much.

Peter Ruschmeier, Lehman Brothers.

Thanks and good morning. I was curious on the central Idaho acquisition, now that you've owned it and you've had time to take a closer look at it, how those acres might break down between just pure timber harvesting opportunity versus HBU, and over what kind of period of time might you expect to extract some HBU out of those properties?

Clearly, that property had a thesis that was based on both a real estate outcome and a timber outcome. We've not given information out about how we've valued those two pieces. I think compared to a traditional property acquisition around the country, this probably is skewed a little more towards a long-term real estate outcome. But we think that comes from a very small percentage of the acres that are there. And over the next decade we will begin that process of identifying and selling those. The process starts this year but it's not going to be quick. The values per acre there in some areas are quite high. We will be very patient and thoughtful about that to try to maximize value.

Okay, sounds good. I also wanted to ask if I could on your rotation comment, and maybe just to clarify, did you suggest your rotation in the South across your whole Southern mix would be coming down from the mid to high thirties to the mid to high 20s? Is that correct?

That is correct.

And what period of time do you think -- given the duration of this asset it just seems like this could take you years, which is a good thing, right? You could have accelerated harvest for years, I would think. But how long do you think it will take you to bring that rotation down to a more sustainable level?

Your observations are correct. It can and will take years. Some of that depends on how robust the markets are and how fast we want to push that. The market for pulpwood is very good, but most of the older stands aren't really a pulpwood theme, they're a sawlog theme. And with the weakness in sawlog and pricing related to the housing business, we may slow down a bit more than we might otherwise do, as I mentioned to a caller earlier. But we haven't given a specific number. But this is something that we will accomplish over the next several years; it won't be the next two or three and it won't be 10 or 15 either. So, in that range.

Maybe last question on that topic if I could. I know that you cut for sustainable cut, but you're clearly indicating that it was a more mature stand and now it's going to be a little bit younger stand going forward. Can you comment on what kind of drop in the inventory level you'd expect from start to finish, presumably you would end up with an inventory that would be a little bit lower, but growing faster than the one you have today, which is arguably older and growing more slowly.

Your observations are exactly correct, but I don't have those numbers to give -- I just don't know what they -- I don't know how much the inventory drop is. Clearly it will come down.

Lastly if I could, Mike, any updated thoughts on -- your thoughts on how Potlach may participate or not in supplying fiber for bio refineries?

We have been an avid proponent of a free and open market for the valuation of the forest resource trees for whatever end market generates the most value. Whether it's a pulpwood outcome or a biofuels outcome, we're very interested in that. We own about 450,000 acres in Arkansas; at this point in time, we think that's where the bulk of the opportunity lies in the near term in the South. I think there's not a lot of reason to expect it to happen in the West quickly. So to the extent that we can participate in the South, we're able and ready to do that and working actively to purport or to support free and open markets for that kind of activity.

Very Good. Thanks very much.

There are no other questions in the queue at this time. I would like to turn the call back over to Mr. Mike Covey for closing remarks.

Thank you very much, and we'll talk to you all at the start of the next quarter. Thank you.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.