Potlatchdeltic Corp (PCH) 2011 Q4 法說會逐字稿

Good morning. My name is Misty and I'll be your conference operator today. At this time, I would like to welcome everyone to the Potlatch year-end fourth quarter 2011 earnings conference call, featuring Eric Cremers, Vice President of Finance and Chief Financial Officer, and Mike Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation. (Operator Instructions) After the speakers' remarks, there will be a Question-and-Answer session. Thank you, I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Thank you, and good morning. Welcome to Potlatch's investor teleconference covering our fourth-quarter 2011 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 will review our fourth-quarter results in more detail. Mike.

Thank you. Good morning. In December of last year, we announced that we had proactively elected to lower our harvest levels to 3.5 million tons for 2012, a drop from 4.1 million tons in 2011, and now at a level some 35% below our harvest potential of 4.6 million tons. We elected to defer this harvest volume due to relatively weak product markets, which of-course is driven by the continued weakness in housing starts. As we reiterated then as now, we strongly believe that trees not harvested today will be worth far more in the future as the housing market begins to recover from its deep cyclical trough. In addition, we will benefit from additional volume growth while we wait for markets to improve. Commensurate with the lower cash flows resulting from lower harvest levels, we also lowered our dividend in the fourth quarter of last year.

Over the past two months, we've seen several signs that the housing market is, indeed, beginning to improve, albeit very slowly. New home inventories are now at record levels. Pending sales of previously owned homes jumped to a 1.5 year high in November, and inventory and months of supply continued to decline. Household formations is on the up swing. Consumer confidence and home builder optimism indexes have been improving, and the job market appears to be getting better. Furthermore, although Europe remains a bit of a mess, China appears to have averted a hard landing. So Chinese demand for North American wood should remain intact.

Thus, while a housing recovery in terms of additional housing starts today remains elusive, we firmly believe it is inevitable and many recent indicators suggest housing has, indeed, bottomed and is beginning to turn. These early signs are encouraging, yet not meaningful enough to change our current thinking about harvest levels for 2012. We also believe that our reduced harvest level and dividend reduction is temporary. We remain committed to raising harvest levels to our sustainable capacity of 4.6 million tons per year when demand increases and favorable pricing returns and to raise our dividend accordingly. We realize that most shareholders understand the value of our strategic landholdings, know the attractive maturity profile of our trees, have a longer-term view, and will be very supportive and ultimately rewarded for their patience.

Thus, despite the short-term challenges faced by our industry, our long-term view continues to be very positive for timber and wood products due to a number of factors. These include continued demand for lumber from China, gradually increasing demand for biomass, the impact of the pine beetle on Canadian supply, and the eventual return of demand for housing to address population growth and household formation in the United States. Eric will now review our Q4 results and provide specific detail about our 2012 outlook.

Thanks, Mike. Let's begin by reviewing our fourth-quarter results. We reported a loss from continuing operations in the fourth quarter of 2011 of $1.5 million, or $0.04 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 $25.6 million, or $0.63 per diluted share in the third quarter of 2011, and compares to net earnings from continuing operations of $8.9 million, or $0.22 per diluted share in the fourth quarter of last year.

Included in our fourth-quarter 2010 results is a $0.16 gain from a sale of non-strategic timberland in that year, partially offset by a $0.06 charge related to a settlement with the EPA over clean up at a property we own in northern Idaho. We took an additional $1.2 million charge in the fourth quarter of 2011 for the environmental issue, and are hopeful this issue is completely resolved with the EPA. Excluding these special items, earnings from continuing operations in Q4 of 2010 would have been $5 million, or $0.12 per share, compared to a loss of $800,000, or $0.02 per share in Q4 of 2011.

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 $12.6 million of operating income in the fourth quarter of 2011, which was comparable to a $12.8 million of operating income in last year's fourth quarter, but below the $25.6 million we earned in the third quarter. The slightly lower year over year earnings decline is primarily due to higher logging and hauling costs, partially offset by higher prices and lower division level overhead. As is typical, 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 our slides, in the northern region sawlog harvest volumes were up about 6% comparing Q4 of 2011 to Q4 of 2010, and down about 41% versus Q3. The year over year increase is driven by higher harvest volume due to stronger demand for sawlogs, as we indirectly benefit from Asian demand. The drop in harvest volume in the fourth quarter from the third quarter is driven by typical seasonality of our northern region, as weather conditions in the fall limit harvesting and hauling operations.

Regarding northern regions sawlog pricing, prices were up about 6% from Q4 of 2010, but down about 6% sequentially from the third quarter. The sequential price decline is driven by two factors. First, we experienced relatively weak demand for cedar sawlogs in Q4, some of which is likely just seasonal in nature. In addition, hem-fir and fir large lumber prices were lower in Q4 versus Q3, and roughly 65% of our Idaho volume is indexed to this lower lumber price.

Regarding northern region pulpwood, harvest volume was up 23% versus last year's fourth quarter, and down 22% compared to the third quarter. While pulpwood pricing was up 10% versus last year's fourth quarter and up 8% versus the third quarter. Northern region of pulpwood volume was up year over year due to strong pulpwood demand in the Pacific Northwest. Volume was down in the fourth quarter compared to the third quarter, due to normal seasonality. Northern region pulpwood prices and margins are the strongest they have been in many years.

Turning to page 6, in the southern region, sawlog harvest volume in the fourth quarter was down about 25% versus the fourth quarter of last year, and was down about 18% compared to the third quarter of 2011. Sawlog pricing in the south remains weak, with pricing down about 9% compared to the fourth quarter of last year, and down about 7% compared to the third quarter. The sequential drop in pricing is primarily driven by the recent idling of G-P's Crossett, Arkansas, mill, which has lowered sawlog demand in the region.

Pulpwood harvest volume in the south was up 21% year over year due to an increase in planned thinnings, but down about 14% compared to the third quarter. Southern pulpwood pricing in the fourth quarter was down 8% year over year, but was up about 3% compared to the third quarter. Southern region pulpwood pricing improved in the fourth quarter, due to the Crossett closure as fewer sawmill residuals were available in the region and customers had to look elsewhere for their fiber needs.

Now let me make a few comments regarding recent price trends as we work our way through the first quarter. In the north, we expect lower sequential sawlog prices in Q1, but expect pulpwood prices to remain firm. The lower sawlog price is driven by weaker lumber prices, which have pulled back a bit due to typical seasonal weakness as well as due to weaker Chinese demand for North American wood. However, we expect both North American and Chinese demand to resume as we move through the year. So we believe that the recent price weakness is temporary.

Regarding pulpwood, we expect continued strength in pricing, due to strong demand and a shortage of saw mill residuals in the Pacific Northwest. In the south, sawlog prices now appear to have bottomed here in Q1 after the recent Crossett closure. So we expect little change there. And we expect pulpwood prices to remain relatively stable as we move through the year.

Page 7 highlights revenue trends in our Real Estate segment. And as you can see, we executed $3.2 million of Real Estate transactions in Q4. We closed 39 different Real Estate transactions in the fourth quarter and, in total, 149 for the full year. Page 8 highlights operating income and margin trends in our Real Estate segment. Operating margins continue to be very attractive for this segment. Note that Real Estate revenues and earnings are both found from the third quarter and from last year's fourth quarter, as the earlier periods included large non-strategic timberland transactions.

Page 9 breaks down acreage sold by product type. Of the nearly 2,200 acres we sold in Q4, roughly 72% were classified as rural real estate type acres, 21% classified as HBU, and 7% were classified as non-strategic timberland. In general, Q4 can be a relatively slow quarter for our real estate sales due to typical seasonality issues. Page 10 highlights trends and pricing for our real estate sales, and, as you can see, prices remain 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 Products Business. In the fourth quarter, this segment lost $1.3 million, compared to a loss of $3.4 million in last year's fourth quarter, and $2.9 million of earnings in the third quarter. Importantly, our Wood Products Business remained cash flow positive in all four quarters during 2011. Page 12 highlights price and volume trends in our Wood Products segment which, of course, are the primary drivers behind the earnings variances.

Lumber shipments were up 1% versus the prior year and were down about 3% compared to the third quarter. Prices were up about 2% versus the prior year, but were modestly lower versus the third quarter. Pages 13 through 17 provide additional detail for our financial results.

Next, I'd like to make a few comments about the outlook for our balance sheet. Our debt maturity profile remains very attractive with just $22 million of debt maturities coming due over the course of the next year. At year end, we had over $72 million of cash and short-term investments on our balance sheet. So we expect to use about $22 million of that cash to pay off our near-term debt maturities. In total, over the next five years, we have just $79 million in debt maturities. Finally, our liquidity position remains quite strong considering our strong cash position, nominal near-term debt maturities, a completely undrawn revolver, and a $100 million accordion.

Next, I'd like to make a few comments about our outlook for 2012. As you know, the primary driver behind Potlatch's cash flow generation and our resource business is our harvest volume. In total, we harvested around 4.1 million tons in 2011, virtually flat from 2010 harvest levels and just slightly below our 4.2 million ton harvest plan at the start of the year. As we announced in December, our plan for 2012 is to continue to defer significant harvest volumes due to relatively weak markets. In total, we plan to harvest around 3.5 million tons in 2012, with about 2.1 million tons coming from Idaho, 1.3 million tons in Arkansas, and the remainder in Minnesota.

We expect selling prices to be relatively flat over the course of the year, but logging costs will moderately increase around $2 a ton in Idaho, as we expect to harvest on more costly steep terrain in 2012 versus 2011. As we have indicated on previous calls, we expect to increase the harvest level 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 both Arkansas and in Idaho will make up the bulk of the harvest increase.

Regarding our Real Estate Business, we continue to be optimistic about our prospects. For 2012, we expect to sell about 20,000 to 25,000 acres in total, with rural real estate representing about 40% of the acres, and HBU and non-strategic land sales each representing about 30% of the total. Our rural and HBU land sales are expected to be completed at prices consistent with the recent past. And we expect land basis to be approximately 20% to 25% of land sales. Although this obviously will vary depending upon the exact acres being sold, which can be challenging to predict.

Our Wood Products Business had a respectable 2011 given the state of the housing industry. Having produced over $15 million of EBITDA during the year. However, given the continued low level of intrinsic demand, due to depressed housing starts, we expect this business to remain somewhat under pressure throughout 2012. And thus, we expect this segment to post full-year results comparable to 2011 if you exclude the lumber hedge. We expect our Wood Products segment to produce significant earnings when housing eventually returns, which we estimate to be in late 2013 or 2014. Working our way down the P&L, we expect corporate administration expense, excluding interest expense, to total around $31 million for the year, relatively flat compared to 2011's corporate administration costs. We expect net cash interest expense to be around $24 million for the year.

Regarding the pension plan, we expect to make a $22 million contribution to our defined benefit pension plans during the first quarter. But this contribution will not be funded by cash currently on our balance sheet. Instead, it will come from a $22 million loan from our Company owned life insurance program, which is the equity we have built up in the plan since the program was put in place back in the 1980s. The Coley fits in the other non current assets line on our balance sheet and would provide $700,000 of income and just $300,000 of cash flow in 2012 if we don't take out the Coley loan to fund the pension plan. Note that this loan will not increase interest expense for the Company but will simply decrease other non current assets.

Capital spending for the Company, excluding acquisitions, is expected to be approximately $20 million in 2012, with roughly $15 million earmarked for our Resource segment, which is primarily for logging roads and reforestation expense. Regarding taxes, which are challenging to predict and are highly dependent on earnings from our taxable REIT subsidiary, which is in turn driven by our Wood Products segment results, we expect a very small tax provision in 2012 of around $1 million. DD&A, or depletion, depreciation, and amortization, should total approximately $25 million for the year and of-course will vary depending upon the exact location and amount of harvest. Note that the afore mentioned DD&A amount excludes the basis of our land sold.

In summary, we had solid performance across all three business segments in 2011 under very challenging business conditions. And with over $70 million of cash and short-term investments on the balance sheet and a harvest potential 35% higher than our 2012 plan, we are solidly positioned to get to the other side of the housing recovery, which is now showing early encouraging signs of life after several dormant years. Misty, that concludes our prepared comments and we will now take questions from the online participants.

(Operator Instructions). Chip Dillon, Credit Suisse.

I'm going to first ask you, the corporate expense line went up quite a bit from the third to the fourth quarter. It seems like, and maybe it's just the way we do the model, it tends to go down. I didn't know if you had anything unusual that you could point to that might have caused that to be higher sequentially and year-over-year?

Well, yes. There's a number of true-up items that we make in the fourth quarter. We had some unusual Avery, Idaho, charge, that, hopefully, provides for a enough accrual on the balance sheet to resolve that liability with the EPA. We also trued-up our AIP program, which is the incentive compensation program for the Company that occurs in the fourth quarter.

And then, the other item to think about as you think about comparing full year over full year is that earlier this year we lowered our revolver from $250 million to $150 million. In so doing, we wrote off some of the costs, the deferred costs, associated with establishing that revolver.

In the fourth quarter.

No, that was full year. That was full year. We took that charge in the first quarter.

And the second thing is, it seems like based on the numbers you gave us, with the new dividend payment rate that with the modest land goal you had, the 20,000 to 25,000 acres I think you said, it seems to me that you would have no reason that you would need to see your net debt go up. In fact, it could edge down. Is that consistent with what you are seeing if we throw in all of the guidance you gave us.

Well, yes. When we planned our dividend, we thought about it over a longer-term cycle than just the very near term. I would expect as we move through the next several years that our net debt position will come down.

With the harvest down to 3.5 million tons, and you are saying that the potential is 4.6 million tons. I know that wouldn't necessarily last forever, that goes it goes in waves. But let's just say with it down that far, doesn't that mean you could have an extra 50,000 to 100,000 tons that you could take advantage of on an annual basis? In other words, you get that back somewhere in better markets.

We certainly have the optionality as to when to take the harvest. If we see two or three years from now really attractive markets and a strong housing market, we could certainly go above 4.6 million tons for a short period of time. Conversely, we could just elect to put it in the out years and then sustain a higher operating run rate for a longer period.

I think there is a lot of optionality. There's nothing magic about an absolute number of 4.6 million tons. We are not limited by contract or capacity or depth of markets. It's just longer-term as we think about sustainability, we've got over time the trend of that kind of an average.

You mentioned in the press release the tie between the sawlog prices, I believe, in the west, primarily, and lumber prices. That's more a natural market phenomenon. That's not actually a contractual type situation, or is it?

Well, we do with a number of our external log customers, that we sell logs to in the open market. We do tie our log pricing to fluctuations in a number of composite lumber prices that occur in the market. It allows our customers then to operate their business at a margin. It gives us fair value for the wood and makes for a good long-term supplier/contractor relationship.

It would seem to me that you are more in that camp than other timber REITs. Maybe I'm wrong, but, in other words, you actually have a way of benefiting if lumber prices go up without having to compete necessarily against other sellers of logs with those customers.

That's generally true. Our indexes are typically lagged about a quarter.

Gail Glazerman, UBS.

Can you give me a little bit of guidance on the service volumes for the first quarter? You talked about the year, and you talked about price, but I'm not sure you talked about volume.

In total, harvest volume is going to be down about 600,000 tons across the year. I think you will see a reduction of about 200,000 tons in each of the first, the third, and the fourth quarters. The second quarter will be relatively flat year-over-year.

Weather seems to have normalized in terms of rain in the south. Are you seeing that phenomenon in any of your market compared to a year ago with the dry conditions driving up harvest?

Well, particularly, as you think about it from the standpoint of the log procurement business for our customers, I think across our entire geography, whether it's in the west or the south, there is ample log inventories at most facilities, and there is certainly no pressure caused by the weather for pricing to go up. Even though it has been a bit wetter, and it's wetter than it was last year, it's certainly not had any favorable impact to pricing yet.

In terms of real estate and potential land sales, your guidance isn't including any large non-strategic sales. Having adjusted the dividend, would you be less open to doing a large sale at this point? Or if the opportunity is there, do you think you might do one? Can you give a sense of what type of interest might be out there at this point?

I think irrespective of the dividend, we try to make transactions for non-strategic land sales at prices that make sense. As we've mentioned in the past, we've transacted or sold most of the property that we'd identified as non-strategic. We still have some tracts left. I wouldn't rule out if there was an attractive, favorable price that we would execute another one. It's not in our current plan. It would be an opportunistic thing and we'd only do it if we felt the pricing was strong.

As we've said before many times, I don't think it's changed, there is a number of pension funds and [TIMOs] that do have funding. It tends to be in the smaller tranches rather than in the larger amounts. The interest is stronger in the US south than it is certainly in the inland west. If we elected to take timberland to market, I don't have any doubt that we could find a number of interested buyers. Timberland pricing has held up very well, especially in the south. The prices and recent deals have been quite high in our opinion.

Michael Roxland, BofA Merrill Lynch.

Volumes and pricing in the north were better than we had anticipated, while the south was generally in line. We were therefore surprised to see aggregate margins in line with our forecast. Was there anything from a cost perspective that impacted your 4Q results?

Well, Mike, we are year-over-year seeing higher fuel costs. As I mentioned on the call, we are now harvesting on more steeper terrain than previously. As we harvest on steeper terrain, the costs go up little bit. That's probably what's driving that.

Now the steeper terrain, is that going to be a one-time harvest item? Or is that something that because you've harvested all the low-lying fruit, if you can say that, you have to harvest on steeper terrain going forward?

That's correct. We will have to harvest on steeper terrain going forward.

As Mike mentioned, some of the recent housing stats point to a market that may be on the mend. How easy or difficult is it for you to increase the harvest to respond to market conditions? And are there any potential sources of friction such as contractor capacity that would make it difficult for you to increase tonnage or your harvest if you saw housing gain some stability?

We think we have a lot of flexibility with our harvest level on the contractor base that we have. Frankly, I think it's much more painful and difficult to reduce harvest levels and take business away from contractors than it is to go to our core contractors and ask them to do more volume, more work for us. I think without exception, most are ready, willing, and able to do that. We have no concerns about contractor capacity in our markets.

Now that the dividend overhang is behind you, what is next for the Company? How do you strategically think about the business? Could Potlatch look to expand its business and be an acquirer of timberlands?

I hope so. We feel like we are not out of the woods in getting through this housing downturn. We need concrete evidence over, hopefully, the next six to eight quarters or something that there is definitive, concrete improvement in the housing market and we see stronger pricing. That will certainly help shore up our balance sheet, allow for a number of opportunities whether it's increasing the dividend as that begins to happen or to use our capital to acquire more land or buy back shares.

We certainly hope that we can be acquisitive in terms of competing for attractive timberland opportunities that are in our geographic market place. We've said that for a long time. I think we looked at the inland west and the central US south as core areas for expansion. We hope to be able to do that. But I think to be realistic, I don't expect that to happen until we start to see a stronger housing market and we see a little stronger balance sheet here.

Joshua Barber.

I was wondering to get a clarification. Eric, you mentioned before that you are expecting about 1.3 million tons of Arkansas harvest and about another 2.1 million tons coming from Idaho, which would leave about another 100,000 tons from Wisconsin. Why is there about a 200,000 ton drop in your forecasted harvest levels just from the northern segment? Is that mostly coming from Idaho? Is that coming from Wisconsin? Some combination of both? And what's driving that?

There is 200,000 ton lower harvest level coming in the northern region and 400,000 lower harvest level coming in the southern region. If you look at it, that's going to be about half sawlog and half pulpwood. We just think it's prudent in this near-term price weakness to hold back the harvest level and harvest at higher levels when prices improve.

When it came to the timber EBITDA, you mentioned this year about $15 million. How much of that was from the net mark to market benefit of the lumber hedge?

Are you talking about Wood Products EBITDA?

Yes. I'm sorry.

About $4.5 million in 2011 came from the lumber hedge.

If you are looking for comparable results in that segment for 2012, that would be excluded any mark to market benefits?

That's correct. It would be in the, who knows, $10 million to $12 million range.

And one last question regarding your pension fund. It looks like the pension under-funding or at least the accounting went up about $50 million from where it was. Can you talk about what happened there and why that went up at year-end? Was there a lowering of your overall anticipated returns? Is there some potential for more than $22 million of contributions from that, and where do you think that liability goes?

Like just about every pension plan in the country, we have been lowering our anticipated returns on our assets in our pension plan. We've been lowering it virtually every year. I think it's now down to around 8% as our expected return. More importantly, Josh, it's driven by the discount rate that actuaries require us to use to value the liability associated with a pension plan. And with interest rates being as low as they are, and they really dropped substantially at year end, that's what drove that liability higher.

So we are going to make this contribution here, hopefully, over the course of the first quarter of $22 million. I think all that is really required is around $13 million, something like that. We will be over-contributing to the plan, which will buy us breathing room next year.

It's hard to think about a pension plan for valuation purposes for long-term because it can be driven quite a bit by short-term changes in interest rates. So we bought ourselves two years of breathing room and then we will see where interest rates and what asset returns look like in the next year or two.

And one clarification on that, because he mentioned that you are borrowing that. It's basically tapping another asset that's on your balance sheet, but effectively you are taking some leverage to pay up that pension?

Yes, we are tapping another asset on the balance sheet. As I alluded to on the call, it's a Company-owned life insurance program that Potlatch took out on a number of employees back in the 1980s. Those employees, I think the average age is now 68 or something like that. They are set to pass away here over the coming years. As they pass away, the Company would receive income and cash flow from that program.

Effectively we are trading in the future income and cash flows from that program for the $22 million that we are going to be receiving from the life insurance company.

Okay. So you're basically just early cashing out a life insurance policy that was a net beneficiary to Potlatch.

That's correct. And we are talking about, I think I mentioned $300,000 of cash flow in 2012. The most that policy ever got to was around $1.5 million a year cash flow. That wasn't for another 10 or 15 years. So the benefit the Company was going to receive was far off in the future. It's not like it's a near-term hit to the P&L.

Are you actually borrowing the money against that? Or can you just get the net present value of those particular assets and be done with that policy?

Effectively, we are borrowing against the policy. So we won't be receiving that call at $1.5 million 12 years from now.

Mark Weintraub, Buckingham Research Group.

To get to the $4.6 million ton harvest, which you are hoping in stronger markets in the next couple years, how much of that increase relative to your harvest expectations for 2012, how much of that is going to be Arkansas versus Idaho, et cetera?

To get up to 4.6 million tons, the increase is going to come in both places, Mark. In the near term, we have deferred harvest to a greater extent in Arkansas than in Idaho. But as we march toward 4.6 million tons over time, the increase will come first in the south and secondarily in Idaho.

I think you said 1.3 million tons in 2012 in Arkansas. Do you know, embedded in the 4.6 million ton number, roughly how much of that is Arkansas?

It's probably around $1.5 million tons or $1.6 million tons, something like that.

So actually a lot of it is Idaho.

Excuse me, Mark. It's around $2 million tons total in Arkansas.

And just trying to understand a little bit more about the point moving to steeper terrain in Idaho. I think I understood the answer to the question before was that, essentially, what we saw in the last year, and I don't know how extended period of time, but that was more the exception as opposed to what is going to be happening this year. Did I hear that right?

In the last two years, as these markets came under pressure and we scrambled to generate cash to support the dividend that we had, we consciously shifted some of our harvesting activities in Idaho to less expensive operating conditions. Meaning the ground was not as steep requiring less costly logging systems. And in some cases closer to market so we didn't have to haul the logs so far. That's not sustainable long-term. We thought we could do it for a couple years.

Now we are shifting back to a more normal operating stance where we harvest on steep ground and haul logs on more typical average haul distances than those just close to market. Going forward, we think our 2012 plan mimics what we will have going forward for several years.

That makes sense. Did you do anything similar to that in Arkansas? And where are we in that cycle if, indeed, you did?

No. In Arkansas all of the terrain is the same, generally flat. The stocking levels are quite similar, it's a fairly old, mature forest and distances to customers are relatively short compared to the west, so there is no big change in Arkansas

(Operator Instructions) Steven Chercover, Davidson.

Just a couple clarifications. First of all, is the St. Mary's plywood mill still running?

Yes, it is, Steve. Running at full capacity.

Appreciate that, because you don't really talk about too much. I don't think this is the same line of questioning as Chip's question, but in the quarter your selling expense was up despite sales being down. Can you explain why that was the case?

Selling expense, Steve? You're talking about SG&A in our news release?

Yes, on the front page of the income statement.

There's a number of items that make up that account, Steve. I don't think it's any one thing in particular.

If I recall, you said corporate expense would be running at about $30 million run rate. Is SG&A $40 million a good run rate for that line?

Yes. I think $40 million or $41 million is probably a good number for that line.

Great. And I know that in some of your presentations you've discussed the potential for biomass at least as a source of demand. Have you actually investigated entering into any agreements with utilities, be they foreign or domestic?

Over the last couple years we've explored a number of opportunities both in the south and in the west, in all of our markets for biomass. That can take many forms from co-firing wood to burn with coal, to stand-alone biomass plant that generates electricity, to manufacturing pellets for use in industrial applications.

Without exception, the people that are willing to invest in that business consistently look to the federal government for tax policy and subsidies to help backstop those investments. There's been a lot of uncertainty around the country's energy policy. We have seen no greenfield opportunities come to market yet because of that.

Just to be clear, you would be delighted to sell to them at the right price but you have no interest in co-investing in the pellet manufacturing or anything else?

And no plans at this time to do that.

(Operator Instructions) There are no further questions at this time. Gentlemen, are there any closing remarks?

No. Look forward to talking to you next quarter. Thank you.

This concludes today's Potlatch year-end, fourth-quarter 2011 earnings conference call. You may now disconnect.