Potlatchdeltic Corp (PCH) 2013 Q1 法說會逐字稿

Good morning, my name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the Potlatch first-quarter 2013 earnings conference call featuring Eric Cremers, President, Chief Operating Officer and Chief Financial Officer, and Michael Covey, Chairman 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 earnings call to discuss our first-quarter 2013 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 warning 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 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 and CEO, who will make some introductory remarks and then I'll review our first-quarter results in more detail. Mike?

Thanks, good morning, everyone. First-quarter results were a bit stronger than we expected. Our Wood Products division continues to post impressive earnings as the significant recovery in lumber prices has benefited the division immensely. Our Resource division continues to perform favorably as well, especially in light of our harvest deferral strategy. And our Real Estate segment results were solid once again and we are seeing steady demand translated into slightly-higher pricing for rural recreational and HVU properties.

Positive macro economic trends are also favorably impacting our business. Housing starts predicted to be at the one million start level just a quarter ago are already being considered conservative by some economic forecasters.

Lumber demand for 2013 thus far is proving robust, despite challenging winter weather conditions, across much of the nation. The expected year-over-year increase in lumber demand of three billion to four billion board feet appears likely based on a continued and accelerated housing recovery. And although the housing market remains the key driver, all end-use markets are expected to contribute to increased US lumber demand in 2013.

Given these demand drivers existing supply has been stressed. As is well known the industry is not operating at full capacity due to temporary and permanent mill closures, but our view is that demand growth over the next 12 months to 18 months will exceed the ability by which existing idle capacity can be effectively brought online to meet such demand. The combination of these factors should lead to continued strength in lumber pricing that in time will eventually result in higher price sawlogs in all regions.

Overall we ask look to both the near-term and long-term prospects for our business with optimism and confidence. When the appropriate pricing environment comes to pass we look forward to increasing our sawlog harvest volumes from their current restrained levels, which is essential to delivering significant cash flows and increasing shareholder value. Our proactive decisions to restructure our credit facility at the end of last year and retire several debt issuances before the redemption dates have contributed to our operational flexibility.

And now I'll let Eric discuss the quarter results in detail and then we'll take questions.

Thanks, Mike. As shown on page 3 of the slides accompany this presentation, we reported first-quarter net income of $15.5 million, or $0.38 per diluted share. This compares to net income of $13.9 million, or $0.34 per diluted share last quarter, and $5.1 million, or $0.13 per diluted share in Q1 of 2012. Please note that a $750,000 accrual related to EPA proceedings regarding the cleanup of one of our properties in Northern Idaho is included in our Q1 results.

I'd now like to review the results of our operating segments for the quarter. Page 4 highlights operating income and margin trends for our Resource segment. For the quarter, operating income was $15.5 million compared to $10.5 million in the fourth quarter, and $8.7 billion for Q1 of 2012. Our improved results were primarily driven by increased harvest volumes over both prior periods as well as some price improvements.

Page 5 highlights volume and pricing results for the Northern Region of our Resource operations. Sawlog prices rose 2% from the prior quarter and 14% from Q1 of 2012, as improved lumber prices are clearly working their way into higher sawlog prices in the Northern Region. As we have indicated on prior calls, roughly 65% of our northern Region sawlog pricing is formally indexed to the price of lumber, but it lags the market by one to three months depending on the customer. For example, in Q4 of 2012 our average lumber price advanced 1%, which resulted in our Q1 in 2013 Northern Region sawlog price advancing a similar 2%. Given our average lumber price increase of 15% here in the first quarter, we expect our Q2 Northern Region sawlog prices to advance by roughly 11%.

Sawlog harvest volume increased 1% from last quarter and 34% from Q1 of 2012. Though the first quarter is usually a lower harvest volume quarter due to seasonality, favorable market conditions prompted us to shift some harvesting activity into the first quarter that would have originally been harvested in the second half of the year. In the Northern Region pulpwood demand remains sluggish and consequently pricing remains under pressure.

Page 6 reviews volume and price trends for our Southern resource operations. Comparing the first quarter of 2013 to the first quarter of 2012, sawlog harvest volumes are up 4% and pricing is up 5%. Though we have continued with our current harvest deferral strategy of approximately 800,000 tons per year, harvest volumes in our Southern Region are higher than last-year's first quarter due to two recent land acquisitions. Improved sawlog pricing between the periods is attributable to improved lumber markets and adverse weather conditions experienced during the first quarter of 2013 as compared to the first quarter of 2012.

Comparing Q1 of 2013 to the fourth quarter of 2012, sawlog volume increased 9% while sawlog prices decreased 4%. Again, the increased sawlog volume stemmed from the two tracts of land acquired in late 2012. The sequential price variance is related to product mix issues, primarily a decrease in hardwood sawlog harvesting, and a shift towards smaller and less-valuable pine sawlogs as compared to last quarter. Southern Region pulpwood pricing improved 3% from Q4 of 2012 and 9% from Q1 2012, primarily due to stronger OSB markets, increased hardwood demand and unfavorable weather conditions that have impacted logging activity thus far in 2013.

Pages 7 covers revenue results for our Real Estate segment. For the quarter, Real Estate posted revenues of $4.6 million and closed 41 transactions. Current quarter revenues of $4.6 million compares to $19 million last quarter and $8.2 million in Q1 of 2012.

Included in fourth-quarter 2012 results are two significant Real Estate sales, one in Minnesota for $11 million and another in central Idaho for approximately $5.1 million. Also, a large sale of HB wafers in Minnesota impacted Q1 of 2012 results.

Page 8 provides an overview of Real Estate operating income and margin trends. This segment reported operating income of $3.1 million for the quarter compared to $13.8 million last quarter and $6.3 million in Q1 of 2012. Acres sold by product type are depicted on page 9.

We continue to experience steady demand, especially for our rural recreational and HVU properties. We are further encouraged by the pricing trends shown on page 10. Pricing for rural recreational and HVU properties are both showing noticeable increases over prior periods, excluding the effect of the $11 million Mississippi Northward sale that heavily impacted our HVU pricing in Q4 of 2012. We anticipate our Real Estate division will continue to experience firm pricing as the economic recovery progresses and more buyers recognize the value of rural recreational property.

Page 11 highlights our Wood Products segment operating income and margin trends. Our Wood Products segment posted exceptional results in Q1, producing $18.9 million of operating income for the quarter, which compares to $13.5 million last quarter and $5 million in Q1 of 2012.

Pricing volume trends for our Wood Products segment are shown on page 12. Our overall lumber price reached $412,000 per thousand board feet for the quarter, an increase of 18% from last quarter and 35% from Q1 of 2012. Shipments for the first quarter were down 5% from both last quarter and Q1 of 2012, primarily related to seasonal factors and timing.

Moving forward we expect quarterly lumber shipments to approximate the 160 million board foot levels experienced throughout 2012. Overall, our mills are well positioned to capitalize on favorable market conditions that we believe will persist throughout 2013 by executing a continued strategy focused on productivity improvements, select high-return capital expenditures and tactical additional operating hours.

Looking back to page 3, total corporate administration cost, excluding net cash interest expense, were $11.1 million for the quarter compared to $11 million last quarter and $8.3 million in the first quarter of 2012. The $2.8 million variance from last-year's first quarter is primarily due to non-cash mark-to-market adjustment related to our deferred compensation plans. As mentioned earlier, during the quarter we incurred a $750,000 accrual related to EPA proceedings regarding the cleanup of one of our properties in Northern Idaho.

The decrease in our book tax provision compared to Q4 2012 is related to lower net income generated in our taxable REIT subsidiary, primarily related to lower income in our Real Estate division. Conversely, the increase in our tax provision from last-year's first quarter is a result of higher net income generated during the quarter in our taxable REIT subsidiary, mainly associated with our Wood Products operations.

Our balance sheet continues to improve along with our improved operating results. During the quarter, we retired three debt issuances totaling $27.7 million with cash on hand and yet still ended the quarter with $59.7 million of cash and short-term investments. Another $9 million of debt will be retired in the second quarter. The four debt issuances were selected for early redemption based on their small call premiums and relatively-high interest rates, which average around 7.3%, which compares to negligible earnings on our available cash deposits.

In total our annual interest expense will decline by about $2.7 million per year as a result of this action. Furthermore, on April 2nd Standard & Poor's upgraded our corporate credit and senior unsecured ratings to BB+ from BB with the stable outlook. And we were just upgraded by Moody's to BAA3, which is investment grade, a level the Company has not seen in about a decade.

Next I'd like to make a few comments regarding our outlook for the remainder of 2013. As indicated in our last call, in our Resource segment we plan to harvest approximately 3.8 million tons in 2013, about 800,000 tons below our run rate potential, with most of this deferral recurring in the South where log prices remain relatively weak. In the Northern Region, given the strong run-up in lumber prices we saw in Q1 and the fact that log prices lag lumber prices, as discussed earlier, we expect Northern Region sawlog prices to be up approximately 11% in Q2, though as a reminder harvest volumes will be somewhat lower in Q2 due to typical seasonality.

For our Wood Products segment we have continued optimism for the remainder of 2013 and beyond, based on simple supply and demand fundamentals. We believe that North American demand is increasing roughly three billion to four billion board feet a year and that capacity is struggling to keep up, as just two billion board feet of capacity additions have been announced thus far in the recovery. Given this imbalance, we expect strong lumber pricing and Wood Products earnings throughout 2013.

Though our Real Estate segment performed slightly ahead of expectations in the first quarter, our current outlook remains generally consistent from our expectations at the beginning of the year, as we now expect to sell at the high end of our 18,000 to 20,000-acre range and for average pricing per acre to remain at approximately $1,400 per acre.

In closing, we are off to a great start in 2013 and our confidence has improved since the start of the year as favorable market conditions continue to translate into improved financial results. That concludes our prepared remarks. Jennifer, I would now like to open the call to Q&A.

(Operator Instructions)

Mike Roxland, Bank of America.

Thanks very much, congrats on a very good quarter. Just first question, can you give us a sense on your outlook for lumber pricing? Despite some recent softness that we've seen in the last few weeks lumber price in general has approached levels last seen during the housing boom without having the same kind of level of housing demand in place. So ultimately where do you see -- what's the main drive behind this? It sounds like from your commentary that it's really been supply driven at this point and where do you think lumber prices can go from here?

Yes, Michael, this is Eric. Yes, there is a fundamental imbalance between supply and demand here. We think supply is trying to keep up with demand, but it struggling to do so. With regard to where we see pricing going I think we do see it a little bit stronger here as we move through the second quarter. Even though we've seen a little bit of a sell off here lately, that sell off is relatively small and it happened after a good 1 month, 1.5 months of result have occurred for the quarter. So, we feel pretty good about where we're going to wind up in second quarter and that's up with higher lumber prices. We do see pricing coming down a little bit in the third and the fourth quarter, as more supply will be coming to market.

But, let me just give you one anecdote about how hard it is for -- in spite of these high prices, how hard it is for volume to come to market. In our wood basket down in Arkansas, there our five mills that are currently down that could start up. None of the five have started up. One recently, we understand, sold to another party. That party has indicated to us that they intend to start that mill up sometime over the next 12 months. But it certainly is not an event that's going to happen tomorrow but it's something that's going to happen over the next several quarters. So, again, it's just an indication that yes, pricing is strong, margins are strong, but getting the supply to come to market is very challenging and that's what's keeping these prices relatively high.

Got you. Given what sounds like a fundamental shift in the supply chain and then really in the supply base, where do you see longer term. So if we look out past 2013 where do you think lumber prices could trend in 2014 and beyond?

Well, I think our -- we don't have a crystal ball here but I think most people think prices are going to stay with these relatively high levels. And we are starting to see a little bit of product come down from Canada, we are starting to see a little bit of product come in from Europe, we're seeing a little bit of slowdown in China. So, we are seeing a response here to these higher prices. But given the increase in housing starts that most people see, the repair remodel markets remain firm, there's issues with supply coming from Canada, it's hard to see there being much of a sell off at all so we think prices are going to stay relatively elevated.

Got you. And then just two quick remaining questions. How much additional flexibility do you have to continue to pull forward your harvest in the north? As you mentioned, 65% to be lock-on contracts in the north are tied to lumber pricing. So, given where lumber prices are and the potential, as you outlined, for some softness in the back half of the year, do you have the ability to pull forward any more of your harvest to capture the better pricing that we're seeing in the first half?

Well, we're running pretty full in the Northern Region and most of the customers that we supply are running their mills pretty full. So, while there is an opportunity for us to increase volume a little bit, it's not a huge opportunity, and right now our plans in the Northern Region are not to increase volumes in the second half of the year.

Got you and then just a quick last one. Can you review for us what the metrics and other factors you need to see to get more comfortable in the sustainability of the dividend and potentially increasing it?

Mike, this is Mike Covey. The dividend has been set in sync with our current harvest levels, which we're very comfortable with that. Our FAD in 2012 exceeded our distribution in the dividend and I think going forward we'll have to look at a number of factors. But most importantly, an increase in harvest levels, particularly in the South, will be one of the mechanisms that we look to and review with our Board in considering the dividend. So there's a number of factors to consider and later in the year we'll be reviewing that with our Board, especially as we see how this recovery continues to unfold.

Got it, thanks very much. Good luck for the balance of the year.

Thank you.

Gail Glazerman, UBS.

Hello, good morning. I guess following up on the anecdote you gave about the sawmills in Arkansas, what do you think the bottleneck is from getting those to restart and can you possibly tie that into what that means for your view for sawlog pricing the South?

Well, there's several constraints, Gail, to getting mills up and running. This mill that I'm referring to it's not been purchased by a large, well-capitalized public companies, it's being bought by another relatively-small operator. So think about balance sheet constraints. It takes anywhere from $5 million to $10 million of working capital to get one of these mills up and running. Think about the employee base. These are small towns and these mills employ some level of skilled labor. Well, in the downturn that skilled labor scatter ed so you have to find a way to get it back to the mill again.

And then finally, this machinery, this equipment's been sitting there, I'll use the term rusting away for the past several years so getting it in good working condition is not a simple task, particularly for a small mom-and-pop kind of operator. So, I think there are a lot of constraints to getting these mills that were turned off to get them turned back on again.

Regarding the outlook for pricing, we recently undertook a study. A consultant came in, a well-regarded consultant that covers timberland operations in the South. They reviewed our wood basket and their belief is that demand today is around 7 million, 7.5 million tons in our wood basket and over the next four years they expect it to get up to 11 million to 11.5 million tons in that wood basket. And we see a number of things that can happen to make that demand for sawlogs increase and as that happens, pricing should move up. Not this year but it'll start to move next year and then more firmly the year after.

So, these things just take time and frankly that same consultant out five, six years has pricing getting up to around $60 a ton from the $40, $41 of ton we're seeing today. So we're very optimistic long term. You're not going to see these results quarter to quarter, but over a longer period of time you will see higher volumes and you will see higher prices.

Okay, thank you. And can you give a little bit more color on what the underlying price trend was in the South during the quarter, or if you take away the mix impact was it fairly stable, up, down?

Yes, it was pretty -- it was flat. Sawlog -- southern yellow pine sawlog pricing has been very flat.

Okay. And going back to Mike's question a little bit about the North, you referenced that you only see in the second quarter -- I can't remember the word you used, but it was relatively modest, harvest change in the second quarter. Normally seasonally you'd see a pretty big harvest change, can give maybe a little more detail or color on what your guidance is for the second quarter?

Yes. So, our harvest volume -- projected harvest volume today for the second quarter in the Northern Region is around 360,000 tons and that compares around 600,000 tons we had in the first quarter so it's a meaningful drop. And then, of course, in the third quarter it ramps back up and our expectation is it'll be up around 800,000 tons in the third quarter.

So, as a reminder that's due to seasonal factors not to market conditions.

Yes. No, I just wanted to check that because first-quarter volumes were so strong. And can you talk a little bit about what you're seeing on the cost side? I don't know if it varies by region or just in general is there anything that you're seeing in terms of the silviculture or the harvest, the actual harvest, diesel, just any part of that?

No, we're seen very little impact from fuel costs. There's a little bit of price pressure in logging and hauling costs. They're -- I think the latest forecast I saw was we're going to be up about 4% in the North year-over-year and up about 5% in the South, year-over-year. Now as a reminder, we're going to have a little bit stronger mix this year in the South, so overall, logging and hauling costs year-over-year are really going to be up 1% if you include mix affects. So, it's small at the end of the day.

Okay, thanks very much.

Chip Dillon, Vertical Research Partners.

Hello, there, good morning.

Good morning.

First question, actually you gave the harvest expectations for the Northern Region. Could you give us what you would see for the South in the second and third quarter and maybe even for the year?

Yes. So, in the South in the second quarter it'll be very, very comparable to what we're going to see in the North, around 367,000 tons more or less. And for full year in the South around 1.5 million tons with pretty evenly split between sawlogs and pulpwood.

Got you, okay. And also, it seemed like the basis of the land that you sold in the first quarter was pretty low, I think it was, at least versus -- I seem to recall that you're basis would be -- maybe this is my guess but 20% range for this year. Is that -- 20% of revenues -- is that still a good guess going forward, or where would you put the basis on the acres you're going to sell?

Yes, that's a good question, Chip. Basis was 13% in the first quarter, we expect it full year to be at around 21%. So we do think it's going to drift up in the back half the year. We expect the second-quarter basis to be relatively low as well as around 13%. So the third and fourth quarter it'll be up in the 25%, 26% range.

Okay, got you. And as you look at the -- you mentioned I think Arkansas where you had some potential restarts, I just want to be clear, you were talking solely lumber mills. You weren't talking about any potential plywood restarts that you've heard about, have you?

You're correct.

Yes, that's correct.

Although that would be nice in your case.

Correct.

Okay. And then lastly, noticing the improvement in the Resources earnings, especially in the Northern sawlog prices, I know obviously this encompasses Minnesota and Idaho and I believe a material amount of your Idaho timber is somewhat indexed to what lumber's doing. Could you give us an idea of how much that influenced your realizations? And then, I'm guessing there's some lag affect so how much of that -- maybe that was in your comment, why you saw that pricing going up further in the second quarter?

Yes. So we've measured -- well first of all, not all of the harvest volume in the Northern Region is indexed to the price of lumber, it's just mixed sawlogs. For example, cedar's not included, chip-and-saw's not included, so there's some products that are not included, but it's roughly 65% of the harvest volume. So we can now look at what happened to those [indices] that are indexed to the price of lumber. We can look and see what happened to them in the first quarter.

We have pretty firm expectations given the index pricing contracts that we have and the fact that the other 35% of our customers that our not indexed get similar pricing we can pretty accurately forecast what that mixed sawlog pricing is going to do here in the second quarter. So based on the index customers pricing is going to go up 15%, but based on all of the other products that we have that make up Northern Region sawlog like cedar, like chip-and-saw, et cetera, pricing is going to go up about 11% across the entire Northern Region sawlog harvest volume. Does that help?

Okay, that's very helpful. And maybe you've heard this, I have and I don't understand it really. But I've heard people tell me that when they look at your Company, Idaho's the weak link and there may be reasons for that versus the South. But my goodness, if you have -- if you believe in a strong lumber price don't you actually have some advantage because obviously, these types of indexed opportunities I don't think exist in the South. Is that a fair response or reflection? And do you think -- I know you've had some appraisals done in the Idaho region, do you think some of those could be stale now given -- if one assumes that the lumber pricing we see is somewhat sustainable?

Well, Chip, it's Mike. We haven't updated our appraisal on our Idaho lands in a couple of years. We've had some transaction evidence with small transactions but we think people under appreciate their productivity and exceptional value of the Northern Idaho forest, as well as the strength of the lumber customers that are in this market. We have some of those very strongest and best manufacturers in the US here and a very strong log market. So compared to the South we're -- because of the shortage of logs and the tightness of the market, we are able to work with customers on an indexing basis whereas in the South there currently is an oversupply of logs in our wood basket and there's just no opportunity to make that kind of an arrangement.

Got you. Okay, thank you.

Joshua Barber, Stifel Nicholas.

Hello, good morning. Most of my questions have already been asked, just a quicker one. Especially with your share's doing exceptionally well and seeming to have a lower cost of capital today. Where would you be thinking about spending incremental capital given that you probably have some headroom under the REIT tests. Would you be more likely to compete on timberlands or would you potentially be looking at maybe expanding some of your wood products businesses, given that you can probably find some better opportunities there today?

Well, we'll reiterate what we've consistently said is that we seek opportunities to grow our timberland business, and if that happens to include Wood Products manufacturing operations we're happy to look at those. If we believe we can fold them nicely into our business and certainly there's no problems with REIT test, but stand-alone Wood Products manufacturing opportunities are not something that we're pursuing.

Okay. When we look at, I guess, South and the Pacific Northwest versus Idaho, would you say -- just seeing how log prices have really rallied in the Pacific Northwest and in the Idaho region -- so much of the last four or five months whereas that doesn't seem to be happening as much in the South. Do you think there's still a giant log oversupply in the South that's just a little bit more time to work through, or has there been more foreign buyers or something else that's maybe at work in the Pacific Northwest that's been pushing that a little bit more?

Well, certainly the Pacific Northwest has the benefit of attention from the China and Japan log market for export, which doesn't exist in the US South to any large degree. Secondly, the South is a very -- I'm going to be specific and talk specifically about the central US South and the Arkansas log market where we do currently have an oversupply due to mill closures and other things that happened in that region. That said, as Eric commented earlier, we believe that demand -- or supply -- demand for sawlogs and plywood logs will increase in the South over the next two to three years by several billion board feet and this what we view as interim or temporary oversupply situation will correct itself.

Great. Thank you very much.

Thank you.

Steve Chercover, DA Davidson.

Morning, Mike, morning, Eric. A couple quick questions. First of all, there's been some recent transactions although they're not directly in your jurisdiction and they seem to suggest that timber values are back to, I guess, pre-recession levels. Would you concur with that and do you remain in the market for more?

Well, clearly we're in the market for timberland. We made two very small acquisitions in the fourth quarter of 2012, but I think given the shape of our balance sheet and the upgrade from rating agencies and other things we certainly -- and an unutilized revolver, we're certainly in the market to purchase more timberland. I don't think timberland is in its pre-recession levels. I guess a high watermark for Southern timberland was probably $1,900 per acre and transactions now seem to be in the $1,500 to $1,600 range so I don't think were back to that level. But certainly the trend seems to be up and we believe the discount rates that [Temos] and others are using are quite low.

Okay. And if I'm not mistaken your objective is to get back to 4.6 million ton annual harvest. Would that be above your sustainable harvest level or is that something that you can do for three to five years or is that the run rate?

Well, we look at this in sequences -- or groups of years, but we think that the 4.6 million harvest -- 4.6 million ton harvest level is sustainable for up to a decade depending on how consistently we hit that every year. We have the flexibility to go up to 5 million tons in a given year but we'll have to back off of that pace to keep it at a sustainable level.

So, on a -- given your current land base what would you say is the sustainable level in perpetuity?

We haven't given guidance on that, Steve, and we're not prepared to do that today. I think we've tried to give investors an outlook for about the next decade and we think that as Southern log prices improve we will approach the 4.6 million ton harvest level and hold that for a number of years.

Okay, thanks, Mike.

Matthew Dobson, JWest LLC.

Hey, congratulations on a great quarter, I just have a couple questions for you. You guys talked about a mill coming back online in the South maybe in the next 12 months, if that happens this year is that upside to your volume?

Not necessarily. It's a market indicator in the wood basket of tightening of supply, but one mill is not going to make a big difference in terms of any activities that we have with our harvest levels.

Got you. And then there's been research and reports out there that's talking about sawlog prices can go up 50% to 100% in the next couple of years. If that becomes a reality can you help us frame where your dividend could go?

We view the dividend as something that we don't want to jerk investors around with quarter by quarter changes in pricing or volumes in any of our business segment. So, we're working with our Board, we look at the long-term harvest plans. Our view of pricing in each of the business lines that we have and then set the dividend on a suitable long-term rate so that would really be how we look at it.

One thing you might do is take a look at our supplemental materials. We reference the financial impact of an incremental harvest. Total impact is around $45 million of cash flow so that might be one way to connect some dots is assume that an extra $45 million of cash flow comes to the Company. But then you also have to take into consideration what's going on in the Wood Products business and what's going on in the Real Estate business. So there's no simple answer to the question and so we look at it every so often.

Well, we do view the dividend as an important way to return value to shareholders and certainly it's high on the Board's list of priorities.

And then my final question is, can you help us understand why you guys think the lumber price is going into decline in the back half of the year?

Well, we are seeing some capacity come back to the market here. Like I mentioned earlier, we are seeing some European shipments at the US, we are seeing Canadian exports increase here to the US. Everybody's working to try to get more volume out of their existing mills and the existing mills that are closed down people trying to figure how to get them back up and running again. So while we are seeing increased demand we're seeing increased supply, as well, but it's going to take these higher prices to keep -- stimulate that demand, if you will. But in general we do, as do most forecasters, envision a little bit of a sell off and I'm talking a small sell off later in the year not significant by any stretch of the imagination.

Perfect, thank you very much and congratulations.

Thanks.

Mark Weintraub, Buckingham Research.

Thank you. Can you guys remind us as you go over time to that 4.6 million tons relative to where you are likely to be this year how much of that would be saw timber?

Oh, it's around 800,000 tons incremental sawlogs, Mark.

So basically all sawlogs?

Primarily, yes.

And presumably that is largely in the South? That pretty much all the South or how would you break that?

It's predominantly in the South, yes.

Okay. And, on that mill -- I realize it's probably -- as you said it's just an indicator, but roughly what size was that one mill you're talking about in Arkansas?

It's around 100 million board feet.

100 million board feet. And then so the -- to get to that, from that 7 to -- from the 7 million to the 11 million to 11.5 million tons that the consultant was suggesting could happen, what type of timeframe did that think that might happen and what are the key variables that need to take place for that to happen?

Well, the consultant doesn't drill down and look at mill by mill and say -- gee, if this one increases operating rate from 75% to 85% that would add this much volume, if this mill did that it would increase volume by that much. Theirs was a top-down view of what do they expect housing starts to be going forward, what do they expect repair model, exports, et cetera. Then say okay, that creates lumber demand of X and then partition that lumber demand or split that lumber demand across the different producing regions. So it gave a portion of that to the South and then it further to the portion of the South down to our wood basket.

So they didn't drill down and go mill by mill. What we did is we triangulated and we said -- okay, if they see demand at 7.3 million tons in this wood basket in 2013 and they see demand of 11 million tons in 2016 that's about an increase of 4 million tons per year in our wood basket. We said -- what are some things that have to happen to go from the 7 million to 11 million and we've got, I don't know, five or so things that we think are going to get is from 7 million to 11 million tons that are very doable things. Thinks like people running second shift instead of just on a one-shift basis, things like mills that are closed starting back up again, things like that. So it was two different approaches to how do we get from 7 million tons 11 million tons but they both got to the same place.

Interesting. And can you help us, how many order of magnitude -- how much of it is -- would be driven by mills restarting as opposed to the second shift? Is it all the mills that are down restarting, 50% of them? I don't necessarily expect specifics -- or just one or two?

No, it's -- I don't know 75% of it, Mark, is existing mills running harder.

Okay.

Mills that are already running putting on a second shift, put it that way.

Okay, thank you.

Joshua Zaret, Longbow Research.

Thank you, two questions. The first I just want to explore your timber acquisition strategy. The question is, how important is it for you to remain in the three regions where you currently operate? In other words, will you go buy 40,000 -- I'm just roughly using that number -- in, let's say, Louisiana? And the reason I ask that, is there a cost to infrastructure that makes you uncompetitive in bidding in the sense that you have to put in your management team, put in an office, et cetera, et cetera, or is your strategy really to stay blocked where you are now?

Our first priority is to bolt-on acquisitions in our existing operating areas, partly due to the cost effect, but at the end of the day that's not an enormous consideration. The bigger concern and consideration would be our knowledge and access to markets in different regions, different than where we're at. We look at the central US South -- Mississippi, Louisiana, Arkansas -- as an area that we consider -- we have familiarity and certainly look out onto acquisitions. But to go to a standalone acquisition in South Carolina of 40,000 acres would be, I think, a large stretch for us because we just don't have market experience there.

Okay. And along the same line with the strategy, would you stay with merchantable tracts like you just had, the two you just purchased where you can harvest immediately? You wouldn't buy pre-merch would you even though if there's a great value there given you're public entity? How do you view that?

Well certainly, as a public entity and a REIT with the dividend obligation, we have to be buying nothing but pre-merch timber could be very dilutive, I guess, to our ability to cover the dividend. So certainly we can tolerate some but typically a mixture of both mature and -- of mature timber and H classes that are across the entire H class spectrum is of interest to us.

Okay, and then my second question. Going back to the converting side everyone is looking at it like it's shift, et cetera, but there have been a lot of announcements of new capacity. Georgia-Pacific last month announced $400 million for plywood and lumber operations, other companies have announced a sawmill here, a sawmill there -- big money, big sizes. Are any of these being announced for your timber baskets that you're aware of?

Well, it's hard to say. Georgia-Pacific is a large customer of ours and we service a number of supply logs to a number of their mills. But they have not -- to our knowledge they've not made a pinpoint determination that a particular plant is going to be the recipient of some of the capital expenditures in plywood, for example. So I think it's impossible for us to answer that specifically.

Yes, Mark -- or Josh, they came out and said they're going to spend $400 million and they mentioned the states that they're going to spend it in and if I recall correctly one of them was Arkansas, but they didn't say specifically which plants the capital was going to.

I see. And -- okay, great, but nothing else? You're not aware of any other new greenfields in your regions?

No, not in sawlogs. As you know, there have been a number of announcements around the pellet and the biomass supply chain in different market areas but not in solid wood.

Okay, great. Thank you.

You're welcome.

You have a follow up from the line of Chip Dillon with Vertical Research Partners.

Yes, thank you. I know you can't give us an exact answer but do you have a rough idea how the -- I think your plan is to sell 18,000 to 20,000 acres this year, how that might flow through the year. Is there a quarter where it looks more obvious than not -- that it might be a high quarter or a low quarter?

Yes, there will be some seasonality in our business, Chip. The first quarter is probably the low quarter for the year. We expect to sell around 5,000 acres in the second quarter, maybe around 7,000 in the third and then maybe around 5,000 in the fourth, which compares to 3,500 acres in the first quarter.

Got you.

The third quarter will be the best.

Okay. Got you, that's very helpful, thank you.

There are no further questions at this time.

Thank you, Jennifer and we look forward to talking to everyone next quarter.