Potlatchdeltic Corp (PCH) 2014 Q3 法說會逐字稿

Good afternoon, my name is Brian, and I will be your conference operator today. At this time I would like to welcome to everyone to the Potlatch third-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed

Thank you, Brian. Welcome to Potlatch's investor call and webcast, covering our third-quarter 2014 earnings, and our pending purchase of Alabama and Mississippi timberlands. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning 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 will now turn the call over to Mike to discuss the acquisition, and then I will review our third-quarter results in detail.

Thank you. Good afternoon, everyone.

We announced earlier today that we have signed an agreement to purchase approximately 201,000 acres of timberland in Alabama and Mississippi, from affiliates of RMS, for $384 million, or approximately $1,900 per acre. This property has been managed intensively by RMS, the timberland investment management organization since 2006, and prior to that, by International Paper.

The transaction is structured as an asset purchase, is subject to customary closing conditions, and is expected to close during the fourth quarter. The purchase will be financed with approximately $310 million of long-term variable and fixed rate loans from the Farm Credit Bank system. We plan to use approximately $75 million of cash for the remainder.

As we have stated for some time, growing the Company profitably is our top priority. The Alabama and Mississippi timberland will be a great addition to our Southern portfolio, and fairly simple to integrate. All of the properties have supply agreements in place with sawmills and pulp and paper facilities for a portion of the harvest volume. Moreover, the timberlands are located in wood baskets with strong and growing demand for sawlogs and pulpwood.

They also have above-average stocking levels, and productivity that exceeds that of our current timberland in Arkansas. We continue to believe that the South would be the go-to region for incremental lumber production, as housing starts continue to recover to a long-term trend level. We expect the South to benefit disproportionately, as southern sawlog prices recover to prerecession levels over the next few years.

This acquisition also provides Potlatch a base from which to grow in two new states. Following this acquisition, smaller bolt-on opportunities in Alabama and Mississippi will now make sense, given that we will have critical mass in both states. We expect the acquisition to be immediately cash accretive to funds available for distribution, and further enhance our ability to increase our dividend from its current level of $1.40 per share.

As discussed on last quarter's call, we continue to generate cash well in excess of our dividend and capital needs, even after stripping out one-time real estate transactions that we executed earlier this year. As noted before, we plan to discuss the dividend with our Board early in December. During our fourth-quarter earnings call in January 2015, we will provide specific guidance on harvest levels, mix, and pricing for the southern region. In short, the Alabama and Mississippi timberlands are a great fit for us, and we are very excited to add these properties to our portfolio.

I will now turn it back over to Jerry to discuss the quarterly results, and then we will take questions.

Thanks, Mike.

Beginning with page 7 of the slides accompanying this call, our third-quarter net income was $33.2 million, or $0.81 per diluted share. This is up compared to the prior quarter, when we reported net income of $16.3 million, or $0.40 per diluted share.

I will now review the results of our operating segments. The results of our resource segment are displayed on pages 8 through 10. Operating income for this segment was $34.1 million compared to $10.8 million last quarter. The third quarter is consistently the highest earnings quarter for resource, because drier summer weather typically results in more operating days and higher harvest volumes.

Northern region sawlog prices improved 6% sequentially, due to mix and slightly higher lumber prices. The price of approximately two-thirds of our sawlogs are indexed to lumber prices on a one- to three-month lag. Pulpwood prices in the northern region improved 4% quarter over quarter, based on stronger demand. Sawlog and pulpwood harvest volumes in the northern region increased considerably in the third quarter, due to the seasonal factors already discussed.

Moving to the South on page 10, sawlog prices increased 16% from the second quarter, due to a greater mix of higher-priced hardwood sawlogs in the sales mix, and very strong hardwood sawlog prices. Prices for our primary product in the region, pine sawlogs, were up slightly, due to a higher mix of plywood logs in the quarter; however pine sawlog prices remained flat for comparable products.

Southern region pulpwood prices improved slightly from the prior quarter, due largely to a higher mix of hardwood pulpwood. Sawlog and pulpwood harvest volumes in the region increased seasonally. As discussed on last quarter's call, we plan to increase our harvest of hardwood sawlogs in the third quarter, to take advantage of robust demand and elevated prices. Our efforts to increase the harvest of hardwood sawlogs were hampered by wet weather.

The results of our wood products segment are displayed on pages 11 and 12. Operating income for the quarter was $15.8 million, compared to $14.9 million last quarter. Slightly higher average lumber prices more than offset a 2% decline in lumber shipments. Second-quarter lumber shipments were higher than production in the quarter, because we successfully worked off the excess inventory that we held at the end of the first quarter, as a result of weather-related transportation challenges.

The results of our real estate segment are covered on page 13. Operating income for the quarter was $4.6 million, compared to $12.4 million in the second quarter. As we reported in last quarter's call, we closed the sale of 9,400 acres of rural recreational land in Minnesota to a conservation entity for $10 million in the second quarter. There were no similarly sized transaction in the third quarter.

Our income tax provision declined sequentially, due to lower taxable REIT subsidiary earnings, compared to the second quarter. Our consolidated effective tax rate for the quarter was 16%. We still expect that the full-year consolidated effective tax rate will be slightly above 20%.

Moving to page 14, our balance sheet remains solid. Cash and short-term investments were $73 million at the end of the quarter. Including non-current investments on our balance sheet, total liquid assets exceeded $100 million as of the end of the quarter. As Mike mentioned, we expect to use $75 million of cash, in connection with the acquisition.

Our $250 million revolver remained undrawn, and we have no debt maturing until the fourth quarter of 2015. Information about the long-term debt that we plan to issue in connection with the acquisition of the Alabama and Mississippi timberlands is presented on page 15. We expect a mix of variable and fixed rate debt, with an initial weighted average cost of approximately 3%. On a pro forma basis, we expect that our net debt to enterprise value would increase to approximately 27% after closing the transaction, based on our market cap at the end of the third quarter.

Capital spending was $8 million in the quarter. We expect to spend slightly under $28 million on capital projects this year, excluding acquisitions.

Now, I'd like to comment on our outlook for the fourth quarter of 2014. We estimate that total harvest for 2014 will be approximately 3.7 million tons. Incremental volume from the new acquisition is expected to offset a shortfall, relative to our harvest plan in Arkansas. We anticipate Northern sawlog prices decreasing modestly in the fourth quarter, due to seasonal backers.

We expect the average price that we realize for Southern the sawlogs in the fourth quarter to decline, due primarily to a change in the mix of hardwood species harvested, and a lower mix of pine plywood logs. We expect EBITDA contributed by the new timberlands to approximate interest cost on the new debt in the fourth quarter.

Our Southern timber depletion rates will increase significantly as a result of pooling merchantable timber in Alabama, Arkansas, and Mississippi together, for purposes of calculating depletion rates. We estimate that incremental depletion expense, including the effect of higher depletion rates on our Arkansas harvest after closing the transaction, will be approximately $1.5 million in the fourth quarter. We estimate that resource earnings will be in the range of $20 million to $25 million for the fourth quarter.

We expect the volume of lumber that we ship in the fourth quarter will be slightly lower than volume we shipped in the third quarter, due largely to fewer operating days. We anticipate a modest seasonal decline in lumber prices. We estimate that wood products earnings will be slightly above the level realized by the business in the fourth quarter of 2013.

We are not planning any large sales in real estate in the fourth quarter. We sold slightly more than 30,000 acres in the first three quarters, and expect that we will end up in the range of 32,000 to 34,000 acres for the year. We estimate that land basis will be approximately 25% of revenue for the year. We expect to record acquisition-related expenses of approximately $500,000 in corporate, and to incur interest expense on new debt of slightly more than $1 million in the fourth quarter.

That concludes our prepared remarks. Brian, I would now like to open the call up to Q&A.

(Operator Instructions)

And our first question comes from the line of Mike Roxland from Bank of America.

Thanks very much, and good luck with the transaction. Just want to get a little bit more color on how the transaction actually came about. Was Resource Management actively shopping these acres? Did you approach the company? Can you just give us a little more color on how it's actually materialized?

Yes, Michael. It's Eric Cremers.

Yes, RMS auctioned this property in the traditional two-step type of a process. They hired an investment bank on Wall Street, and solicited bids. And you had to submit your first round bid, and then you needed to clear that initial round to get on to round two. And we were successful in getting to round two, at the end of the day.

Got it. And is there something particularly appealing about, or unique to, the timberland in Alabama and Mississippi? Is there a lot of housing growth in those areas? Are there active mills that surround the new acres that require constant flow of wood?

And really, the reason I'm asking this question is that last quarter you highlighted that your Southern sawlog business in Arkansas was challenged given idled mills and relatively high inventories of deferred timber. I'm just wondering if whether those two states are somewhat immune to those issues that you're encountering in Arkansas?

Michael, we do have issues in Arkansas with trying to get mills restarted; and we are looking for demand to improve in Arkansas. The whole South been impacted by the downturn in the real estate market and the housing market. But mills are coming back up, and capacity is being expanded throughout the region.

Alabama in particular has got a robust sawlog market; and capacity there, demand there, is expected to improve. It's in our new wood basket. It's going to improve from about 36 million tons per year being consumed today. It's about 38 million tons per year over the next couple of years.

And similarly, in Mississippi, demand today is about 27 million tons per year; and that's expected to grow to 30 million tons per year. And these are from projects that have already been announced. And it's not from any one sector. It's from lumber mills, OSB mills, pellet mills. It's all across the South. Fiber is available at reasonable prices throughout the South. So I don't know if that answers your question.

No, it does. I appreciate the color there.

Two quick questions, and then I'll turn it over. On average, you paid over, as Mike mentioned, over $1,900 an acre. Is there any HBU potential associated with some of the new acreage you acquired?

Yes, absolutely. Like any large land purchase, you would expect there to be some makers that have got more value as HBU or real estate play than what the timberland is going to be worth, just from a timber management value alone. And we estimate roughly 15,000 acres of HBU in total will get sold off of these properties over the coming years. It's not going to happen all at once. It will take time; but yes, there's very clearly an HBU opportunity here.

Got you, and then last question. Can you give us a rough sense of the EBITDA per acre on the new acreage? Are we talking about something that's in line with your current $25 per acre? Pr do you think that it's somewhat higher, given the fact that you're dealing with areas that seem to be more in demand, relative to what you have in Arkansas?

That question is challenging to answer, Michael, simply because the harvest volume off of this property tremendously from year to year. The low point might be 500,000 tons per year, and the high point might be up to 2 million tons per year. So it just depends on what that harvest profile looks like. So I hate to give you EBITDA guidance, given how much variability there is in the harvest profile

Got it. Well, congrats on the transaction and good luck for the balance of the year.

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

Congratulations on the deal. Just maybe a few more questions on the deal, and then some on the markets. Is the average age class, and mix -- and I appreciate you will give us more details next quarter -- I mean, can you give a sense of how that compares to your Arkansas land?

Yes. What I would tell you is that it's a very evenly split age class, spread across the spectrum of zero to traditional maximum agents out might be 30 or 35 years. This is pretty even-aged timberland, so it's pretty straightforward from that standpoint.

As Mike indicated, it's fairly well-stocked. It's got over 10 million tons of timber on it. And it's, relatively speaking, it's traditional Southern timberland. It's about 70% pine plantation, 25% hardwood -- so nothing unusual there. And it's been very well managed, as Mike indicated, by RMS. They have chosen genetically-improved seedlings, and they've had a pretty aggressive fertilization program over the years. So it's good timberland.

Okay. And just the mix between pulpwood and sawlogs relative to your Arkansas land?

I think it's roughly half-and-half, Gail. It varies, depending upon the particular age class; but it's more or less half-and-half.

So slightly more pulpwood than what we've experienced in Arkansas.

Okay. And I guess your reference to pellets means that even though you haven't participated in pellets to date, that's something you might be able to participate on in the new land?

Yes, there is a pulp mill that's anticipated to go up in the region.

Okay. And just looking at activity in your legacy properties, I think last quarter you talked about a potential restart in Idaho, and if you could give an update there. And then maybe going into more detail on the comments you were giving to Mike, are you seeing any kind of signs of life around your property in Arkansas yet?

Yes, we are seeing mill restarts in all of our operating areas, frankly. It depends. If you look at Idaho, a mill restarted in Clarkston, which is right next to Lewiston if you know the region. That mill is now up and running, and it's consuming more or less 200,000 tons a year of sawlogs. Our largest customer in Idaho just expanded their mill in Lewiston earlier this year, and it's in the process of ramping up, consuming more logs.

Another mill that we had not mentioned previously just started up down in Emmett, Idaho, so towards the southern end of our ownership in Idaho. And it's going to consume -- I don't know -- 150,000-200,000 tons a year as well. So we are seeing activity, in particular in Idaho.

Down in Arkansas, there is no word on the cost to start up, although plywood markets remain pretty strong right now. So we are cautiously optimistic on that. And there is a mill in El Dorado that is rumored to be -- a lot of folks are kicking the tires looking at that mill, thinking about starting it back up again. And it's been down for many years. So, yes, we are seeing activity take place throughout the South and the North.

Okay. And I guess you kind of referenced underlying Southern sawlog prices still pretty lat. Are you start to see any starting any of this strength that's been in other parts of the South creep in at all, or is it really pretty much flat as a pancake?

I'm not sure we understood the very last part of the question.

Any signs of life in sawlog pricing in Arkansas or for that matter, I guess, for Mississippi and Alabama, around your new properties? Because I know it's very isolated. What trends have been there?

Certainly, in sawlog pricing in Arkansas, hardwood prices have really taken off nicely. They reached prices as high as $90 a ton here recently, which is really high for hardwood. On the Southern yellow pine side of things, things are relatively flat. But there are places throughout the South where it looks like prices have bottomed, and maybe they're coming up a buck or two. Frankly, for this acquisition, on this timberland that were making, we didn't model in an increase really for next year. Our view is, it's going to take roughly a year for markets to consolidate; and then we think we will start to see prices move higher.

Okay. And just one last question. Can you give a little bit of color on harvest breakdown that you are expecting for the fourth quarter between the South and North, and between pulpwood and sawlogs?

Yes, Gail. This is Jerry Richards. I will take that one.

The starting point, to help you, is the harvest profile of this fourth quarter actually looks quite a bit like the harvest profile, both volumes and mix. And roughly it's going to be about 60% in Idaho, 40% down in Arkansas.

Okay. And just actually one last question. That brings up one thing. Volumes were a little lighter than I was expecting in the quarter. To what extent was weather the key driver of that versus market?

Yes, Gail. We probably missed our volume targets by 100,000-150,000 tons in the quarter, and that was primarily due to wet weather down in the South. And some of that volume has now -- we'll get after that in the fourth quarter.

Okay. Thanks very much.

And now our next question comes from the line of Paul Quinn from RBC Capital Markets.

Yes, thanks very much and congratulations on the acquisition. Just a couple of questions on that. I know that RMS property comes with some timber supply obligations. Maybe you could give us some background on what those are -- the length and the percentage that is covered in terms of that harvest.

Paul, this is Eric.

There are some supply agreements that come with those properties. I won't get into the details of the supply agreements. But it's roughly 350,000 tons per year of pulpwood and roughly 50,000 tons per year of sawlogs.

For the next few years.

Yes, for the next few years. The pulpwood contract drags out farther than the sawlog contract. And all the mills that are under these contracts, we spent a lot of time looking into them. They're all first- and second-quartile mills, so they are very competitive mills.

Okay. And my understanding, that is a volume commitment. But pricing is off what?

Yes, it's off of local market data in the particular wood basket; and it's adjusted on a quarterly basis.

Okay. And just taking a look at -- I saw that timber market's price is up for Southern yellow pine sawlogs, down 0.5% quarter over quarter -- I mean, really flattish, down slightly. But it's surprising to me because we had very robust Southern yellow pine lumber prices in the quarter. How do you see that disconnect playing forward? Is that because the oversupply of logs down there?

Yes, I think that's pretty much what it is. You had so much deferred harvest in the downturn, and now you're seeing a lot of capacity come back online. If you look at eastern Alabama, the market there is pretty much fully recovered to pre-recession levels. Western Alabama is still running a little bit behind, but you're seeing capacity come back as times goes on. And ultimately, that scale is going to tip; and it'll push prices higher.

Okay. And then just one thing I couldn't understand. You described it as pretty even age management, but then the harvest being very variable from 500,000 tons to 2 million tons per year. Why is that?

It's just whatever is coming of age that particular year and whatever our price forecast is. Those are the two ingredients that go into harvest schedule model. And I can't get into the details of any particular year, but it's just what drives it.

Paul, I think at this point, we just tried to get some bookends between 500,000 tons and 1.5 million tons just to give you some scope of what it might be. I expect as we begin to manage the property and give guidance in the first-quarter call in January that we will narrow that quite a bit from where we are at today.

And then just lastly, the RMS. This timber was up for sale, very well known out there. I think RISI reported that the stuff in Alabama is probably worth $400 to $500 an acre more than Mississippi. Do you see that? Is there a difference in stocking level, growth rates in that and a more competitive timber market?

Well, the stocking level on both properties, the site index on both properties, almost all aspects of the productivity of the land is very similar in both states. And any reflection of valuation would have to do with the market more than the stocking of the timberland.

Paul, I think if you talk to consultants that cover the industry, most of them say if you're going to put up a new sawmill in the South, Mississippi is probably the go-to state in the South because of the fundamentally slightly lower sawlog prices that you find there.

So you're saying Arkansas is not the go-to state now?

Well, it's not far from --

Fair enough. Congratulations again. Best of luck.

Our next question comes from the line of Chip Dillon from Vertical Research.

Congrats on the acquisition.

When you look at the EBITDA accretive comment, I mean, I'm guessing if we apply the 3% interest rate on the incremental $384 million, we're going to get about -- if I do my math here -- about $11 million to $12 million of interest expense. I would guess for that to be accretive, you've got to get $12 million or more of EBITDA. And I just didn't know what harvest levels that would be consistent with so we can get some sensitivity about where breakeven is on a harvest basis. And look, I know prices can move around and mix. But looking at the fact that it's heavily pulpwood, what kind of harvest level would that $12 million number be consistent with?

A couple of things, Chip. It's $310 million of incremental debt, not $384 million.

Okay. Fair enough.

Just to clarify that -- we plan to use about $75 million in cash. And we're not going to give harvest level guidance until we get through our budgeting process at the start of the year. We will provide that on the first-quarter call. But I think to reiterate the point that we made, we feel this is accretive on an FAD basis. And certainly we are going to incur incremental interest expense. We think that at the end of the day, there is still cash left over to help support the dividend that we have and to grow it more over time.

Okay. And when you look at the legacy lands, do you think -- will there be any change in the way you will harvest those lands, based on this acquisition? And, maybe, is there any synergy potential? I know we don't usually look for those, especially when you're buying land that's in a new area. But could you address those points?

You know, Chip, Arkansas is really a separate wood basket entirely from Mississippi or Alabama. So our harvest scheduling that we run in that region will be independent from the work that we're doing over in Alabama and Mississippi. So it's really a separate decision.

On the second question of are there synergies, we've got a very solid leadership team down in Arkansas today. That leadership team is going to oversee these new properties. And that same southern resource manager that's our running Arkansas properties has got extensive experience, particularly in Mississippi.

And so incrementally, we only have to add a couple of people to integrate these timberlands. We know the markets; we know the customers; so I think from that standpoint, it'll be pretty straightforward

We deal with Georgia-Pacific, Weyerhaeuser, and West Fraser today in Arkansas. And those are some of the large customers that we will have Alabama and Mississippi as well.

Got you. And I know you don't typically separate your income by region. And I know you're mostly -- when I look especially at this last quarter -- but most quarters, you're overwhelmingly harvesting in Idaho. But if you took your average EBITDA per ton in Idaho, is it fair to compare how these lands might look in terms of their harvests? Or is it just too much of an apples and oranges situation in terms of looking at the profit or the EBITDA per ton?

They are dramatically different markets, Chip. As you know, the market up here in Idaho is heavily influenced by what goes on over in China. So log prices here have been bid up, and margins are strong up here in Idaho.

The South doesn't have the opportunity to get logs to China today in a meaningful way. People been experimenting with it, but not in significant volumes. So margins are significantly different in Idaho versus the South.

Okay. And I guess the last one is, it looks like you're paying about $1,900 an acre. And what is obviously a challenge for us is when IP sold these lands eight years ago, it looks like they were part of a much larger package that went for about $1,200 a ton. So it looks like there's been some appreciation, but I know I'm not looking at apples and oranges.

And I didn't know if you had any comment or knew what some of the other RMS lands were in comparison to what you're buying now.

I can't comment on that. One thing to keep in mind though, Chip, is that cap rates have dropped dramatically over that same timeframe. And the forward price curve for sawlogs is pretty robust right now.

Okay. And then this might have been in the slide, but what term of debt are you anticipating in terms of how -- I guess it's 2024 is where most of the debt is going to be coming due?

Yes, Chip I will take that. It's Jerry Richards.

So the term of the debt will range from 5 years to 10 years, and we do have a scheduling slide that lays out the maturities by year. The first three tranches starting with five year, we expect to be variable-rate and then fixed rate for the last three tranches of that debt. And of the total $310 million, about $110 million is coming due in 2024.

Okay. And it looks like, given the guidance, you have some idea of when this is going to close. Is your best guess the end of November, or do you have a point in time estimate?

Yes, it will be mid to late November, Chip. That's our guess.

All right. I hope it doesn't interfere with Thanksgiving. Thank you.

And our next question comes from the line of Mark Weintraub from Buckingham Research.

Thank you.

Some questions just also on the acquisition. First off, I guess, I recognize it could vary from 500,000 tons to 1.5 million tons in terms of the harvest. But is it fair, if we look at the 10 million tons of merchantable inventory and assume kind of 6% to 7% growth rates, that the sustainable harvest level might be in that 700,000-ton level? Is that a fair way to look at it?

Yes, that's probably a decent starting point, sure.

And then I just want to clarify. At one point, I thought you said it was about half pulpwood, half saw timber. And then there were a few other comments about it being heavily tilted to pulpwood. And then certainly you talked about the supply agreement in place, which was certainly more pulpwood at this point. Just to clarify, is it about half-and-half order of magnitude?

Well, the different regions are driven by different types of logs. Alabama is more of a pulpwood market, and Mississippi's more of a sawlog market. I think the way to think of it is, it's roughly 350,000 tons of pulpwood supply in Mississippi. And that's covered by a supply agreement. And then there's other pulpwood supply coming out of Mississippi and Alabama combined for the 350,000 -- excuse me. And roughly 50,000 tons of sawlog driven by a mill in Alabama, a customer in Alabama.

Okay. And presumably, though -- so that's 400,000 tons and so --

Total of 400,000 covered by supply agreement.

And so there's another 300,000, let's say, on average, that's not; and that's primarily saw timber?

We haven't given guidance on that, Mark. We're not going to step through the math.

Okay. I guess I'm just trying to clarify. I thought early on it you said it was roughly half-and-half pulpwood/saw timber. Did I mishear on that?

No, the inventory that were getting today is roughly half-and-half. In any given year, volume bounces around a lot.

Understood.

One year, we got 1 million tons of sawlog coming off this property. Another year we got 200,000 tons coming off this property.

Understood. That's helpful. Thank you.

And then, as I'm trying to understand a way to frame it. Is basically, at current pricing and the middle range of the harvest expectations, is it modestly FAD accretive? And then you have all this optionality to the upside from an FAD accretion perspective? Is that one way to think of it?

And then just supplemented with recognizing that it's cash that counts, but how earnings dilutive at current pricing and the same types of assumptions that you're drawing when you talk about it being FAD accretive, might it be, as we think about modeling for next year?

Mark, this is Jerry Richards.

In terms of your first question, I think you have fairly characterized when you say modestly accretive with the optionality for the upside as sawlog prices recover. I think that's fair. And then in terms of EPS dilution, there is EPS dilution primarily because we are going to mark these trees to market and depletion expense will go up. And obviously that's a non-cash expense.

But in terms of the $1.5 million I put in the script, I mean, that's for as we sit here. In terms of incremental depletion for the fourth quarter, that's probably a good starting point, in terms of getting a feel for that run rate.

Okay. That's helpful. Thank you.

(Operator Instructions)

Our next question comes from the line of Steve Chercover from D.A. Davidson.

Thanks.

Good afternoon, everyone. I'm afraid I'm going to keep on harping on the new acquisition, but we're glad to see you growing. So beyond the bolt-on opportunities in Alabama and Mississippi, are you still -- have the financial flexibility that you could do something material?

Yes, Steve, this is Jerry Richards.

Certainly when you look at our balance sheet, we have worked hard over years to delever and put ourselves in a position to do an acquisition of size; and this clearly fits that mode. Going forward, certainly when we think about financing or accommodating future acquisitions, we have flexibility and options to allow us to continue to consider transactions.

Great. And then the mix, as you said, 70% pine and 28% hardwood. Over time, do you think you can increase the mix to more pine plantation? Or is the site classed -- that 28% that is bottom lands is always going to be seeded for hardwood?

That 25% is hardwood, and it's natural pine. We will convert some of that 25%. My guess is over time, another 5% or 10% will get converted over to pine plantation.

Okay. And then switching gears, plywood remains a real bright spot in the wood products ecosystem. Do you see that being sustainable into 2015?

I just came back from the RISI Conference, Steve. And RISI spent some time talking about plywood. And, yes, I think plywood -- for a number of years, OSB was stealing share from plywood. But it now looks like the plywood market hit the bottom, and they're working their way higher again. So, yes, we're optimistic about where plywood is headed.

That's great. Since I wasn't at RISI, can you just tell me, did they give a point estimate for housing starts in 2015?

Yes, I think they're at 1.37 million. And I think they just took their number down, I saw this morning, down to 1.3 million starts for next year. They're are at the high end of housing starts expectations. But their view is that over the past couple of years, we have seen housing starts move higher, in spite of all of the excess inventory that has been out there and has been dumped on the market.

So a lot of that inventory has now cleared, and the fundamental supply and demand factors are coming into play. You don't have this excess inventory overhang. And therefore, they believe housing starts are going to move higher next year.

Sounds like kind of the carbon copy of their script from last year. Hopefully people use of grain of salt on that.

They're at the high end.

(Operator Instructions)

And we have no further questions at this time.

All right. Thank you for your interest in Potlatch. This is Jerry. I'm going to be heading back to my desk and look forward to your questions.

Thank you.

And this does conclude today's conference call. You may now disconnect.