Potlatchdeltic Corp (PCH) 2010 Q4 法說會逐字稿

Good morning. My name is Chastity and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch year end fourth quarter 2010 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. After the speaker's 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 2010 earnings. Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the disclaimers regarding forward-looking statements in our press release on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that segment information as well as reconciliations 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 and CEO, who will make some introductory remarks and then I'll review our fourth quarter results in more detail. Mike?

Thanks. Good morning. I'll begin by making a few comments on our strategy as we emerge from the recession. Like to reiterate the importance of our dividend as a vehicle to return value to shareholders, and provide our outlook for 2011. Five years ago, Potlatch converted to a REIT and began focusing it's energy on the value of its core asset, it's land holdings. We announced that we had an over mature forest and we had the ability to significantly improve our cash flows by increasing the harvest level.

We also announce that we've completed the stratification of our 1.5 million acres and identified approximately 250,000 to 300,000 acres of land we deemed non-strategic. These acres were deemed non-strategic because, quite simply, they had more value as real estate, whether it's HBU, rural recreational land, or non-strategic timberland belonging to someone else other than Potlatch. After we completed that initial stratification, we announced we would begin selling off the non-strategic land over the next decade. We also announced that we would make strategic acquisitions along the way. So, that over long periods of time and net of land sales our acreage base would grow.

Unfortunately, over the past few years demand for lumber and logs in the US collapsed, due to the weak housing market. Weak demand resulted in weak prices and put pressure on anticipated cash flows from our Resource segment.Since we desire to maintain our dividend, which we believe is very important to our shareholders, we faced a choice. Increase the harvest level to improve cash flows from the Resource segment or accelerate the sale of non-strategic lands. We elected to accelerate our land sales process if we could obtain attractive values.

So, how have we done? Over the past couple of years we have completed three meaningful, non-strategic timberland sales at prices that were very attracted to our shareholders. Combined, these three deals totaled 160,000 acres. The buyers of our non-strategic timberland, mostly TIMOs, or Timber Investment Management Organizations, have been flush with cash and willing to pay meaningful premiums, valuing this land using very low discount rates.Importantly, the TIMOs value timberland using long-term discounted cash flow models, and look beyond near-term housing market weakness when valuing timberland acquisitions. Since 2007, we also completed two meaningful acquisitions, which combined grew the land base about 250,000 acres offsetting our non-strategic timberland sales activity.

So, five years later, net of acquisitions and divestitures, our land base is still 1.5 million acres. We have maintained our dividend even though the easy solution would have been simply to cut it. We spun off Clearwater Paper into a new public company which rewarded our shareholders due to its success. It was clearly the right thing to do. In the meantime, we've survived the worst housing market in US history. We currently have $90 million of cash in our balance sheet, and we still have the ability to significantly increase our harvest level when the market improves. And because of this, our strategy of preserving the value on the stump will soon bear fruit.

As many of you know, the industry had several significant tailwinds that will play out over the next couple of years, including an improved US housing market, significantly increased Chinese demand and greatly diminished timber supplies from British Columbia due to the mountain pine beetle. In addition, we still have plenty of non-core land to sell over the next decade. It won't be sold at the same pace as the past couple of years, as most of what is left is smaller tracts of rural recreational or HBU land. But we still have some non-strategic timberland to sell and we continue to be approached by TIMOs. In fact, we have already executed here in the first quarter a purchase agreement to sell 17,000 acres in Idaho over the next three quarters for $26 million, or about $1500 per acre. This is the only significant non-strategic timberland sale we plan for 2011.

Our Wood Products segment had a dramatic turnaround last year improving year-over-year EBITDA by $26 million. Since the downturn, we've sold or closed two facilities and lowered our cost structure. We expect the business to perform reasonably well in 2011, consistent with 2010. Although we expect modestly higher prices for logs and lumber in 2011 than we experienced in the fourth quarter of 2010, we don't anticipate raising our harvest levels above 4.2 million tons in 2011. We will continue to defer the harvest of about 400,000 tons annually, primarily high valued sawlogs in Idaho, until market conditions improve further, which we firmly expect to happen over the next couple of years. To put some perspective on it, our average sawlog sales price went up $7 a ton last year, in spite of a very weak US housing market.

In total, we harvested 3 million tons of sawlogs last year, so that extra $7 a ton amounted to an additional $21 million of cash flow. In total, our resource EBITDA improved from $57 million in 2009 to $83 million in 2010, if you exclude the timber deed that was done in 2009. Those of you worried about industry-wide harvest deferrals somehow impacting future of sawlogs pricing should take note. Our sawlog prices rose 13% last year, in what is admittedly a very lousy market. So, needless to say, we see significant increases in our cash flow from our Resource business in 2 to 3 years after housing starts have improved, the British Columbia harvest level has declined, and Chinese demand has further increased. Eric will now review our fourth quarter results and provide some specific detail about our 2011 outlook. Eric?

Well thanks, Mike. Let me begin by reviewing our fourth quarter results. We reported earnings from continuing operations in the fourth quarter of $8.9 million, or $0.22 per diluted share, as can be seen on page 3 of the slides accompanying this presentation. This compares to net earnings from continuing operations of $18.2 million, or $0.45 per share in the third quarter of 2010, and compares to earnings of $2.9 million, or $0.07 per diluted share, in the fourth quarter of last year. Included in our fourth quarter 2010 results, is a pre-tax charge of $4.1 million, or $0.06 per share after tax, related to a settlement with the EPA over cleanup on a property we own in Northern Idaho. Excluding that charge, earnings from continuing operations would have been $11.4 million, or $0.28 per share. I'd now like to focus on our fourth quarter results broken down by segment.

Slide 4 highlights operating income and margin trends in our Resource business. Our Resource segment produced $12.8 million of operating income in the fourth quarter of 2010. Which was above the $11 million of operating income in last year's fourth quarter but below the $24.3 million we earned in the third quarter. The improved year-over-year earnings is primarily due to higher pricing in virtually all products and regions. The sequential drop in earnings from the third quarter is primarily driven by the seasonality in our business as the third quarter is our strongest from a harvest volume standpoint.

Turning to page 5, in the Northern region, sawlog harvest volumes were down about 8% comparing Q4 of 2010 to Q4 of 2009, and down about 37% versus Q3. The drop in harvest volume in the fourth quarter from the third quarter is driven by the seasonality of our Northern region. And the year-over-year drop is primarily due to the fact that we had accelerated our harvest levels earlier in the year when prices were stronger. Regarding northern region sawlog pricing, prices were down about 6% from the third quarter but were up 14% compared to the fourth quarter of 2009. The sequential price decline is driven by lower lumber prices seen early in the fourth quarter which impacted log demand.

Regarding Northern region pulpwood, harvest volume was down about 10% compared to the third quarter and was down about 39% versus last year's fourth quarter, while pulpwood pricing was up 11% versus the third quarter and up 6% versus last year's fourth quarter. Volume was down in the fourth quarter due to both seasonality, as well as the fact that we sold our Wisconsin timberland in the third and fourth quarters, which were predominantly low margin pulpwood type acres. In general, we are seeing a firming of pulpwood pricing in the Pacific Northwest due to improved demand.

Turning to page 6. In the Southern region, sawlog harvest volume in the fourth order was down about 3% versus the third quarter but was up 8% compared to the fourth quarter of 2009. Sawlog pricing in the South was down about 6% compared to the third quarter but was up 6% compared to last year's fourth quarter. The sequential drop in pricing is primarily driven by a product mix shift in two areas. First, we sold a higher percent of small diameter chip and saw sawlogs to customers in the fourth quarter versus the third quarter. And second, since logging conditions were ideal in the third quarter, we aggressively harvested low-lying hardwood stands in that quarter. So, as we moved into the fourth quarter, we harvested fewer high-value hardwood sawlogs versus pine sawlogs in the fourth quarter compared to the third quarter. If we look at Southern pine sawlogs in isolation, prices dropped just 0.8%sequentially.

Pulpwood harvest volume in the South was down about 16% compared to the third quarter but was up 3% year-over-year. Southern pulpwood pricing in the fourth quarter was down about 8% compared to the third quarter but was up 6% year-over-year. Pricing dropped in the fourth quarter versus the third quarter as log decks and inventories are relatively full at our customer base due to the excellent weather and logging conditions.

Now let me make a few comments regarding recent price trends in our Resource business. In the North, we expect both sawlog and pulpwood prices to be flat in the first quarter compared to the fourth quarter. And its prices to move up modestly as we move through the year. In the South, we expect modest near-term price weakness, as log decks and inventories are relatively full, and our customers, due to the favorable logging conditions. However, like the North, we expect modest price increases as we move through the year.

Page 7 highlights revenue trends in our Real Estate segment. And as you can see, we executed $39 million of real estate transactions in Q4 driven primarily by the closing of the second and final phase of our previously announced non-strategic timberland sale in Wisconsin and Arkansas. We closed 22 different real estate transactions in the fourth quarter, and in total, 130 for the full year. Page 8 highlights operating income and margin trends in our Real Estate segment.

Page 9 breaks down acreage sold by product type. And as you can see, over 90% of our acreage sold in the fourth quarter was non-strategic timberland with rural recreational and HBU land making up the remainder. The non-strategic timberland sold in the fourth quarter was primarily the second phase of the RMK transaction that we previously announced in the third quarter and is a mix of Wisconsin and Arkansas non-strategic timberland. We estimate that Wisconsin land sold for about $450 to $500 an acre and the Arkansas land sold for about $1300 to $1400 an acre, though these are just estimates as they were sold as a package.

Page 10 highlights trends and pricing for our Real Estate sales. And as you can see, prices have remained relatively firm for both HBU and rural land sales and our outlook is for continued strength in pricing as the economy continues to improve.

Page 11 highlights trends in operating income for our Wood Product business. As you can see, our Wood Products segment lost $3.4 million in the fourth quarter compared to a loss of $4.8 million in last year's fourth quarter and a loss of $600,000 in the third quarter. Is important to note, however, that the fourth quarter 2010 loss includes a non-cash charge of $2.9 million for lumber hedges we put on during the fourth quarter. This relates primarily to a hedge that cash settles over the summer. As we indicated less quarter, the hedge was put in place due to our concern about low lumber prices in 2011 due to continued weakness in domestic housing starts. Accounting treatment requires mark-to-market adjustment at the end of each quarter. Lumber futures peaked at the end of the fourth quarter, necessitating the charge. Since the end of the fourth quarter, lumber futures prices for our hedge have retreated and if this continues, the unrealized loss will be reversed or reduced as we move through the year. Excluding the non-cash accrual for the hedge, our Wood Products segment was in fact cash flow positive in the fourth quarter having produced $1.5 million of EBITDA.

Page 12 highlights of price and volume trends in our Wood Products segment. Lumber shipments were down about 2% compared to the third quarter but were up 9% versus the prior year. Prices firmed in the fourth quarter having increased about 6% from the third quarter and 11% versus the prior year. Several factors are behind the positive trends we are seeing in our Wood Products pricing 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 increased Chinese demand. Though it's still early in the quarter, thus far our lumber shipments in Q1 have averaged $298 per MBF well ahead of our fourth quarter average of $283 per MBF. Page 13 through 17 provide additional detail for our financial results.

Now a few comments about our balance sheet and some recent changes. Our debt maturity profile remains very attractive with limited near-term debt maturities. In fact, in 2011 we only have $5 million of debt maturing, and that happened in mid-January, and that debt has now been retired with internally generated cash. In total, over the next five years we have just $79 million of debt maturities. As highlighted in our earnings release, we finished 2010 with nearly $91 million of cash and equivalents on our balance sheet and a completely undrawn revolver. Given our very strong liquidity position, we elected to lower our revolver amount to $150 million, which will save us about $0.5 million a year in commitment fees going forward. In addition to the $150 million revolver, of course, we have another $100 accordion with the Bank Group. With over $90 million of cash on our balance sheet, a completely undrawn revolver and $100 million accordion, we have way more than ample liquidity.

Next, I'd like to make a few comments about our outlook for 2011. As you know, the primary driver behind Potlatch's cash flow generation in our Resource business is our harvest volume. In total, we harvested around 4.2 million tons in 2010, up about 8% from 2009, and consistent with our harvest plan at the start of the year. This increase in harvest volume is a direct result of improved log pricing and market conditions.And in fact, most of this increase occurred in the third quarter and consisted of relatively high-value, high-priced sawlogs.

Our current plan is to hold our harvest back in 2011 to levels consistent with 2010, at around 4.2 million tons. We'll be above that level if prices improve above our expectations, or potentially modestly lower if prices fall. We expect to increase the harvest to the 4.6 million-ton range sometime over the next two to three years, as market conditions improve along with higher housing starts. Importantly, high-margin sawlogs in Idaho will make up the bulk of the harvest increase. This is important as sawlog margins in Idaho are roughly 10 times higher than pulpwood margins in Idaho on a per ton basis.

Regarding our Real Estate business, we continue to be optimistic that underlying demand and values will remain solid. For 2011, we expect to sell about 35,000 acres with roughly half of the acres coming from rural real estate and HBU land sales. Our rural and HBU land sales are expected to be completed at prices consistent with the recent past, and we expect HBU and rural land bases to be approximately 15% of land sales, though this, obviously, will vary depending upon the exact acres being sold.

Regarding 2011 non-strategic timberland sales, as mentioned, we recently executed an agreement to sell a relatively small 17,000-acre tract of land in Idaho for over $1500 an acre, which will provide approximately $26 million of revenues in 2011. The transaction is split in thirds and is planned to close in each of the first, second and third quarters of 2011.

As Mike mentioned earlier, our Wood Products business had an excellent 2010 and is off to a solid start here in 2011 as lumber prices have exceeded our expectations early into the new year. As such, we expect Q1 Wood Products earnings to be just a bit below last year's first quarter results when we had $5.2 million of operating earnings. However, given the low level of intrinsic demand due to depressed housing starts, we expect this business to remain somewhat under pressure throughout 2011; but we still expect it to be cash flow positive in all four quarters.

Working our way down the P&L, we expect corporate administration expense including net interest expense, to total around $26 million for the year. And we expect net interest expense to be around $26 million for the year. We expect to make a $3.6 million contribution to our defined benefit pension plan. Capital spending for the Company, excluding acquisitions, is expected to be approximately $18 million in 2011 with roughly $13 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 a very small tax provision in 2011.

DD&A, or depletion, depreciation and amortization, should total approximately $27 million for the year. And of course, will vary depending upon the exact location and amount of our harvest. Note that the aforementioned DD&A number excludes the bases of our land sold. In total, we are estimating land bases to be approximately 20% of real estate revenues in 2011, though this, of course, will depend on the exact acres that ultimately gets sold.

In summary, we had solid performance across all three business segments in 2010 and with over $90 million of cash on the balance sheet, we're well positioned to get to the other side of the housing recovery. Chastity, that concludes our prepared comments, and we will now take questions from the online participants.

Thanks. (Operator Instructions)Our first question comes from the line of Michael Roxland with Bank of America Merrill Lynch.

Thanks very much. You mentioned, and we've also heard from your peers, about lumber and log exports to China and the result in better pricing in the Pacific Northwest. Normally you don't participate directly in the export market given where your land is situated, but I just want to get some more color on the flow through benefit from higher pricing from those markets and what you're seeing particularly in your markets with respect to pricing.

Yes, Michael, this is Eric. Our-- we don't as you know export logs or lumber to China, but one of our largest customers here in Idaho is selling into the Chinese market. We produce about 3 million tons a year of sawlogs. This 1 large customer acquires about 10% of that volume, and we don't know the exact amount of their lumber production that's going to China, but we know it's meaningful to them.

Got you. Ana have you seen any interest in the US South from Chinese customers, particularly at prices have increased in the Pacific Northwest?

Not to date. No, we have not seen interest yet, but we've heard some chatter about that.

So you have the expectation that you will see some pickup in the demand for US lumber in the South, particularly as prices rise in the Pacific Northwest, so the Chinese will look for alternative ways to procure our timber and lumber?

Well I don't-- it's hard to see the US South being competitive getting product into the Chinese market, but it's kind of like the rising tide lifts all boats, to the extent that volume is coming out of British Colombia or the Pacific Northwest and going to China, it takes lumber that otherwise would have been dedicated or sold into the US or North American market. So I think that the US market benefits from that and the South benefits from that indirectly.

Got you, and then just one last question. Could you just provide a little more color on the 17,000-acre land in terms of the breakdown between how many were non-strategic versus rural or HBU acres and maybe some of the stocking levels on those lands, the end price realizations that you're looking at?

Well in terms of the split, what I tell you is that 17,000 acres, roughly 15,000 of it is probably non-strategic and roughly 2 to 3 might be rural, it's something along those lines. I'd say the stocking is probably below average for our Idaho, core Idaho timberland holdings. And that's consistent with what kind of how we think about non-strategic timberland.

Got you. And values would be in line with what you previously have done for those types of acres?

Yes, and certainly, if you go back and you look at the appraisal that we get our core Idaho timberlands to provide collateral for the revolver, that $1500 an acre is consistent with what our land gets appraised for in Idaho. So we felt good about the price, it was above what we valued it at. And given that it was in the non-strategic bucket, it made sense to pull the trigger on it.

Got you. Thanks bring much.

Thank you. Our next question comes from the line of Gail Glazerman with UBS.

Good morning. Just adding up on that, can you give a sense of what EBIT or EBITDA off that land might have been?

Well what I can tell you, Gail, is that we sold it for the $26 million or so. Land bases was around 24%, and we had kind of nominal closing costs. So if you back into that number, that'll get you your operating earnings impact.

Okay. And the 4.6 million harvest goal, should we think of that as kind of the new long-term achievable kind of maximum harvest, kind of moving forward adjusting for the Idaho sale?

Gail, yes we identified last-- late last fall, we restated our previous expectation was as much as 5.1-million tons on kind of a sustainable 10-year basis at the peak of the harvest. After selling land in Wisconsin and Arkansas over the last 18 months, we-- and regular real estate activity, we restated that number to about 4.6-million tons. In any given year we could go a bit higher than that, but it wouldn't be sustainable for long, we'd have to make up for it with lower numbers in the future, but we think that run rate of about 4.6 is how you should think of it over the next decade once we reach that level.

Importantly, Gail, that increase to 4.6, that's almost entirely the high-margin sawlogs, not a lot of pulpwood.

Okay. And just in general, can you give us color both in terms of what you're seeing in terms of interest in rural lands and just in general on industrial timberlands, what you're seeing kind of out in the market and what you're hearing from the TIMOs that you speak with?

Well I don't think that things have changed very much. I think there's a number of TIMOs of that all have funding available to them. It tends to be we think in the smaller amounts of $50 million to $250 million, they're looking for quality timberlands primarily in the south, although there is interest in other parts of the country, certainly Pacific Northwest. There is not a lot for sale that we're aware of on the industrial space. In terms of rural recreational real estate property, I think we feel like it's a pretty steady market with no real trend up or down, it's been fairly steady throughout the downturn.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Chip Dillon with Credit Suisse.

Yes, thanks very much. How-- just first question is to make sure I have this right, you said the G&A in 2011 would be $26 million and then the interest would also be $26 million. Did I get that right?

Yes, that's correct.

Okay, so they just happen to be the same number. Okay. And then if I add up on slide 9 the acres that you all were able to sell this year-- last year, and I know at the end of 2009 your acreage was around 1.5 something and acres, it looks like you would be back to about 1.48 million. Is that about where you ended the year?

Yes, that sounds about right.

Okay. And then I guess just the last question is, if we think about that ramp of 400,000 incremental harvest potential in tons, you said the margins were like 10 times on the sawlogs, which makes sense. I mean, let's just say you were able -- and obviously, you probably wouldn't because the market is not there, but let's just say the market was there at the kind of prices you saw in 2010, could you see resources earning another $25 million to $30 million? Is that a good guess? Of course, we would assume prices would eventually get higher, but if you were able to sell all of that increment at 2010 prices, would that have been about another $25 million, $30 million in EBIT or operating income?

Yes, I think that's probably a fair estimate. I mean just to put some primitives on it, I talked about in the call that we harvested 3 million tons of sawlogs last year and we got an extra $7 a ton, so there's a lot of sensitivity to price increases. But that obviously doesn't include the base margin that you would get off just the harvesting over those times, which you know is what pricing is going to be. But it could be $20 to $30 a ton pretty easily.

Got you. Got you. And then you mentioned the land sale in this year, the split between the 3 quarters. Is that-- do you expect to maybe -- could there be more this year that you haven't-- in other words, should we say that ' probably going to be it, the 35,000 acres, or could there-- could that flex a bit as we go through the year?

Well our-- Chip, our outlook currently is that's our guidance for the year. Obviously, things can change. And if someone came in with attractive offers for any piece of property that where at a significant premium to what we felt the value was, we'd consider it. But at this point in time, we just plan the 1 non-strategic land sale and the balance being made up of kind of our regular kind of everyday real estate activity in rural recreational land.

Okay and last thing is you noted the big build in your cash balance, any chance that you could go the other way and maybe find something that would be attractive for you all to acquire? I know you probably as a general rule are keeping your eyes open obviously, but could that happen this year?

Well if we found a strategic acquisition that made a lot of sense, we'd certainly consider and look at it, but we've not found the market to be very attractive, nor have we seen a lot of property for sale. So at this point, we would not contemplate that happening.

Got you. Okay. Thanks very much, guys.

You're welcome.

Thank you. Our next question comes from the lineup Joshua Barber with Stifel Nicholas.

Hi, good morning. I was wondering if you could talk a little bit more about the buyer of the Idaho land,was that institutional buyer or was that more of an individual buyer and what the purpose was of their purchase?

It was another Northwest forest products company.

Okay. Can you talk a little bit in the Wood Products business about the lumber hedges and the potential, I know, Eric, you had mentioned that with future prices having retreated somewhat that you're probably not going to have any mark-to-market issues over there. But those futures roll through September I believe, so what's the possible cash outlays or any other mark-to-market risks that we have there? Can you sort of quantify the price risk in terms of lumber futures?

Yes, well, Josh, what I can tell you is that when we put the lumber hedge on, random lengths prices back on the CME where around $290 in MBF. Right at year end, if you look at where pricing was at the end of the year, prices had run to $350 or so, so that was the delta of about $60. They have since retreated down to about $315. They have given back about $35 of that $60, so this thing is going to bounce around a little bit as we move through the year. It's hard to know where we are going to wind up at the end of the day. I have a hard time seeing that prices could go back up to the $350, but then again I wouldn't have guessed they'd gone to $350 by the end of 2011 in the first place. We've all been surprised by the strength of lumber through December. So I guess to answer your question, I don't see a lot more downside. Frankly, I see potential a little bit of upside from where we were at at the end of the year.

Okay. How much of your lumber production were you actually able to hedge by that?

It's a small amount. That's a good point. It was about 6% of our total lumber production. So to the extent prices do run up and we lose money on the hedge, we're going to make it in Wood Products. And as I had mentioned in the call, our Wood Products business is off to a very strong start in the first quarter.

Right. One last question regarding the Avery landing site, what is the total environmental reserve that you have on that right now?

It's a total of $4.8 million.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Dan Cooney with KBW.

Hi, guys. How's it going?

Hello, Dan.

Just if you could get back to, I guess, your plans for the uses of cash next year and is there any way that you guys can kind of proactively delever the balance sheet a little bit, just give the level of cash you guys have?

Well, Dan, we don't envision delevering the balance sheet as we move to the next couple of years. There's a lot of uncertainty as to how and when the housing market is going to recover, so I think our plan is to not use that cash to delever.

Okay. And then if we could just talk about the credit line amendment for a minute. It looks like the collateral covenant increased to 3 times from 2.25 times, but I guess since the capacity dropped by 150 million -- or to150 million, you're getting about a pro forma coverage of 5 times, so that gives you guys a pretty good cushion there. I was just wondering if that gives you some leeway to unencumber a portion of that 640,000 acres and if you would potentially look to sell any of that or if that's pretty much just all core timberlands at this point?

No, certainly your observation is a good one. The collateral coverage ratio did go up to 3 times and the debt to capital covenant went up to 70%. We have way more collateral than we need for that revolver. We certainly will consider taking acres out of the collateral pool. There's certainly no harm in doing that, there's only opportunity. I don't know that we would look at selling those acres. That is our core Idaho timberland. And as Mike mentioned, we've already executed the one non-strategic timberland sale that we had planned for the year. So while we may unencumber some acres, I don't think we'd look to sell them, but you never know.

Okay, great.That's it for me. Thanks.

Thanks.

Thank you. Our next question comes from the line of Steven Chercover with D.A. Davidson.

Hi, 2 quick questions, please. So first of all the call it 17,000 acres or 18,000 that you have left are all going to be small little deals?

Primarily, yes. They'll be the typical type land sales.

Okay. So there's just that 1 large. And if you were approached by a buyer for land unsolicited, would you go there, would you sell it?

At the right price, Steve, sure. I think we've said that from the beginning. If someone can offer us attractive values more than what we can see internally that it's worth, and it was tax favorable, this happens to be a year where that's also an attractive thing with somewhat of a holiday on a built-in gains tax, sure. But it's not contemplated and we'll have to see if it happens.

Okay. So if someone offered you a fairly significant -- if you had an opportunity to crystallize significant acreage for values over and above what you assigned internally, what would you do with the cash? Would you buy back shares since apparently you don't have a lot of maturities that make sense?

ell I think the capital allocation question of what we'd do with the funds if that were to happen, I think we'd have to sit down and look at the range of alternatives from capital invest in the business, acquisition opportunities that are perhaps elsewhere or adjacent to our land in some other spot that are attractive, buying back shares, there's a whole host of opportunities we'd have to consider. And we'll cross that bridge if it comes.

Okay last question, just from the tone of your commentary, it sounds like you think that the worst is over, is that accurate?

Yes, absolutely. Well, I mean we don't certainly know with a crystal ball, but we certainly feel like in our Wood Products business and our Resource business, they've both turned the corner from where they were in 2009. Our Real Estate business is kind of staying the same. But we definitely feel better about things than we used to. And I think with a Chinese demand, there's a very attractive article in the Wall Street Journal today, certainly our customers are talking about that buzz in the Northwest, so of that will drift to Idaho, the mountain pine beetle is playing itself out, housing we think will come back over time. I think we feel better.

Pine beetle is going to take its toll.

Absolutely. Okay. Thank you very much.

You're welcome.

Thanks.

Thank you. (Operator Instructions)Our next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you. Just first on the built-in gains tax holiday. So presumably you're not going to have any cash taxes related to the 17,000 acres that you're selling, how is that going to run through the P&L? Will that be any book taxes or will there not be any book taxes either?

Yes, there'll be book taxes on that.

Okay. And so there'd just be the normal book taxes but you get it reimbursed?

Yes, because we're still running NOLs in the TRS, essentially it will be a deferred tax asset at the end of the day.

Okay. And then second, just trying to understand a little bit more -- well, it was Chip's question on the type of margin or profitability you could get say into 2010 that you would have gotten had you been selling the incremental volume. I guess as I look at it from-- quickly-- that basically, if the business overall is making $75 million, $80 million-- or I'm sorry, about $60 million, $65 million, even if you assume that it was all for saw timber, that would have-- and you're selling 3 million tons of sawlogs, that would have only been about $20 per unit. Now, if you had been ramping up the harvest, would because of the fixed cost absorption, would that incremental profitability been much higher than the $20 per unit on a P&L basis? Obviously, on a cash basis, you're getting the full amount, but on the P&L basis, wouldn't it have been higher than the $20?

I mean it would have been, but the fixed costs are relatively small in comparison to those variable costs. We've got, I don't know, a few dollars a ton tied up in division administrative costs where as the logging and the hauling can be $35 a ton.

So would it be fair using 2010, again, as our base that may be the incremental contribution would've been $25 or $30 per unit, is that a reasonable way to look at it?

Yes, I think that's reasonable.

Okay. Thank you.

Thank you. There are no further questions at this time.

Thanks for participating and we'll talk to you next quarter.

Thank you.

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