Potlatchdeltic Corp (PCH) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter's 2008 Potlatch earnings conference call. My name is Alicia and I will be your operator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to introduce your host for today's call. Mr. Eric Cremers, Chief Financial Officer. Please proceed.

Well, good morning. This is Eric Cremers, CFO for Potlatch and joining me here in Spokane is Mike Covey our Chief Executive Officer. After taking you through our quarterly results, Mike is going to provide some comments regarding our 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 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 the 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 discuss our first quarter results. We reported first quarter 2008 net income from continuing operations of $24 million or $0.61 per fully diluted share as can be seen on page 3 of the slide accompanying this presentation. Included in this net income is an after tax charge of $1.6 million related to a settlement in principal with a direct purchase or class in the OSB Antitrust lawsuit. This comparison net income of $5.8 million or $0.15 per fully diluted share in the first quarter of last year which included both a $2.8 million pretax reorganization charge for our resource segment as well as a $9.2 million pretax cost for plan maintenance on our recovery boiler in Lewiston.

I would now like to shift the gears and talk about our first quarter results broken down by segment. Our resource segment results for the first quarter of 2008 were much better than the first quarter of 2007. Operating income in the first quarter totaled $17.2 million compared to $13.2 million in the first quarter of last year. Increased fee harvest volume was a significant contributor to the positive comparisons with total Company fee harvest volume of 22%. Broken down by region, our northern region fee harvest volume was up 41% versus last year, offsetting the 7% decline in the southern regions fee harvest volume.

The decline in the South was directly related to weather as conditions made it challenging to harvest in certain areas, but two acquisitions we completed last year, one in Wisconsin and one in central Idaho, were key drivers of incremental fee harvest volume in the North. Also, as we indicated in our last call, we deferred some fee volume in the fourth quarter of 2007 for tax reasons and we indicated then that we expected to make up that deferred volume in the first quarter which we did. Pricing has been a positive contributor to the quarter's earnings in the southern region with pricing up 10% versus Q1 '07 due to the strong oak wood market.

On average, pricing in the northern region was down 9% versus Q1 '07 and down 16% versus Q4 '07. It is important to note that this drop in pricing is due to both a drop in saw log prices other than cedar and in unfavorable product mix. We are carefully monitoring pricing and will consider harvest deferrals should prices drop more. Finally, in comparing Q1 of 2008 with Q1 of 2007, it is important to note that we had a $2.8 million pretax restructuring charge in Q1 of '07.

Our real estate segment closed sales totaling $21.1 million during the first quarter resulting in operating earnings of $16.7 million. Included in these results is a portion of a one-time sale of nearly 43,000 acres in Northern Minnesota for just over $16 million. Excluding this large land sale, we had 28 other real estate transactions at an average price of over $2,200 per acre well above the $1,500 per acre we achieved last year.

Now, I would like to make a few comments about the large land sale in Minnesota. First, the sale will close in two phases. The first of which amounted to 23,500 acres and has already closed and the second of which will be 19,300 acres and will close in the second quarter. The average selling price on this non-strategic acreage was relatively low at $370 per acre, but it is important to note that this price per acre was considerably above both our internal and external estimates of value for the property, both from a timber standpoint as well as from a recreational real estate standpoint.

Further, selling this none strategic piece of real estate will allow us to redeploy the capital to better uses. So, we are quite pleased with the sale and we are excited about the progress we are making in this nascent business segment.

As you expect, our wood product segment had a challenging first quarter with operating losses of $10.1 million for the quarter in comparison to operating earnings of $2.8 million in last year's first quarter. The steep decline in performance was driven by lower lumber shipments and a nearly 16% decrease in average lumber selling prices.

While we did see improvements in both plywood and particle board pricing, it was not enough to offset the weakness in lumber pricing and shipments. Given the weakness in the lumber business, we announced the permanent closure of our Prescott, Arkansas lumber mill on March 27. It was a difficult but necessary decision to permanently close the facility. We estimate the total pretax cost of the closure to range from $19 million to $21 million. Recorded discontinued operations a $19 million charge for asset impairment and employee termination costs in the first quarter, $17 million of which is a non-cash cost.

Any remaining cost will be recognized during the balance of the year as discontinued operations. The pulp and paperboard segment had operating earnings of $11 million during the first quarter of 2008 versus an operating loss of $6 million for the first quarter of last year. There are three major drivers to our improved performance when comparing the quarters; first, excellent production shipments; second, continued favorable pricing environment offset by higher fiber, energy and chemical costs; and third, planned downtime at our Lewiston, Idaho facility which cost $9.2 million in last year's first quarter.

We now anticipate planned downtime for maintenance at our two mills in the third and fourth quarters at a cost of $15 million and $3 million respectively. In addition, early in the second quarter, we took downtime at our Idaho mill to perform maintenance on a recovery boiler, which costs $1.5 million and resulted in lost production of roughly 5,000 tons of pulp.

Consumer products reported first quarter 2008 operating income of $3.3 million versus $4.8 million in last year's first quarter. Although pricing and shipments were up 2% and 8% respectively, it was not enough to offset the higher pulp, freight and energy costs we experienced in Q1. We announced price increases that recently went into effect that should help offset these higher costs over the remainder of the year. Eliminations had a $1 million positive impact on operating income during the first quarter compared to a negative impact of $1.3 million last quarter and a positive impact of $4.9 million in last year's first quarter.

The main driver for the positive elimination entering the first quarter compared to the fourth quarter was the seasonal log inventory decrease we typically go through this time of year in Idaho as it gets more challenging to harvest during the winter months and, therefore, we typically begin reducing inventory in the first and second quarters and start building it back up again in the second half of the year. The lower positive impact in the first quarter of 2008 compared with the first quarter of 2007 was due to lower volume decrease in 2008.

Corporate administration including interest expense totaled $22.7 million for the quarter compared to $22.2 million in the fourth quarter and $18.5 million in last year's first quarter. The first quarter of 2008 expense includes $2.7 million for the OSB Antitrust settlement with a direct purchase or class as well as higher compensation expense and legal costs. Interest expense totaled $8.5 million in first quarter of 2008 compared to $7.6 million in last year's first quarter. Our interest expense had increased as we utilize our revolver for the recent Central Idaho acquisition. EBITDA totaled $47 million in the first quarter versus $26.8 million in last year's first quarter.

Funds for continuing operations or FFO for the quarter totaled $46.3 million versus $24.6 million a year ago. The Company paid a normal distribution of $20.1 million during the quarter compared to $19.1 million in the first quarter of 2007.

In our last webcast, we indicated that we expect the capital spending for 2008 to be in the $50 million to $60 million range. We now expect it to be at the bottom end of that range for the year primarily driven by lower capital spending in our wood products division. Pages 4, 5 and 6 provide additional detail by segment for the variances I have described.

I would now like to turn the discussion over to Mike to provide some additional comments about our operations and markets.

Thank you, Eric. We are pleased with the performance of our resource and real estate businesses during the quarter. However, there are several key cost pressures on our manufacturing businesses which we did not fully anticipate at the time of our last earnings call in January. Energy costs both for natural gas and diesel fuel have significantly increased. Our pulp base businesses are large users of natural gas, and fuel costs impact multiple segments especially log hauling costs and the cost of outbound shipments in our tissue business.

Wood fiber for our pulp mills continues to escalate in cost largely due to the shortage of residual chips caused by sawmill curtailments in the West. Residual wood chip prices at our Idaho mill have increased by 7% since this time last year. Similarly, at our Arkansas mill chip prices have increased 11% year over year. We did not anticipate the depth of the downturn of our lumber business. The benchmark random lengths composite lumber index has fallen by 14% over last year while log costs have declined only modestly about 6% to 9%.

In addition, the margin squeezed caused by rising costs for energy, labor and most maintenance parts and supplies has resulted in most of our wood products facilities operating at a loss. At this time, we do not anticipate the permanent closure of additional plants and we believe that most of our log customers who purchase fee volume from our resource segment to operate their mills will continue operations as well. Most of our log customers have made purchasing commitments for the second quarter and into the third quarter prices that approximate first quarter levels.

For this reason, we do not anticipate deferring harvest volume in the second quarter although the second quarter is seasonally our lowest quarter for harvesting activity due to spring breakup conditions throughout Idaho, Minnesota and Wisconsin as well as spring rains in the South. Deteriorating log prices continue to be the largest risk factor to our earnings outlook for the remainder of 2008.

While saw log prices remain under pressure, pulp log pricing is very strong and continues to improve in some areas. This is largely due to the strength of the pulp and paper market and the decline and availability of residual wood chips from saw mills. Importantly for Potlatch, approximately 20% of our saw log sales in Idaho are cedar, which continues to sell at record prices and shows no sign of weakness.

Land sales from our real estate segment are still expected to be 20% to 30% higher than 2007 after setting aside the non-strategic land sale that we initiated in Minnesota in the first quarter and will complete next month. Prices and demand for rural recreational real estate in Idaho and the lake states appear to be strong with little evidence that prices have softened. We will be able to better gage that as we get into the more active summer season.

Eric commented on the major maintenance outages in our pulp and paperboard segment, which make quarter-to-quarter comparisons of performance difficult to track. Looking at the past 12 months of division level EBITDA from both of our paper mills, it was $92 million compared to $52 million in the prior 12 month period. During the last 12 months, we have seen significant improvements and results from the Idaho mill despite rising costs for wood chips, energy and chemicals.

Both the Lewiston, Idaho and Cyprus Bend, Arkansas mills continue to improve production and quality which has allowed us to gain market share in the high-end folding carton in commercial print market while scaling back production and lower margin grades. Market pulp sales during the last quarter were roughly 20,000 tons compared to 30,000 tons in Q4 2007 when we had large shipments to Asia. Market pulp sales are limited by a very small capacity pulp drier and pulp production constraints at this facility.

We have announced price increases on cut stock, which affects approximately 90,000 tons of productions from our Idaho mill. This increase if accepted by our customers will result in additional earnings of about $1.3 million for the balance of 2008. The full effect will not be seen until next year due to annual contracts for cut stock. Markets in all three grades we produce - commercial print, cut stock and liquid packaging - remain in strong demand and we have solid backlogs at both mills. Further the weak dollar continues to create demand for our products outside the U.S. helping to keep the U.S. market tight.

Unfortunately, we expect these market opportunities will be partially offset by a rising costs for wood chips, pulpwood, energy and chemicals. As we mentioned on the last quarterly earnings call, our consumer products segment continues to improve shipments, productivity and tissue output from each of our four tissue machines. Rising pulp cost and energy, however, continue to eat away at price increases that were implemented this last month. It will take at least a full quarter for our customers to work through inventory stocks and reorder tissue products at the higher prices that went into effect April 7.

At this time, we expect 2008 operating results to be in line with our 2007 performance, which is down from the modest improvement we expected at the start of the year. Now, I would like to turn to our announcement last week that our Board has authorized us to evaluate a potential tax-free spinoff of the Company's pulp based businesses. Such a spin-off would create two standalone publicly traded entities. A [pure play timber wreath] and pulp based manufacturing company that would include our consumer products facilities in Lewiston, Idaho; Las Vegas, Nevada and Elwood, Illinois and our pulp and paperboard facilities in Lewiston, Idaho and Cyprus Bend, Arkansas. These businesses plus our wood products facility in Lewiston, which would be included in this spinoff since it shares the same site in many plant services, had combined revenues of $1.2 billion in 2007.

We believe this spinoff may have several benefits. Among other things it would allow management to focus more intently on our core business of timberland management and the sale of rural recreational real estate. These businesses are fundamentally different from the pulp base businesses and have earnings streams that are far less volatile.

Importantly the spin-off company could focus on managing and growing the manufacturing business without the restrictions posed under REIT rules. There are a number of critical work streams to complete and evaluate prior to seeking approval from our board of directors to move ahead with the spin-off. Should we decide to pursue it, we believe the spin-off could be completed in the fourth quarter of 2008 assuming the following gating items are complete. This includes the receipt of an IRS ruling that the spin-off would be tax free to shareholders and the company. It's contingent on obtaining SEC approval after the company files a Form 10. And finally we need to retain a CEO, a board of directors, and other key management positions.

Many of the questions asked by investors and analysts last week following our announcement revolved around the capital structure of both the proposed spin-off company and Potlatch. It is far too early in the process to speculate or answer questions related to any of the issues around the capital structure that either company would have in the event of a spin-off. As we hit mile stones in our evaluation process, we will share additional information with analysts and investors. It is important to know that our Board carefully considered a wide range of alternatives before announcing that we would explore spin-off. Based on initial market reaction and the feedback from investors and analysts, we are confident that the initial spin-off evaluation makes sense.

Given the Board's fiduciary obligation, we will continue to carefully evaluate all of our available alternatives to maximize shareholder value as we move through the process. We believe the evaluation of a tax free spin-off of the pulp-based businesses is the right step to take at this time. Thank you for your interest this morning, and Alicia we will now take questions from participants on the call.

(Operator Instructions). The first question comes from the line of Gail Glazerman with UBS. Please proceed.

Hi. Good morning. I was wondering if you could talk a little bit about --more about real estate, the sale in Minnesota -- I just want to also -- just what that does year overall strategy and just to confirm so you are still looking for 20% to 30% sales growth in real estate excluding the Minnesota sale. I just want to confirm that.

Gail, that is correct. When we originally did our Company-wide stratification in 2006 of land that we thought was suitable for higher and better use opportunities or was non strategic, this 40,000-- a portion of this 40,000 acre piece was identified in Minnesota due to its very low productivity from a timber perspective. A very small percentage of the land base we felt was suitable for any recreation, real estate, or HBU outcome in the future. So this is the most northern, northeastern part of our Minnesota ownerships. So we have our eye on it for disposition for some time and we have had discussions with an investor--a local investor in Minnesota who values the property different than we do; and I don't think this value is indicative of certainly the rest of our ownership in Minnesota or the rest of the Company. As Eric mentioned, I think we had 28 real estate transactions in the quarter, which were at prices about 25% higher than what we executed last year, and that is in line with our guidance was at the start of the year.

Gail, just to give you a feel for it -- this is Eric -- between those other transactions we had in Minnesota they were done around $1,600 an acre so to Mike's point about this acreage was dramatically different than our other real estate transactions in the state. I think the pricing points that out.

Okay. And then going on to the year, I think you are guiding towards about 18,000 to 22,000 acres of sales. Does that also still hold including Minnesota or has that gone down?

No. I think our forecast the start of the year is -- it still holds. It just -- pretend that that Minnesota transaction didn't happen and we told you last quarter's is consistent with what we are thinking for the rest of the year.

Okay. And can you talk a little bit -- I mean on -- we talked about land sales, maybe talk a little bit about your opportunity to acquire land, what you are seeing in the market and what type of opportunities are out there at your pricing levels given what you're seeing in your land, or I guess is too much of a hindrance.

This is Mike. The timberland landscape across the country continues to be very competitive with I think still an awful lot of capital attracted to this asset class particularly as an inflation edge, and I think the fundamental understanding of the value of timberland is better and better understood every year. So it is still a very competitive landscape. There is not a lot of property on the market and what there is tends to have a lot of bidders particularly from (inaudible).

Okay. Finally just switching gears, if you can talk a little bit about the Northern saw log markets. They get prices that came off pretty sharply on the sequential basis and just wondering how that -- is the effect starting to stabilize or is it still kind of in the second quarter coming off?

To give a little more color, our Northern Region is made up of both the lake states and Idaho, two very different market areas. Pricing in the lake states actually is quite stable. Pricing in Idaho particularly for pulp logs continues to increase as it does around the country. As I mentioned, pricing for cedar actually has gone up year over year and continues to be very, very strong. For mixed saw logs that service the dimension lumber and stud lumber, customers that we sell logs to, those prices did come off a bit and we expect that those prices are going to remain under pressure.

In the second quarter of this year, we don't have a lot of harvesting activity planned in Idaho. It is just seasonally our lowest and the lake states. It's seasonally a very low slow period because of spring break up. So, as Eric mentioned, we are going to evaluate these prices closely as we come out of the second quarter and get into June or July when logging starts to commence more actively and evaluate what if any deferrals we ought to consider. A lot of the volume for the second quarter and a portion of that in the third quarter has already been sold to customers at prices we think are attractive, but we are going to have to watch the markets closely.

Okay, thank you very much.

You're welcome.

The next question comes from the line of Hamzah Mazari with Credit Suisse. Please proceed.

Thank you. Just a couple of questions -- you talked a little bit about the next steps in executing your spin, could you give us a sense of signings -- when you expect the IRS ruling, when you expect to file the Form 10, and when you expect to give an update on your executive search process.

Hi. Good morning. This is Eric. I think with regard to the outlook we -- our public statement is that we hope to get it completed by the end of the year. We still think we are on track to make that happen some time in the fourth quarter. I think the key items are the Form 10 and the IRS ruling and we are in discussions now with the IRS. We expect to get that letter ruling some time over the next couple of quarters. It is not a simple process. In some cases they will expedite their ruling but in other cases they won't. So it is too early to predict exactly when we are going to get that ruling from the IRS. The Form 10 we hope to have filed some time in the mid to late summer and part of the timing that is going to drive that is getting in place the senior management team at least the CEO before we make that filing. Our search is just now underway for the new CEO so that is going to take us a couple of months I would expect.

Okay, thanks. The [pulp conditions] you guys are facing across your businesses, do you have any hedges in place there?

We have forward bought some energy, unfortunately not nearly enough or not nearly as much as I would have liked. We try to buy forward roughly half of our natural gas usage, and we are not at that level today and we're at prices that are above where we were last year so we have a little bit of gas bought forward but not as much as we like.

Is it fair to say on your paper board business that you guys are pretty much maxing out on exports or is there any additional room to push through more tonnage on the export side?

This is Mike. I think if we were to exit some domestic markets and switch them to export market that is something that we consider on a pretty consistent basis but many of the contracts on our paperboard business both for cut stock and other items are longer-term contracts, which makes flipping markets problematic. We can't just do it on a whim. We produce as much market pulp as we possibly can and we don't have contracts for that. We are exporting most of that, but we cannot make a meaningful switch in the amount of export at this time.

Okay. Just one more question -- your land sales market seems to be holding up pretty well. Are you seeing any slow down in any of your markets in terms of phase of land sales, transaction activity?

No, we have not. And I guess our real estate business is relatively small, but the evidence that we would have would be if we have any sales that didn't move from contract to closing that has not happened. We still see a lot of interest in broker inquiries to brokers for property that is listed, but the caveat that I will add and I think we have mentioned is the most active period for our real estate business is in the summer season and we are just approaching that; but so far in the markets in Idaho, in the lake states where we have the most activity, I think Wisconsin and Minnesota both, interest and demand still appear strong.

Thank you very much.

You are welcome.

The next question comes from the line of Mark Weintraub with Buckingham Research. Please proceed.

Thank you. First, I realized that the harvest is going to be closely monitored but at the starting point, should we still be using what you referenced in your 10K as the 4.2 million to 4.4 million tons? Is that a good starting point to be at?

Mark, this is Mike. That is a good starting point. Part of the reason for that is you can't lose track of given the size of our Company particularly is over the last 2 years -- over the last actually 18 months, we have grown the land base by 18% and so a lot of the harvesting activity is driven by much more timberland management.

Okay. On the gating issues for the -- are there any precedents for getting the letter from the IRS on the type of action that you are taking, and how if for whatever reason that the IRS didn't want to give you a letter but was certainly not saying that there will be a problem either, would that be a limiting factor or not?

Well, there has certainly been a number of tax free spin-offs that have been done by a number of entities particularly C-Corps. There's not as many examples in the (inaudible) field but I don't think that we are on the cutting edge here at all. I think what we are asking for is a fairly straightforward process and application.

If the IRS for some reason did not consider it or the timing wasn't satisfactory, there are alternatives we can consider and get opinions of counsel as to whether or not this would be a tax free event for shareholders outside of a private letter ruling. We are not expecting that to happen.

Understood. Even though you have mentioned it a couple of times, it is not really a high priority potential issue in your view?

It is a very high priority -- it is a critical gating item but we really don't expect any problems with it. We have a very strong case for our business purpose for doing it and early indication is that the IRS will agree.

Okay. And then just on the Minnesota sales -- I guess I am just looking at the presentation you had made a couple of years ago. You had indicated 50,000 to 60,000 acres in Minnesota with markup values of $450 per acre above timberland values. I guess I am just trying to foot what actually you got on these properties; and if I remember it rightly, those were markup values as opposed to actual transaction value. Is it that you have a lot of very valuable non-core Minnesota lands, or how should I be thinking about that? And more importantly if you were to update that table which you had given, it was maybe a year back or whatever, would there be significant changes for the markup values you would be placing on the HBU or the non-core lands that you had identified on the 250,000 to 300,000 acres in total.

The table that you are referring to and I do not have it in front of me, but it was prepared and distributed in December of 2006 when we rolled out our stratification plan. As I mentioned, a portion of this property that we sold in Minnesota we had identified at that period in time, as I also stated, we knew it was the lowest value property that we had. So was it specifically called out with an estimate of the value that we eventually sold it for now? Probably not, but I don't think that should cloud our overall estimates. As Eric mentioned, the transactions just this last quarter in Minnesota for the rest of the property we sold were, I think, at $1,600 an acre. Overall, I think our HBU program was around $2,200 an acre in the quarter when we threw in the activity from all the states, which I think is very much in line with the estimates that we prepared in '06. More importantly, I think last year's program ended up at about $1,500 an acre in total; and we expected this year 25% to 30% increase in prices because the character of the property that we are going to sell this year had a larger HBU component and I think we are right on track with that today, Mark.

Okay. Great. So that $1,600 you reference from Minnesota that was actually other non-core lands as opposed to HBU?

There is some HBU in that mix, Mark. If you look at the total acreage that we sold outside of that one large Minnesota transaction in the quarter, it was around 5,500 acres; and of that acreage 1,800 of it across the Company is what we would consider HBU with the rest being just rural recreational type real estate. The rural recreational stuff sold for around $2,000 an acre and then our total acreage sold for $2,200 an acre. The HBU actually went for $2,800 an acre.

Okay great. So the bottom line there, Eric, there's -- at this point if anything you feel as good or better about this, the values of your HBU and non-core program that you did in December 2006, would that be a fair--

Yes. Not only do we think we feel as good or better about the value, we are building a team that have attracted I think a number of people that are going to abstract a lot of value from this; and I think, furthermore, we are probably identifying more land than maybe we initially thought. Certainly the property that we purchased in central Idaho has a much higher component of HBU and that was not discussed at all in the December rollout in '06 that you are referencing. We didn't own that then.

Fair enough. And one last quick one, folks. Conceptually when you are thinking about the cash flows from your business and you have obviously gotten your ongoing harvest cash flows and then you have referenced that you also think about your land sales -- Do you include non-core land sales in the thought processes you use or do you kind of view this as kind of separate one time stuff that you don't really include in that thought process when you start thinking about dividends and things like that?

Well, certainly when we did the assessment of the thing you refer to '06 of land that would be sold over time which was identified as I think between around 18% of our ownership, 250,000 to 300,000 acres at that time. A portion of that, we identified and consider as non-core and we said all of it was going to be sold over a decade, so I think that the non-core pieces of it such as the one we just sold in Minnesota are definitely part of the -- if you think about in terms of a decade of cash flows. We expected to sell those properties over a 10-year period. In addition, we were able to redeploy this Minnesota sale in a 1031 exchange and do this on a tax-free basis. So I think that is all part of our strategy.

Okay. Thank you.

You are welcome.

The next question comes from the line of Steve Chercover with D.A Davidson. Please proceed.

Thanks good morning, Eric and Mike.

Good morning, Steve.

First question, I believe you said you incorporated the $2.7 million of OSB settlement into first quarter corporate expense so that goes away, but can you quantify what kind of expenses we might see associated with your analyses that spin off whether it is recruiting CEOs or just (inaudible) investment banks?

That is a good question, Steve. We are still getting arms around what those numbers might look like it. It's a little bit early, but certainly there is going to be some accounting work that has to be done to get the financial statements ready for the Form 10. There will be some recruiting costs. There's going to be a fair bit of legal costs as we get that Form 10 prepared and get the letter ruling from the IRS. I'd hesitate to guess but it's probably less than $5 million over the next couple of quarters excluding banker fees.

Yes. Good. I was glad, hoping it wasn't going to be the kind of numbers that were, although I don't remember them precisely associate with the original transition into read so will you break those out as we go through the quarters, what the kind of discrete spending on device is?

Yes, yes. We will break that up for you.

Great. Secondly, can you quantify the magnitude of the tissue price increase either percentage terms or dollars per ton?

Well, I think the public announcement and the comments that we made, Steve, were in a range of 4% to 7%. Obviously not all of that at least -- not all of that we anticipated would be successful. There will be some promotions that have to go against that so the net price increase on products may be as two to five when it is all set and done and it was not on every single tissue product that we make. As you know, we follow kind of and compete with many of the large brands and some of our pricing is predicated on what they do and how our merchants accept that, so it was not across the board.

Sure. Any early indications that it's being accepted in the market place? I know it is only a couple of weeks.

Yes. So far from the three large grocery store chains that are our largest customers I think it has been accepted completely and it is being implemented in their stores today.

Good. Quick final question, the number of acres that you sold in Minnesota, that's already reflected in the [$455,000] that has been reflected in your recent press releases even though half of it has yet to sell. Is that correct?

Yes. The full acreage -- of that full acreage the 43,000 only the 23 is closed. The remainder is still yet to close and we should close that in May.

Yes, I understood that, Eric, but I think I calculated that 45,000 was sold just like looking at your recent press releases versus the 10K, and so I just wanted to determine that you have already kind of taken that out of your ownership in recent press releases.

No, the full amount has not traded, not traded hands and we had offers around the issue there or what (inaudible) but only of that $23,000, 500 acre figure is close. Now we could have an additional 5,000 acres above and beyond that Minnesota sale.

Understood. Okay, thank you.

The next question comes from (inaudible) with Bank of America. Please proceed.

Hi. This is [Mike Rosamond] for George. Going one second back to the cost issue, in addition to some of the inflation hedges you set up, what are some of the other measures you have taken to offset the rising cost?

Well, there is numerous examples of that by product line. As you can imagine, one of the largest expenses that we incur is the hauling of logs. From the diesel fuel perspective we're taking steps to try to optimize that to get more loaded, more loaded tons per month on each load of logs. We have taken steps to reduce our natural gas usage. We've cut the amount of gas usage per ton of paper production that we make out of our paperboard mills almost in half I think in the last three or four years. I don't have exactly the statistic in terms of over the time period, but I believe it is over the last four years it's gone down by 50%. We're examining the use of alternative fuels where we think that can make sense to get away from the fossil fuel inputs that are very expensive.

Electricity is another area to a lesser degree than natural gas or diesel. It's gone up. We're trying to minimize the use of that where we can. So I think it is one of the largest cost inputs we have that's gone up the most is wood chips and anything in this steps we can take to increase the yield from the input of wood chips to the output of paper production in each of our mills is in one of the areas where we have the most leverage and we're making improvements in that daily.

What's your outlook for cost pressures? Obviously there's -- I would assume (inaudible) that they will remain -- in the short term may remain elevated, but in a longer term what's your outlook there?

Well, I am not an economist. I don't know. It's -- I never-- I don't think any of us imagined we'd see diesel fuel prices of over $4 a gallon or natural gas over $10 per (inaudible). I just -- I have no idea what to think.

On the pulp side, the fiber side we really need to see a rebound in saw mill activity to get the pulp prices back down again to help out our pulp based businesses. And when that happens is kind a dependent upon housing starts and consumer confidence and the like--

-- to get our chip prices down.

Yes, to get the chip prices back down. Very hard to predict.

Excellent. Last question. Given the continued weakest saw log markets, why not defer more of the harvest until pricing recovers?

Well, it's difficult to make that kind of across the board statement. Every market is different. As I mentioned, we're seeing pretty decent markets in the south, especially for pulp wood and saw log pricing there has held up relatively well. The lake states it's been pretty flat. Dimension saw log prices in Idaho have tumbled a bit more. We also balance that with -- we've talked about in the past, we have an older decadent forest particularly in Idaho and we have an older age class forest in Arkansas. We think -- when we run our modeling, and try to simulate not only the growth of the forest but the value of the trees and how best to maximize net present value almost in all cases it tells us the smartest thing to do is accelerate the harvest, replant the trees, establish younger thriftier stands makes the most financial sense. Obviously there is a limit to that. I think the area we are going to have to watch the closest is the Idaho saw logs but I think in Arkansas and the lake states, we feel that we are in pretty solid ground with our plan today.

Given the weakness in Idaho, are think you mentioned before you're going to -- you will reevaluate towards the end of the second quarter whether you're going to have any type of deferral?

Yes, that's correct.

Thank you.

You're welcome.

The next question comes from the line of [Roger Vogner] with [Vogner] Enterprises. Please proceed.

Mike, in the comments at the beginning, you made a comment on consumer products. What the volume increase was and we missed that. Could you repeat that?

I don't recall a comment about a volume increase in terms of --

You talked about pricing and shipments. Pricing was up 2% and shipments were up 8%.

That's what I was looking for. Shipments. Thank you. That's all.

The next question comes from the line of Richard Paoli with APG Investments. Please proceed.

Hi, guys. It's Richard Paoli. Just a follow up on an earlier question. Could you remind me the proportion of I guess, the haul costs that are born by you versus by the I guess by the purchaser. Because if I recall correctly, regionally there is different methodolgies. Can you just remind us how that all works? And then what the trend has been on, I guess, the cut the (inaudible) guys. They're probably getting squeezed also. Is that right -- the contract workers?

Does your question related to our resource segment when you say "hauling?"

Yes.

The company both a logging cost to a contractor to cut the tree down and load it onto a truck and we also pay a hauling cost then to deliver it to a location -- to a mill location so we bear 100% of the cost. Typically we index the cost of what we pay our contractor to do that based on the price of fuel so that the contractor does not bore the entire risk and expense of a rising fuel market. We obviously try to make it fair but there is no question that our contractor has been squeezed as well. They operate heavy machinery and the logging equipment is very fuel intensive. It is not only the cost of fuel but the cost of tires and hoses and many of the other things that come from petroleum products has risen as well.

So they are squeezed, we are squeezed and I think most of our customers would feel that without a rise in the price of wood products which of them sell they do not have the ability to pay anymore for it so it is truly a margin squeeze.

So guys do not do any contract brokerage to sold -- on a bench basis and then the buyer bears that cost. Is there any chance that the trend changes given the environment?

We do a small amount of that where we would sell us a stumpage sale and the contractor would have or the purchaser would have typically 12 months to 18 months or something to cut or remove the timber and they take the market risk on price and cost. We do a little bit of that but not very much. We feel we can add more value by maintaining the ability to merchandise and cut the tree into its component log statements to maximize value where we can sell pulp log to a pulp customer, saw log to a saw log customer. We typically think we get more value than letting somebody else to do that .

Okay and then just a follow up question also. Are the number businesses being spun off also, I guess, in the lumber manufacturing or is it just the pulp and tissue type businesses.

Primarily it is the pulp based businesses that I have mentioned which is tissue and paperboard. Included in that is one sawmill in Lewistown, Idaho where the sawmill on Lewiston, Idaho is on the same site and complex as a large paperboard facility and consumer product facility where it shares power and services and air permits and chips supplies and so on. So that one is secluded in the spin off but the rest are not considered at this time.

And then just one last question. Could you just perhaps walk through the big picture why does it make more sense to spin off this business versus sell it to an operator who essentially can gain economies of scale by combining and do what they do especially when you have to go out and find the Board of Directors, find management and I am presuming that you would need certain approvals anyway to sell the business maybe just sort of that but it seems like that analysis has been done and why that included in that fashion.

Well, first of all the decision to spin it has not been made. We are evaluating it and our Board is considered a number of alternatives before arriving at the decision to evaluate the spin off. One of the considerations in the spin off pending approval by the IRS obviously is there is a possibility that this can be a tax free event for the Company and the shareholders which is also a very compelling advantage to a spin off versus the sale of a business.

And there was no way to structure or potentially de-structure any type of tax advantage sale?

As we have looked it, this alternative mix the most sense right now to evaluate.

Okay great, thank you.

You're welcome.

We have no additional questions at this time. I would like to go ahead and turn the call back over to management for closing remarks.

Thank you and thanks for your participation and we will talk to you in the next quarter.

Ladies and gentlemen this does conclude your conference call. You may now disconnect. Have a great day.