Potlatchdeltic Corp (PCH) 2009 Q4 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time I would like to welcome everyone to the Potlatch year-end fourth quarter 2009 earnings conference call featuring Eric Cremers, Vice President of Finance and Chief Financial Officer and Michael Covey, Chairman, President and Chief Executive Officer for Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Well, thank you and good morning. Welcome to Potlatch's investor teleconference covering our fourth quarter 2009 earnings. Before we begin, let me remind you that this call may contain forward-looking statements within the meaning of the US 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.PotlatchCorp.com as part of the webcast for this call. I would now like to turn the call over to Mike Covey, our Chairman, President and CEO for opening comments.

Thanks, Eric. Good morning. In our earnings release this morning we reported FFO for the year of $122.7 million, well in excess of our combined dividend payment in capital expenditures for 2009 which totaled $81 million and $16 million respectively. So in a year where both our resource business and our wood products business both significantly underperformed due to harvest deferrals and unprecedented weak pricing, we were still able to generate significant cash flow to cover our dividend. We did this by capitalizing on some of the very unique attributes of the timber asset class. First timber is highly sought after by investors regardless of the economic outlook, as investors are willing to look through near term economic weaknesses in valuing the asset. Another unique attribute of timberland is the tracts are easily separable and can readily be sold to generate cash at attractive pricing, if desired.

In 2009 we capitalized on this with two specific transactions. In the first quarter of 2009, we sold almost 25,000 acres of nonstrategic timberland in Arkansas for about $1,760 per acre at a time when our 1.6 million acres of Timberlands were valued at about $800 per acre based on our enterprise value at the time. This transaction was swallowed by the execution of a tax free timber deed for $49 million in the third quarter of 2009, which included approximately 50,000 acres of pine plantations between the age of one and 10 years old, providing $48 million in cash proceeds.

We begin 2010 with much stronger fundamentals in both the resource and wood products business. In wood products, lumber prices just reached 18 month highs and each of our sawmills are expected to generate meaningful cash flow at current lumber price levels, and in our resource business we expect that the higher lumber prices will work their way into higher log prices over the next few quarters which is typically what happens. The higher log pricing will allow to us increase our harvest levels, which should significantly boost the company's cash flow and help sustain the dividend. As we have stated many times, our Timberlands are extraordinarily stocked with mature valuable sawlogs. Our 2009 harvest levels were 25% below our long term sustainable level of 5.1 million tons.

As Eric will discuss in a minute, we plan to begin a slow increase in harvest levels in the second half of 2010, assuming log pricing improves from current levels. We we still anticipate harvesting far less than our potential of 5.1 million tons, but anticipate a measured increase to that level over the next couple of years as housing starts begin to strengthen later this year and beyond. Our real estate thesis remains much the same as it's been over the last two years. We continue to see steady demand and fairly stable pricing for rural recreational land particularly in the lake states. Demand for HBU property that has more amenities such as water frontage, views and proximity to destination resorts, for example, remains weak. This is especially the case in Idaho, where we own thousands of acres of land with HBU characteristics.

During 2010, we will continue a process of further stratifying this land to determine which is most suitable for eventual sale, which needs additional entitlements and which land might be best suited for conservation rather than development. I'm also confident that we can continue to execute nonstrategic timberland transactions that create value for shareholders. TIMOs and others continue to express interest in our nonstrategic timberland and we are exploring a number of options. We begin 2010 with a strong balance sheet, ample liquidity and virtually no pending debt maturities. The spinoff of Clearwater Paper has unlocked significant value for Potlatch shareholders and the transition has gone smoothly.

Although there is still a great deal of uncertainty about the pace of economic recovery, we believe we are well positioned. It continues to be our view that as harvest levels begin to increase, perhaps as early as the second half of this year, we will be well on our way to generating cash flow in excess of our current dividend level. Eric will now discuss our fourth quarter results and our outlook for 2010 and then we'll take questions and answers.

Thanks, Mike. Let's begin by reviewing our fourth quarter results. We reported earnings from continuing operations in the fourth quarter of 2009 of $2.9 million or $0.07 per diluted share as can be seen on page three of the slides accompanying this presentation. This compares to net earnings from continuing operations of $46 million or $1.15 per diluted share in the third quarter of 2009 and compares to earnings of $5.9 million or $0.15 per diluted share in the fourth quarter of last year.

As you're probably aware, we completed the spinoff of Clearwater Paper in the fourth quarter of 2008. So the results of the Clearwater businesses including costs associated with completing the spinoff, corporate administrative costs, directly associated with Clearwater and interest expense for the debt retained by Clearwater have been moved to discontinued operations in all historical periods. I'd now like to focus on our fourth quarter results broken down by segment.

Slide four highlights operating income and margin trends in our resource business. Our resource segment produced $11 million of operating income in the fourth quarter of 2009, which was below the $15.9 million of operating income in last year's fourth quarter, and below the $55.4 million we earned in third quarter. As a reminder, we executed a timber deed in the third quarter, which provided $41.5 million of operating income in that quarter. Comparing the fourth quarter of 2009 to the fourth quarter of 2008, the lower operating income this year was driven by both lower harvest volumes as well as by lower pricing.

This can be seen on page five of the supplemental materials. In the northern region sawlog harvest volumes were down about 4% comparing Q4 2009 to Q4 2008 and down about 14% versus Q3 2009. We continued to defer our harvest level in this relatively week environment and although northern sawlog pricing in fourth quarter was down about 5% versus the prior quarter, this drop in pricing was largely due to a product mix shift.

In the fourth quarter we experienced a sharp dropoff in the demand for cedar poles used for the buildout of utility transmission lines. Cedar poles typically represent about 5% of our cedar volume and just 1% of our total northern region sawlog volume. This high value product typically sells for double the typical cedar sawlog price and four times the typical northern sawlog price. We expect this market to improve once housing and the general economy improves. Excluding cedar, sawlog prices in the northern region dropped just 1.7% in Q4 versus Q3. Furthermore, pricing for mixed sawlogs in the northern region, excluding cedar, is up about 3% so far in Q1 versus Q4. In the northern region, pulpwood harvest volume was down 16% compared to the third quarter but was actually up 16% versus last year's fourth quarter while pulpwood pricing was flat versus the third quarter and down 3% versus last year's fourth quarter.

Turning to page six, in the southern region, sawlog harvest volume in the fourth quarter of 2009 was up about 12% over the third quarter but down 16% compared to the fourth quarter of 2008. Volume in the fourth quarter was down due to the previously announced harvest deferral, as well as the exceptionally wet weather we've had in the south. Sawlog pricing in the south was down about 5% compared to the third quarter and down 15% compared to last year's fourth quarter. This lower pricing was primarily due to a product mix shift due to the wet weather towards smaller chip and saw sawlogs versus the much larger and higher priced traditional sawlogs. Pulpwood volume in the south was down about 10% compared to the third quarter and down nearly 29% compared to last year's fourth quarter again due to the harvest twirl and wet weather. Pulpwood pricing in the fourth quarter was down about 3% compared to the third quarter, and down about 12% compared to last year's fourth quarter. Fourth quarter pulpwood pricing was largely determined by contracts entered into earlier in the year, and thus, don't reflect the supply constraints caused by recent wet weather.

Now let me make a few comments regarding recent price trends. Although pricing in the fourth quarter was slightly below our expectations, sawlog pricing appears to be firming, albeit modestly, along with the recent rise in lumber prices. In fact, sawlog prices in the first quarter are trending at levels higher than we experienced in the fourth quarter of 2009. We continue to be optimistic that as we move through the year, we will continue to see progressively higher sawlog prices as housing eventually becomes a positive contributor to GDP growth. Regarding pulpwood pricing, in general it, too, is moving higher as we move into the first quarter but regionally there are areas of strength and areas of weakness.

Page seven highlights operating income and margin trend in our real estate segment. We reported fourth quarter operating income in our real estate segment of $4.5 million which compares to $1.5 million dollars of income in the third quarter and $300,000 in last year's fourth quarter. Generally speaking, we have a relatively low book basis on our various land holdings, so margins in our real estate business are quite high as you can see on this chart.

Page eight breaks down our real estate revenues by product type. As you can see, we had total real estate revenues of $7 million in the fourth quarter with $4.3 million coming from rural land sales, one and a half million from HBU land sales and $1.2 million from a conservation easement. This compares to revenues of $5.6 million in the third quarter and revenues of $2.9 million in last year's fourth quarter. We closed 40 different real estate transactions in the fourth quarter and 154 for the full year. Page nine breaks down acreage sold by product type and as you can see, over 88% of our acreage sold in the fourth quarter was rural recreational land, and the remaining 12% was HBU. This is a typical split of rural land versus HBU for us in a quarter when we don't have any nonstrategic timberland sales.

Page ten highlights trends in pricing for our real estate sales. Our real estate sold an average price of approximately $1,225 per acre in the fourth quarter with HBU land selling for nearly $2,700 an acre and rural land selling for a little over $1,000 an acre. In addition to HBU and rural recreational land sales, we also had one conservation easement in fourth quarter which was for 954 acres at almost $1,250 an acre or about $1.2 million. In spite of the bad economy, our real estate business continues to be relatively firm with prices for both HBU and rural land holding up relatively well. We continue to see a little trading down to lower priced acreage in our rural land sales program, but interest in rural land remains intact. Our plan at the start of the year was to sell approximately 15,000 acres of HBU and rural recreational land in 2009 along with nearly 25,000 acres of nonstrategic timberland. I'm happy to report that in spite of the very challenging economy during 2009, our real estate business performed exceptionally well.

Page 11 highlights trends in operating income for our wood products business. As you can see, our Wood Products segment lost $4.8 million in the fourth quarter compared to a loss of $11.4 million in last year's fourth quarter and a loss of $1.5 million in the third quarter. It is important to note, however, that the fourth quarter 2009 loss includes a non-cash asset impairment charge of $3 million for our Post Falls Idaho particle board facility. Excluding the non-cash impairment charge, we were, in fact, cash flow positive in the fourth quarter with our Wood Products segment producing EBITDA of $500,000 in the fourth quarter compared to EBITDA of $800,000 in the third quarter and negative EBITDA of almost $9 million in last year's fourth quarter.

Page 12 highlights price and volume trends in our Wood Products segment. Shipments were down just 1% compared to the third quarter but were up over 18% compared to last year's fourth quarter. Prices fell about 6% from the third quarter due to seasonal factors but improved considerably from the unprecedented lows we saw in the first quarter. Several factors are behind the positive trends we're seeing in our Wood Products pricing and shipments trends including lean inventories throughout the US lumber distribution network, a relatively weak US dollar compared to the Canadian dollar, significant wood products manufacturing capacity reductions throughout the industry, as well as our own focus on lowering costs. We are confident that the worst is behind us for our Wood Products segment. Though it's still early in the quarter, thus far our lumber shipments in Q1 have averaged $272 per NBF well ahead of our fourth quarter average of $255 per NBF.

Returning to the P&L on page three, elimination and adjustments had a $3.5 million positive impact on operating income during the fourth quarter of 2009 compared to a negative impact of about $900,000 in last year's fourth quarter and a negative impact of nearly $800,000 in the third quarter. The main driver for the positive elimination entry in the fourth quarter and for the full year was the result of lower log volumes primarily associated with LIFO inventory reductions. Corporate administration, including interest expense, totaled $16 million for the fourth quarter compared to 14.8 million in the third quarter and $8.2 million in last year's fourth quarter. The increase in corporate administration costs is due to a number of one time adjustments. The largest of which was our higher post employment benefit expense for retiree healthcare. Our OPEB expense increased due to a number of factors including increased utilization and medical inflation.

As noted during our last conference call, we have taken steps to lower this liability which I'll discuss in greater detail in a moment. Net interest expense, cash interest expense totaled $6 million in the fourth quarter of 2009 compared to $5.1 million in the third quarter and $5.2 million in last year's fourth quarter. The increase in interest expense is due to the bond offering we completed in the fourth quarter, the proceeds of which were used to repay revolver drawings and for general corporate purposes. EBITDA totaled $13 million in the fourth quarter versus $63 million in the third quarter and $10.3 million in last year's fourth quarter. Funds from operations, continuing operations for the quarter, total $11.7 million versus $64.3 million sequentially and $15.4 million a year ago. As I indicated earlier, comparing fourth quarter performance to third quarter performance can be challenging due to the timber deed we executed in the third quarter. We paid our normal $0.51 per share distribution in the fourth quarter totaling $20.3 million.

Pages 13 through 17 provide additional detail for our financial results. Now a few comments about our balance sheet and some recent changes to it. During the fourth quarter, we executed a $150 million bond offering with the 7.5% coupon and a 10 year maturity. With the proceeds we completely paid down our revolver drawing and put the remaining cash in the balance sheet. Also in the fourth quarter, the $100 million of credit sensitive debentures matured and have now been fully retired with restricted cash that was also on our balance sheet.

We have virtually no debt maturities this year, just $5 million maturing in 2011 and in total over the next five years just $56 million of debt maturities, resulting in a very attractive debt maturity profile. Furthermore, with $55 million of cash on the balance sheet in a completely undrawn $250 million revolver, we have strong liquidity. As I indicated earlier, we made significant changes to our retiree healthcare plan in the fourth quarter, prospectively lowering the benefit and then capping it going forward. This liable which amounted to $131 million at the end of 2008 now stands at $82 million.

Now a few words about our outlook for 2010. Given the uncertain economic environment like most companies we find it very challenging to provide much in the way of guidance. Though generally we see positive developments in each of our businesses. So I'll give you our latest thinking as it relates to our outlook for the year. As you know, the primary driver behind Potlatch's cash flow generation in our timber business is our harvest volume. In total we harvested 3.8 million tons in 2009, down about 12% from 2008, and down about 11% from what we initially planned for the year.

This lower harvest volume was a direct result of weak market conditions and our decision to defer harvest activity. As we have stated on many occasions, our view is that over time we can readily increase the harvest up to around 5.1 million tons and hold it there for nearly a decade, but given the near term outlook for below trend housing starts, now is not the time to do it. That being said, we have seen a nice balance in lumber prices recently to 18 month highs and are optimistic a portion of this will work its way into better log prices as we get into the back half of the year.

Therefore, our current plan is to modestly increase the harvest volume in 2010, say between 5 and 15% to about 4.2 million tons, versus 2009 with most of the increase loaded in the back half of the year. We'll be at the higher end of the range if prices are firm and at the lower end of the range if weak market conditions persist. We expect to increase the harvest to the 5.1 million-ton range sometime over the next couple of years as market conditions improve.

Regarding our real estate business, we continue to be optimistic. For 2010, we expect revenue from rural and HBU-type lands to be relatively consistent with the revenue we've experienced in 2009 with the slight shift towards fewer acres sold but at slightly higher prices. Regarding nonstrategic timberland, the outlook continues to be favorable. In 2009, as Mike mentioned, we executed two important transactions, one in our real estate segment and one in our resource segment. We believe that both of these transactions were done at prices significantly higher than the implied value embedded in our stock price.

Prices for timberland may have come down a little, say 10 to 15%, but generally speaking, prices are holding firm, and we are continuing to explore a variety of opportunities to capture value for our shareholders. Of course, these transactions are lumpy, difficult to predict, but we're optimistic nonetheless. As I mentioned earlier, our Wood Products business had a challenging 2009, particularly in the first half. However, excluding the non-cash impairment charge, we have been cash flow positive in each of the last two quarters. We expect this business to remain under pressure throughout the first half of 2010 with roughly break-even results, but then improve in the second half of the year and more meaningfully in 2011 and beyond as housing starts return to more normal levels.

Working our way down the P&L, we expect corporate administration expense, excluding interest expense, to total around $26 million for the year and we expect net interest expense to be around $27 million for the year. Corporate expense is forecast to drop about $7 million from 2009, primarily due to the steps we've taken to curb our retiree healthcare expense. Over the course of the year, we expect to make modest pension payments related to our supplemental pension plan, totaling just under $2 million. Capital spending for the company, excluding acquisitions is expected to be approximately $18 million in 2010 with roughly $12 million earmarked for our resource segment, which is primarily for logging roads and reforestation expense. Regarding taxes, which are challenging to predict and highly dependent on earnings from our taxable REIT subsidiary we expect to continue to realize a tax benefit in 2010, though it is likely to be somewhat less than the benefit we reported in 2009 and will be dependent on what happens in our real estate and Wood Products businesses.

DD&A, depletion, depreciation, and amortization should total approximately $29 million for the year but, of course, will vary fending on what we decide to do with our harvest level. Note that the aforementioned DD&A number excludes the basis of our land sold, the amount and percentage of which will be dependent on our land sales activity and the exact acreage we elect to sell. For reference land basis amounted to a little over 16% of our real estate revenues in 2009.

In summary, we face a very challenging 2009 but nonetheless we managed to generate significant cash, more than enough to cover the dividend through some attractive transactions. Furthermore, we are very confident the worst is behind us. Assuming housing starts improve as virtually all economists expect, lumber prices should continue to rise, even beyond their current level. Not long after lumber prices increase, we expect log prices to follow suit. Amanda, that concludes our prepared comments, and we will now take questions from the online participants.

(Operator Instructions). Your first question is from Gail Glazerman with UBS.

Hi, good morning. You seem awfully confident that the lumber rally might be sustainable. You touched on some of the topics but I was wondering if you might possibly expand on it. Are you seeing higher demand for sawlogs that makes you think this is maybe a turn in the market versus, just a supply chain type issue?

Good morning, Gail. It's Mike. I don't think that we could make a case that it's demand-driven at this point. Housing starts certainly haven't meaningfully moved. I think it's more supply related. Wet weather's contributed to that. Log shortages in the west, destocking in the inventory chain, I think all those things have a factor.

So I do think if you read into our comments that we're optimistic, I think really that's not related to what's going on with lumber prices in this quarter as much as I think we look for housing starts to begin to improve in the second half of 2010 and I think that's where we're more optimistic we'll begin to see traction in log pricing. It certainly doesn't hurt to have this little bubble in lumber prices and hopefully when it settles back down, we'll end up at levels higher than we were before we started, but we don't count on this to last.

Okay. And can you talk a little bit about the weather situation in the south, then, you know, how that's shaping up so far in the first quarter relative to the fourth quarter. Has that been impacting your land all that much?

Well, we only have operations in one southern state and that's in south central and southwestern Arkansas and we certainly had near record wet weather, had to shift harvest activities, as Eric mentioned, to kind of higher ground where we can find it which typically leads to more of a chip size smaller tree than the sawlog, the larger sawlogs that we find in the mixed bottom land. So it's had an impact on mix and certainly pulpwood demand and pulp wood pricing is up in the south due to the wet weather conditions and we just opportunistically try to take advantage of that, but we've been wet like everyone has.

Okay. And can you just give an update on what you're seeing in term of potential energy-related demand. Is there still discussions and interest from utilities? Has the level of interest changed at all the last couple months?

No. I don't think there's been any change at all. We continue to have vigorous discussions in almost every operating area that we have with energy companies, utilities and the like that are interested in creating electricity, pellets, even more far ranging opportunities with biofuels. I think maybe the bubble's burst on the BCAP opportunity, which was more of a near term thing and that looks like it's on hold, but I think the longer term interest in sustainable long term energy contracts for supply of raw materials still is strong and there was just, I think another project we just announced in the state of Washington this last week on the west side near Shelton, Washington. So there continues to be interest.

Okay. Just one last question and I'll turn it over. Given the amount of interest in what you're seeing in terms of the nonstrategic timberland, do you think it would be possible to replicate transactions somewhere to either of the two large deals you did last year?

Yes. We believe so.

Okay. Thank you.

Thank you.

Thanks.

Your next question is from Chip Dillon with Credit Suisse.

Hi. Yes. Good morning.

Could you talk a little bit about the, you know, as you see the lumber rally occur, does it seem to be kind of even across the country or too you see it, you know, better in the west versus the south and also do you think the log price improvement will likely show up, and run reason before the other?

Well, it's all good. There's been some regional differences. Southern prices have taken kind of unprecedented jumps recently, western dimensions up strongly. I don't think we can point to in our operating areas. Make the lake states areas is a little weaker for us than the south or Inland west, but generally it's all been positive. In terms of where it's most sustainable, certainly the weather will eventually change in the south. That will have some impact and supply will be more plentiful. I think the log shortages that exist from really a very open and unseasonably mild winter here in the west on that goes from the coast all the way to the Inland area, I think will cause longer term log shortages through what typically is the breakup season, Chip, and that would go through April or May. So I think we'll continue to see log pressure at least until the logging season resumes in the late spring.

Got you. And then when you look at the land sale opportunities or including timber deeds, you had two pretty -- well, I mean relatively speaking large transactions that were the bulk of what you did in 2009 and as you look at 2010, just should we expect maybe several more transactions than just two that might be a little smaller, or you think it would still be, just a couple like you saw in 2009?

Oh, I don't think that as we sit here that we have expect that there will be several. I think it's reasonable to expect there may be one or two. The demand for by TIMOs and others, tends to still be in this 10 to 30,000-acre range. I think we may find opportunities to execute one or two of those, but I don't expect it to be more than that.

The great thing just to add to what Mike's saying, Chip, the great thing about a company of our size is that's really all we need to one or two year.

Got you and I guess the last thing just, you know, could you give us your views or what your latest thinking is on the whole pine beetle issue at least, above the border there in BC, and do you have a closer guess as to when you think, you know, the harvest levels in BC will go from, you know, the current sort of elevated rates to something that's well below what we had been seeing, you know, the last couple decades because of the fact they need to let their forests regrow?

Well, what we know, we really get from RISI and other public sources in terms of expectations about -- from RISI and other public sources in terms of expectations what's going to happen about the harvesting in Canada. We'll begin to see declines in harvest rates due to log quality and eventual product quality deterioration in the kind of the three five year time frame. It will begin to spiral down from there, but I don't think it's imminent.

Got you. Thank you.

Thank you.

Your next question is from Mark Weintraub with Buckingham Research.

Thank you. On the real estate, are you expecting that to be relatively back-ended as you indicated with the harvest or might that be generating cash flows earlier in the year?

Hey, Mark, it's Eric. There's really two different components to the real estate business. As you know, there's the regular HBU and kind of rural land sale. That business is remarkably stable for us. If you look at the number of transactions we did in each of the four quarters last year, it was 38 in the first quarter, you know, first, second and third quarter all quarters had 38 transactions. Then we had 40 in the fourth quarter. So that's a pretty stable consistent business. The one that's harder to predict is the nonstrategic timberland sales, and that business is very, very lumpy and very difficult to predict. So I couldn't guide you to a certain quarter when that might happen.

Okay. And previously, you'd indicated as regards to dividend that you were very comfortable. I think, though, that you said in the past that you'd be reviewing that again, depending on how the markets looked this spring, et cetera. Given you've been able to refinance, given what you've seen so far, do you have a greater level of confidence that you've at least got another year until any reconsideration would have to be made, or is it still the same place as we were three months ago would you say?

Oh, Mark, this is Mike. I think we're really with the same place that we've been. We look at it every quarter with our Board. We look at the pace of we see and expect an economic recovery, lumber pricing and the performance of each of our businesses balanced against our liquidity position and, our thought has always been that we could bridge the gap here to better housing starts and more robust harvest activity while we're earning the dividend from core businesses and we look at that every quarter. So I don't think that's changed at all.

Thank you.

Your next question is from Bob DeWalt with Reed and Rice.

Morning, Mike.

Good morning.

Just wanted to find out if you could maybe elaborate a little bit on strategic planning as far as it relates to the lumber operations at Lewiston, Idaho and at St. Marys, Idaho. Obviously the Lewiston, Idaho, has been part of the Clearwater spinoff, St. Marys I believe is still under the Potlatch umbrella, but just want to see if you could maybe comment on operations up there and what you see developing in 2010.

Mike, I can't comment on Lewiston as you mentioned, that's part of Clearwater Paper and it wouldn't be appropriate for me to comment on that. In regard to St. Marys operation where we have an industrial plywood plant and a dimension sawmill in St. Marys, Idaho, it's a very key part of our Idaho operations and is strategically linked to the timber that we harvest in north central Idaho and both mills are very competitive, low cost high quality facilities that we think are part of our core operations and will be for a long time.

Thank you.

Thank you.

Your next question is from Mike Roxland with Banc of America Merrill Lynch.

Thanks very much. This is a follow-up to the real estate question earlier, but in knowing it's difficult to predict real estate sales, but any guidance as to how first quarter is shaping up and how we should expect maybe 2Q and 3Q to shape up?

Mike, it's getting back to what I had indicated to Mark. I mean I think if you just look at our HBU and rural land sales, the total's somewhere between 13 and 15,000 acres a year. I think you could almost spread those acres pro rata across the four different quarters and feel good about your forecast. I can't comment on what could potentially be a nonstrategic timberland sale. That's as I mentioned earlier just very difficult to predict and until you get through the contract and negotiations with people and get ink on paper you just don't know. So I can't help you in terms of which quarter is may fall in.

Fair to say that there are things currently undergoing -- in terms of nonstrategic land sales, that you are currently evaluating those types of opportunities --

We've been having conversations with the TIMOs and others.

Got you. With land values down as you mentioned let's say around 15% and perhaps the stabilization you're currently seeing in the market, are you likely to become more a buyer of Timberlands that you might have been let's say six months to a year ago?

I think it's definitely moving in our direction with prices coming down perhaps 10 to 15%, but I would probably caution you that in all likelihood, after we get done penciling out our math we're still going to find find that we can't effectively compete with others for acquisitions. I think we need pricing to come down a bit more before we can be competitive.

Got you. Just lastly on the dividend, if land sales remain challenging, and you're not able to execute on nonstrategic land sales similar to what you did with those two large sales in 2009, how do you think about funding the dividend? Is it going to use the untapped revolver or would a dividend cut be a consideration?

Well, this is Mike. As I mentioned with Mark, it's something we cover with our board. We look at sources of cash both from core operations from nonstrategic timber log sales, from cash on hand. We had $53 million at the end of the year on hand from the high yield offering that we completed. We've got an undrawn revolver and the board will look at the suite of all those options and figure out what makes sense quarter to quarter.

Thanks very much. Good luck in the quarter.

Thank you.

Your next question is from Keith Morris of Ramsey Asset Management.

Hi. This is Mike Marburg. Thanks a lot for taking the call. So just back to the real estate this year and last year, the total acreage just ballpark the range is like 60 to 100,000 acres. That's 2008 and 2009. So is that sort of the rough range in acreage sales that we should expect or can you make it a little bit more narrow or is this year's 100 plus higher than what would be sort of typical in the next few years?

Well, your numbers are off a little bit. The timber deed did not involve the sale of land. It only involved the sale of stumpage.

Yes.

So in 2009, we sold about 20,000 acres of kind of regular real estate, if you will, and around 24,000 acres of nonstrategic timberland. So last year's number was probably more like 45 or 50 just so we kind of level that expectations here. So I think it isn't so much -- you can only sell what the market's interested in and the trends of kind of the sweet spot that we've found has been these TIMOs are looking for transactions that are somewhere between, $30 million and $100 million in size and depending on where the timberland's located, the stocking of it, the price per acre and so on, that really really drives the process more than any kind of targeted acreage figure.

Okay, okay. Appreciate that. And then through the year when you look at costs per ton and based on the data that you give you can impute that on the resources side and this has some imperfections with it, but through the year the cost per ton was down quite a bit as a result of your cost cutting efforts and that's good.

This quarter, costs per ton were down about 8% and maybe these aren't exactly what you would calculate but just roughly and it was against a very hard comp in the fourth quarter last year when costs per ton were down quite a bit. So that was very positive. Do you expect to continue to be able to take on the unit basis the cost per ton down or are we sort of at a bottoming level and we should expect this to sort of inflate normally from here?

Yes. This is Eric. I don't think you're going to see significant price reductions in our logging and hauling costs in our resource business. Some of that is energy dependent. Some of it was us with some recent contract negotiations we've gone through with our contractors. We've brought prices down or costs down, but I don't -- that trend is not likely to continue going down, more likely will stabilize.

Okay. That's helpful. So just in terms of putting in -- you can do sensitivities on different operating margins on the resources side and then the range of what you'll be able to sell. No matter how you get there it's going to be real tight on the dividend. Are you assuming any working capital benefits that would help create some free cash flow or should we assume that the working capital benefits are neutral in 2010?

I think the working capital improvements that we got over the last year we feel good about. We brought inventories and receivables down but don't expect that to continue going forward.

Great. And then final question, appreciate it, trying to be fast here, your guidance to $4.2 million roughly, that seems appropriate to us. I guess you're 5 to 15%. We were a little bit surprised. It's in contrast to Weyerhauser and Plum Creek who are all anticipating more flat harvest levels for 2010. Any sense as to why you guys would be -- would stick out a little bit from the rest of the folks?

Well, I think we're reaching out into the very back half of the year when we expect perhaps lumped prices to even improve from where they are today and prices to move up from where they are today. So, I think it's a matter of your time frame. We're willing to go out to the back half of the year and estimate that we will, in fact, be able to get higher prices and therefore, will be able to take our harvest levels up and they may not be seeing that. It's very regionally dependent and specific to local market conditions.

Idaho has been strong?

Well, we just have so much of the timberland in the area that we control a lot of what goes on here.

Got it. Okay. Thank you.

Your next question is Steve Chercover with DA Davidson.

Good morning, Mike and Eric.

Morning.

Just first question. Do you guys have any preference between the outright land sales versus the deeds?

No. Not really. I mean, Steve, it's just a matter of what we think delivers the best value. I would say that the timber deed had a particular attractiveness in that it was treated as good REIT income. It was a stumpage sale, so we didn't have any tax leakage from that, whereas if we sell land unless we execute a 1031, we are typically responsible for built-in gains tax.

Yes. I thought a deed was brilliant and kind of first of its kind that I'm aware of and I was wondering if you were to sell the residual land at some point, would that then have some tax implications?

The land from the timber deed?

If we sold that, yes, it would have tax implications.

Okay. And then final question, as the previous caller just mentioned, you appear to be willing to ratchet up your harvest levels a little bit and I'm not sure that the other guys won't do the same, but do you think it's necessary that everyone kind of meters the incremental wood into the market or risk basically crushing any price momentum?

That's something I won't comment on. I think really the timberland owners the situations are unique in each region. As you know, timber doesn't move long distances. So as Eric mentioned, we have a very large presence in Idaho and in terms of size we're -- I don't know -- six or seven times the size of the next largest industrial landowner. So our decisions have a big impact locally.

That's probably a little more muted in Arkansas where there are several other large industrial landowners, but I don't believe Weyerhauser gave guidance on their guidance level beyond the first quarter. I don't recall what Plum Creek or Rainier said, but I think we have the unique position of this extraordinarily mature and high quality resource timber base that we think ought to be harvested at much higher levels at better pricing and Eric said if we see better pricing the second half, we'll begin to start increasing it, but, you know, we're only talking about going to roughly 4.2 million tons which is where we were in 2008. That's still a long ways from our kind of sustained level at 5.1 million tons. We're very cognizant of the fact we don't want to sell it in a weak market, but we also are cognizant of the fact that we've got to generate cash for the business. We only have really three levers to pull and that's harvest, real estate and wood products.

Your next question is from Peter Ruschmeier with Barclays Capital.

Thanks. Good morning.

Good morning.

Just had a couple questions. I was curious if you can share your merchantable volume at the end of the year or potentially the change in your merchantable volume from 2008 to 2009 in terms of inventory.

Oh, inventory stocking on our Timberlands?

Yes.

That's not something that we've been sharing. We don't have it at our fingertips. I just don't have it.

Is it qualitatively going up, Mike?

Yes. Yes, it is.

Yes, it's going up.

It's going up but I don't know how much, Peter.

Okay. And your slides, on slides five and six, I'm curious how much of the decline in price that you've seen would you attribute to mix as opposed to, you know, market price or asked differently, if you were to characterize, you know, especially in the sawlog side in the north and the south if you were to characterize the average diameter or to speak qualitatively about the quality of the log in the last 12 months where the harvest was at the peak, can you speak to that issue?

Well, I'll speak to it broadly without specifics. I think as we commented in the south, particularly the wet weather we've had over the last few quarters, we've tended to shift our harvest activities to what we would consider higher ground in Arkansas. That's still not very high, but it's not the lower bottom lands where we have higher quality sawlogs. So I think there has been a shift into smaller log diameters in Arkansas that's as you look at the deterioration in pricing that you see in that graph, that's partly what explains it in Arkansas and sawlogs. In Idaho it's also related to the fact that we are just harvesting less cedar and cedar's the most high valued component of our sawlog mix. So in both cases smaller logs in Arkansas, less cedar in Idaho, that's attributed to it, but as we look at the company's average log diameters, they're not appreciably going to change over the next several years. We have a very large overmature forest.

Okay. And just lastly, I'm curious if you could elaborate on what you might be seeing, from a third-party loggers in Idaho, Arkansas. How are things changed? Is there logger availability? Have there been folks that have been shaken out of the business and just really what you're seeing on the ground.

Yes. There has been some shakeout, but I think the better loggers have gotten bigger or repositioned their assets and equipment. We don't think that we have any problems working with our logging force in any part of the country and our ability to ramp up harvests. We have contractors available to work for to us do that. There has certainly been some shakeout and that's unfortunate, but the core contractors that work with us, they've had a tough year but hopefully they're going to be with us and make money this year.

Very good. Thanks very much.

Thank you.

(Operator Instructions). Your next question is from Chip Dillon with Credit Suisse.

Yes. If you could just review for us what your acreage was as of year end.

Total acreage?

Yes.

1.6 million acres.

So 1.6. And I guess the way of thinking about it is those are all owned, but you have the 50,000. I think you did the timber deed and so maybe the way to think about that one is the revenue from that land you've kind of monetized that for maybe a couple of decades more or less because I mean obviously as trees get cut you'll get the land back, right? And you'll have to replant it, but is that sort of the way to think about that 50,000?

Yes, that's the way to think. We'll start getting them back, in 20 years is what will happen.

Got you, got you, okay. Thank you very much.

Yes.

At this time there are no further questions. I'll turn the call back over to management for further remarks.

Thank you, Amanda, and thank you all for joining us. We'll talk to you next quarter.

Thank you for participating in today's conference call. This does conclude the call. You may now disconnect.