Potlatchdeltic Corp (PCH) 2015 Q4 法說會逐字稿

Good morning. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch fourth-quarter 2015 earnings conference call.

(Operator Instructions)

I like to turn the call over to Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, please proceed.

Thank you Angie, and good morning. Welcome to Potlatch's investor call and webcast covering our fourth-quarter 2015 earnings. 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 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 at www.PotlatchCorp.com.

I'll now turn the call over to Mike for some comments, and then I'll cover our fourth-quarter results and outlook.

Thanks, Jerry, and good morning. In most respects, we are glad to put 2015 behind us. Although our resource and real estate segments performed well in 2015, the results from our wood products segment were extremely disappointing, and a major reason our stock fell 28% last year.

Lumber prices were hurt principally by a strengthening US dollar, which has gained 43% against the loonie since January of 2013. To a lesser degree, weaker demand from China and modest growth in the US housing market also put pressure on lumber prices. As a result, our average lumber price realization dropped $56 per thousand board feet, and EBITDA for the wood products segment dropped $56 million year-over-year.

We're encouraged that our wood products segment returned to positive EBITDA in the fourth quarter of 2015. Resource remains a steady contributor and a significant source of cash to support our dividend. The segment generated over $100 million of EBITDA for the second year in a row, in spite of the fact that sawlog prices remained low in the South, and rolled over slightly in the North in 2015.

Real estate also performed well in 2015. Opportunistic sales of commercial property resulted in this segment generating more cash than planned.

I'll now touch base on progress on our strategic initiatives. We successfully integrated the 200,000-acres of timberland that we acquired in Alabama and Mississippi at the end of 2014. We entered into new customer relationships and hired log and haul contractors as part of establishing a business in two new states. The new properties met our performance goals for the year, and were accretive to FAD per share.

We also completed four large capital projects, and spent a total of $18 million of capital in our wood products segment in 2015. These projects were executed well, coming in on time and under budget. We already are seeing the benefits in the form of additional production, better recovery from logs, and a higher proportion of premium lumber.

Shifting to a strategy that we discussed on last quarter's earnings call, we are actively pursuing opportunities to take advantage of the arbitrage between high private market timberland values and the steep discount at which our stock currently trades in the public equity market. Hence, we have shifted from being a buyer of timberland to a seller, with the intent of using sale proceeds, if we're successful, to repurchase our shares and reduce debt. Our built-in gains tax required by tax rules for 10 years after a REIT election expired at the end of 2015. This greatly increases our flexibility, because we can now sell timberlands out of the REIT without paying income taxes.

We believe that our leverage to lumber prices has been a key factor that has resulted in our stock trading at levels we have not seen since 2009. Our stock is currently about 40% lower than analyst estimates of NAV, or roughly $900 per acre. The recent market volatility, and the further decline in our stock price has only increased our conviction that this is an attractive strategy.

Turning to next year, we expect to generate better results than we did in 2015. For planning purposes, we anticipate US housing starts of approximately 1.2 million units in 2016. This represents an increase of a little over 10% from last year's level, and continues the trend of moderate, steady improvement.

We expect lumber prices to increase about 15% this year from their current level. This would reverse most of the price decline that occurred in 2015 and result in average annual prices being up about 5% year-over-year.

We plan to harvest approximately 4.4 million tons in 2016. This is the same volume that we actually harvested in 2015, but is down slightly in the South from what we planned last year. We believe that southern pine sawlog prices will remain flat -- remain at flat levels throughout 2016.

The Minnesota rural recreational real estate market continues to be strong. We expect to sell some conservation properties in 2016 that are dependent on government funding. As a result we anticipate the number of acres that we sell will be a bit higher than our long-term average of about 20,000 acres per year.

Our dividend is yielding about 6% at our current share price. We continue to believe that the dividend is sustainable, and our objective is to grow it over time.

I'll now turn the call back to Jerry to discuss the quarterly results, and then we'll take questions.

Thanks, Mike. Beginning with page 3 of the slides accompanying this call our net income was $3.5 million or $0.09 per diluted share in the fourth quarter. By comparison, net income was $0.53 per diluted share in the third quarter. The decline in earnings was largely due to seasonally lower harvest volumes.

I'll now review the results of our operating segments. Information for our resource segment is displayed on pages 4 through 6 of the slides. Operating income for the segment was $16.1 million, compared to $36.4 million last quarter.

We harvested 1.1 million tons in the fourth quarter which is at the low end of the range that we discussed on last quarter's earnings call, and represents a sequential decline of almost 30%. Our highest quarterly harvest volume consistently occurs in the third quarter, because of the better weather and more operating days relative to the other three quarters of the year.

As presented on slide 5, our northern sawlog prices declined $9 per ton or 10% in the fourth quarter. About 60% of the price decline was a result of seasonally heavier logs due to higher moisture content with the remainder primarily due to the effect of lower lumber prices on our index sales. As discussed in prior quarters, log prices are set on a dimensional basis in Idaho, not based on weight. For the year, our total northern harvest volumes were consistent with our 2015 plan, and were flat compared to the actual volumes harvested in 2014.

Moving to the south on slide 6, sawlog prices declined $6 per ton, or 11%. This was primarily due to a seasonal decrease in the volume of hardwood sawlogs that were harvested, which sell for higher prices than pine sawlogs. Pulpwood prices were down 4% in the fourth quarter, largely due to a seasonal decline in hardwood pulpwood harvest.

For the year, the total harvest volume in the South was 2.2 million tons, which was about 100,000 tons under our plan. Our first-quarter volume was behind plan, due to wet weather constraining logging operations. We were able to make up part of the shortfall in the second half of the year, before conditions became wet in the middle of the fourth quarter.

The results of our wood products segment are displayed on slides 7 and 8. The segment lost $1.3 million in the fourth quarter, compared to a loss of $5.4 million in the prior quarter. The sequential improvement was primarily due to lower wood costs, and higher shipments. As Mike mentioned, the segment's EBITDA was positive in the fourth quarter, which is an improvement compared to the last two quarters.

Our average lumber prices declined 6% quarter over quarter, which is a larger change than the drop in lumber prices implied by calculating the simple average of monthly random lengths framing lumber composite prices. This is primarily because we are more heavily weighted to studs than the index, and studs have been disproportionately affected by higher Eastern Canadian production.

We took seven days of market-related down time at our Gwinn, Michigan lumber mill in the fourth quarter. Log costs continued to moderate in the lake states, which helped margins. The volume of lumber shipped increased almost 10 million board feet, or 6% in the fourth quarter.

The results of our real estate segment are covered on slide 9. Operating income for the quarter was $2.5 million, compared to $4.2 million in the third quarter. While the number of acres sold in the fourth quarter were comparable to the third quarter, a larger proportion of the fourth-quarter sales mix was comprised of properties with a higher cost basis.

I will now turn to slide 10. We used the revolver to pay $22.5 million of debt that matured in December of 2015. We plan to refinance that debt, along with $5 million that matures in February, in the first quarter of 2016. Capital expenditures of $32.7 million for the year came in under the $36 million that we budgeted.

Now, I'd like to comment on our outlook. We plan to harvest 4.4 million tons in 2016, with total volumes in the North and South comparable to 2015 actual volumes. Approximately 90% of the harvest in the North and about 45% of the harvest in the South, including stumpage, are expected to be sawlogs. We expect quarterly harvest volumes to follow typical seasonal patterns.

The first quarter harvest is planned to be between 850,000 and 875,000 tons, with a bit over half of the volume in the North. The weather has been unseasonably warm in Idaho this month, which hinders our ability to haul logs out of the woods. Unless temperatures drop below freezing for an extended period of time in the near future, some of the log volume we plan to deliver in the first quarter may be deferred until later in the year.

We expect northern sawlog prices to decline 5% to 10% in the first quarter, due primarily to seasonally heavier logs, resulting from higher moisture content. We expect southern sawlog prices to decline approximately 10%, mostly due to a seasonal decline in the volume of hardwood sawlogs in the sales mix. We expect southern pulpwood prices to be flat in the first quarter. At these volumes and prices, we estimate that resource earnings in the first quarter will decline by about one-third relative to the segment's earnings in the fourth quarter of 2015.

Turning to wood products, we expect to ship approximately 165 million board feet of lumber in the first quarter. Our forecast assumes that our average lumber price realization will be approximately 5% higher in the first quarter. For that to occur, prices need to increase from the current low point, as the quarter progresses. Wood products earnings would be positive in the first quarter at this volume and price.

Shifting to Real Estate, we plan to sell between 20,000 and 25,000 acres in 2016. We expect that approximately 70% will be rural recreation, 20% HBU, and 10% non-strategic. We estimate that land basis will be between 35% and 40% of revenue for the year. In the first quarter, we expect to sell about 3,000 acres, and estimate that land basis will be at the low end of the annual range.

We expect that corporate expenses will average $9 million per quarter, and that interest expense will average a little over $8 million per quarter in 2016. Approximately one-third of our debt is exposed to changes in three-month LIBOR. We estimate an annual tax rate of 10% to 15% in 2016. Given seasonality in resource earnings, almost all of which are non-taxable, we expect the consolidated tax rate to be about 35% in each of the first two quarters, with a small tax benefit in the first quarter and tax expense in the second quarter.

We have budgeted capital expenditures of $19 million for 2016. Approximately $14 million is for logging, road construction, and reforestation costs in our resource operations. Most of the remainder is planned in our wood products business.

To summarize, we expect our earnings for 2016 to improve over last year. Given the low starting point for lumber prices, and the fact that we are in a seasonally weaker part of the year, our consolidated first-quarter results will likely be near breakeven. Earnings for each of the remaining three quarters are expected to be higher than the comparable quarters in 2015.

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

(Operator Instructions)

Your first question comes from the line of Collin Mings of Raymond James.

First question for me, just on the land sales front. Can you discuss if there are any specific packages you're planning to market, or are actively marketing right now?

Collin, are you speaking to our regular real estate business?

No, as far as speaking to the potential of looking at opportunities that you would then take the proceeds to invest in a buyback?

Okay, well, we have been in the process of evaluating land throughout the Company's portfolio, both in the South and in the West, that would be suitable and attractive to institutional investors. We still think there's a lot of institutional pension fund TIMO money on the sidelines. As we have stated on the call, we're in the middle of evaluating opportunities there, and given that it's the middle of winter, I think, coupled with the uncertainty we've seen in many of the markets and the process just takes time, so when we have something to announce, we'll do that.

Okay. Would you look to wait until you are further down the road with a larger deal, before implementing a buyback, or just given the current disconnect that you highlight, would it make sense to go ahead and put one in place even if it's just small amounts of potential share repurchases, just given that level of discount currently?

Well, from a governance standpoint, the Board, has not authorized a share repurchase yet. We would not ask them to do so until we had the proceeds in hand to support a share repurchase.

We certainly don't have any excess or surplus cash on hand today, so a strategy to repurchase shares or pay down additional debt really is hinged on asset sales, so we wouldn't want to put the cart before the horse here. I think we'll announce capital allocation plans simultaneous with an asset sale, when and if that does happen.

Okay, and then, I think you addressed this in the remarks, but just to clarify. There's not really one region where you might have a bias of completing a transaction, whether it be Idaho or the US South? It's wherever you're able to maybe generate interest at a price you think is fair?

Yes, I think that's a good summary. Certainly in the US South, there's strong institutional interest in timberland there, at values that I think continue to be quite strong. The most recent transactions that Plum Creek executed with Twin Creeks' joint venture last year points to timberland values for high-quality timberlands over $2,000 an acre, certainly lesser stocked lands would fetch a bit less. And in Idaho, although it's not as dynamic of a market, we certainly feel that our timberland there is attractive and highly valued, so we haven't constrained it to one area.

Okay, question, I guess for Jerry, just more on the capital expenditures. Is the $19 million, should we view that a true recurring CapEx number, just given it's a material step down relative to the last two years, where you had some bigger projects?

I think that's the right way to look at that. Collin $19 million probably is more of a regular run rate, and when you look at what comprises it, about $14 million to $15 million is the normal resource spend that makes up CapEx, and then we always think about wood products being in that $5 million or so range for maintenance capital.

Okay, and then as far as the debt refinancing that you're planning on Q1, can you maybe just give us some color on the size and pricing, and maybe speak to whether or not the recent downgrade and credit watch that came out of November, if any of those have impacted pricing at all?

Absolutely, Collin. So in terms of what we're planning, we had $22.5 million of debt that matured in December, and we have $5 million coming due in early February. We are actively in the process of putting permanent refinancing in place, and the amount would be $27.5 million. Just refinancing that debt that has or is maturing.

In terms of tenor, we're thinking 10 years. Have very limited maturities out in that window, and also, it's a great opportunity to take advantage of low interest rates.

In terms of a potential effect of being put on negative watch, really no effect on pricing. In fact, quite frankly, the pricing I was quoted here recently is actually down a bit from what I was quoted last fall. So in terms of that cost the existing debt's weighted average was a little over 5%, and we think net of patronage, because we're working with the farm credit system to refinance this debt, it would be under 4%.

Okay. Very helpful detail there. One last question for me, and I'll turn it over. Just curious, some of the wet weather conditions here in the South, any impact on your operations, either in the fourth quarter or into the first quarter?

Collin, it's Eric. If you look at the fourth quarter last year, that wet weather that hit us, really hit towards the back half of December, and it really hit Arkansas harder than it did Mississippi or Alabama.

So harvest volumes were a little bit impacted late in December, and that, I think Jerry addressed that in the call script. We were off a little bit in our tonnage in the South. Really haven't seen much inclement weather here in the first quarter, so things generally remain on track in the South.

Okay. Great. Thanks.

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

When you look at the guidance you gave for the log pricing, for the year 2016 in the South, you said you thought it would be roughly flat. Is that a full year look, because I know it seems like prices were at their weakest point at the fourth quarter. I didn't know if you thought they would stay at the fourth-quarter level, or maybe recover through the year, and there might be a mix issue in there as well?

Yes, Chip, it's Eric. Yes, generally, they are going to be flat year-over-year. There is a fair bit of seasonality in the South, particularly as it relates to mix impacting the third quarter, so a lot of the hardwood stands you really can't access, until you get to drier weather, and that tends to occur in the third quarter. So you'll see our prices pick up as hardwood logs, sawlogs sell for $70 to $80 a ton compared to pine at $40. So you can see meaningful changes in our reported prices just from that mix impact, but generally, pine prices are flat in the South.

Okay, and did you give us a full year guide on the northern timber price that you saw for 2016 versus 2015?

No, I don't think we did in the call script that we just went through, Chip, but they generally should be flat year-over-year.

Okay, when you call for the 5% increase in lumber, I guess that's sequential, and you're obviously expecting, the forces of normal seasonality plus any improvement in housing to offset whatever currency impact we're seeing from Canada?

Yes, I think there's a number of reasons to be optimistic about lumber pricing heading into this year, Chip. The first thing is, there's a lot of volatility at the start of the year. It kept dealers on the sidelines, so we think field inventories are at relatively low levels. That's some of the anecdotal evidence we're picking up in conversations with dealers.

The second thing is, if you look at the demand factors that are out there, we're talking about higher housing starts, we're talking about improved repair remodel markets. We're talking about non-residential construction doing well.

The only thing that's really holding back the industry is weakness in China, which ultimately is causing the Canadians to push lumber away from China, towards the US. That's the only real negative factor. But if you collectively take all those things into consideration, there's reasons to be optimistic, and we're talking about 5% improvement in pricing year-over-year, and that's right in line with where the pundits are forecasting, as well.

Got you. And if you think about Canada just real quickly, are we talking what proportionate change you think the diversion from China is. Is it maybe their share of the market goes up a few percent, or is it something more substantial than that?

I'm not sure I understand your question, Chip.

Well let's say Canada is supplying roughly 35% of our market. Do you think that goes to 50%, or does it go to 36% or 37%? Because I never saw them as massive -- exporting massive amounts to China in the first place.

Just to give you a sense of it I think last year, they shipped 10.8 million board feet to the US, and maybe prior year it was 10.2 million. So they have moved about 600 million or 700 million board feet, and all of that production has come out of China, and its now come to the US. So you can think about that incremental 600 million or 700 million board feet out of a market size of, I don't know, call it, 50 billion board feet. So it really isn't a monumental shift in market share, but that is the equivalent of four or five new lumber mills being constructed. So it's having a meaning --

Yes -- I'm sorry, go ahead.

I'm just saying that it's having a meaningful impact. Those 700 million or 800 million board feet that used to go to China that are now coming to the US, it's having a material impact.

Okay. And then if you look at your plan for the year, you mentioned the first quarter would be near breakeven. I guess with the tax benefit, that would be slightly less than zero, and then you would be looking for improvements in the subsequent three quarters. Is that consistent with, I mean, if you hit your plan as you're thinking about it, how should we think about the dividend?

In other words, I would assume you plan to keep it where it is. You might want to verify that, but how much off of that plan would it need to come off before you would consider reducing it? Of course it could go ahead of your plan and you might raise it, but let's think about you reducing it, and are there other levers you might pull to keep the dividend, or would you be willing to pull, maybe upping the real estate sales slightly?

Well Chip, this is Mike. Just to set some parameters, in 2015, we paid $61 million in dividends, and we think about our funds available for distribution after adjusting for the one-time discretionary capital investments that we made in wood products. Our FAD was about $56 million, so basically, we're distributing about 100% of dividend of our FAD.

We think that will improve a little bit this year. Certainly the CapEx spending in our wood products group area is way down. We don't have any plans to decrease the dividend, or to increase it at this point in time. The Board typically evaluates that in the fourth quarter, and they held the dividend flat in the fourth quarter of 2015 at our last meeting. And certainly, it's gotten tighter, but I feel pretty confident about it.

We think business is going to continue to pick up. Our long-term outlook for the rise in southern log prices, we still think while it keeps getting, the can keeps getting kicked down the road a little bit, we still think southern log prices will rise over time. Our wood products business we think will get back to more mid cycle earnings than the level that we had in 2015, so we feel quite good about the dividend, and certainly, we've got real estate assets that we can either accelerate if we need to, but I feel good about the normal run rate we're on.

Got you, thank you.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

I guess first question I had, if you think about the North versus South, I think you guided timber prices to be flat for both regions. Which of the two would you see as perhaps having more upside or downside risk over the course of the year? And to the extent that you can answer that question, what would be the drivers of that upside or downside risk?

I'll take a stab at it and Eric or Jerry can jump in. But I think the volatility in pricing probably is more likely to occur in the North, where we, as you recall, we index a portion of our log sales to customers to the price of lumber. So to the degree we get a positive upside surprise in lumber prices, that should drift over to the log side of the ledger. I'd look for any upside to really come from that. I don't think we feel like there's much downside risk. Lumber prices we don't feel like are going to fall, so the floor is pretty well set. But we're hopeful we'll see some upside. Eric?

The only thing I'd add is, in the South, George, the industry has been through some really tough times over the past four or five years. And across the entire South, you've not seen southern yellow pine sawlog prices drop below $40 a ton on a delivered basis. So clearly the worst of times are behind us in the South, there's stability there. And if anything, there's probably upside in the South as demand continues to improve.

Eric, just taking that one for a minute, and I hear what you're saying, and I'm sure it's the most likely scenario. But could you see a scenario where you've had four or five years where there hasn't been much appreciation, and your timber owners progressively get more frustrated, and just say, you know what? I need to monetize that timber for whatever reason. Realizing we aren't in the middle of a credit crisis per se, where people would need to raise funds, but do you see that as perhaps a scenario where really you'd see that as a low probability that people would just get frustrated, to monetize the timber now, despite the fact you haven't had much of an uplift?

George, I think most people think of the timber asset class as a very long-term investment, and they don't make very short-term decisions on such a long-term asset. So I frankly don't see that. Most people talk about, as we get into higher levels of lumber demand in North America, more and more of that demand has got to come from the South. That's really the only wood basket that can support it, so I really don't see a scenario where lumber log prices could move lower.

Look, I appreciate the answer. Obviously, timber isn't a short-term asset, but four to five years is four to five years. But we'll leave it there.

When we think about the wood products business, you mentioned housing starts, obviously everyone is forecasting 1.2 million starts or higher, or most everyone is. Repair remodel should be growing, I want to come back to that in a minute. Why do you think distributors are keeping their inventory so low to start the year, if in fact that's your view?

Well they generally tend to run their inventories down towards the end of the year. A lot of them pay taxes on the amount of inventory they have at the end of the year, so they just naturally run them down at the end of the year. When you get into January and February, what happened this year, all this market volatility, low oil prices, concerns about debt levels in China, stock market selling off 10% 11%, a lot of Fed talk about raising rates, that scares people. And so they hold off on buying inventory.

Meanwhile, construction continues to happen. So those inventory levels get pulled down. Now, as you get into February and as you get into March, people start thinking about the coming building season, and they start thinking about those higher levels of housing starts, which the folks that we talk to say, building activity continues pretty robustly. It just naturally, you're going to see demand pick back up again, and that ought to pick prices back up again.

And obviously, the inventories get run down in the fourth quarter, but early in the year, that's what I was getting at. So you think it's basically a feedback effect from what we've seen thus far, in terms of what it might mean for demand levels down the road, which is keeping inventories relatively low at the distributor level. You'd agree with that?

Yes.

Now are you seeing any signs thus far of lumber prices picking up, which they should be? And then if you could give us some view on what you think repair remodel and non-res construction, not that non-res is huge for lumber, what you think those growth rates are going to be this year?

Yes, so I would say, we haven't seen a pick up in pricing yet. It's still too early in the year, George. I wouldn't expect to see it, frankly, until you get out into maybe mid-February. It's not like you can pinpoint one day and say, okay, this is the day that price has turned. So far, no, we have not seen prices turn.

As it relates to the growth in market segments, yes, I think repair-remodel that continues pretty nicely. Home equity levels are pretty high in the US, right now. People have recovered from the housing crisis that we had a few years ago, so people are willing to invest in their houses, and so repair-remodel markets should be up 6% to 8% this year. If you take a look at non-residential construction, the latest forecast I have got is that non-residential construction should be up 5% to 7% this year over last year.

The only segment that's really holding things back is industrial production. The strong US dollar is crimping demand in that segment, but still, markets should be up for lumber, about 1% in 2016.

Okay, I appreciate the rundown. I'll turn it over.

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

Was hoping, if possible, to get a little bit more color on what you are seeing in the timberlands market. I realize it's a little sensitive, given that you're potentially going to market yourselves with some acreage, but just generally speaking, there just doesn't seem to be a whole lot of liquidity of late when it comes to the types of private transactions that we had been seeing previously, but maybe that's not right. So if there's any color you could provide, that would be helpful.

Well Mark the higher-profile transactions that have occurred have been for, what I would think of as not typical timberland assets. The Foley transaction in North Florida was not a classic timberland package. The Campbell sale that happened in Louisiana last fall had a lot of impairments around it, with leased acres, that wasn't really a typical classic one.

I think the best examples of clean transactions have been the Plum Creek Twin Creeks joint venture announcement that was in the fall of 2015. I think that was probably the cleanest timberland deal that was out there, although it hasn't closed yet. Those prices were around $2,100 an acre.

And there's been several smaller transactions that I think have been indicative, but I'd agree with you, it's not been as robust as maybe it was a couple of years ago, but I think having said that and our discussions with TIMOs in particular, I think there's still a fair amount of money that's been allocated to the asset class, and people are looking for good assets to purchase.

Is there any way you can give us a little sense of timing expectations, as you go through the process of trying to identify timberland sales opportunities?

Well, we've had our eye on this strategy for a couple quarters now, and we said in the past that we weren't going to execute on anything until we got past this built-in gains window on the REIT conversion, which happened in January of this year. So we're certainly past that and we're actively working on a strategy, but given the volatility in the markets, and everything that's going on we're reluctant to give you a point forecast on a time. Rest assured we're working on it. That's as far as we can go.

Appreciate it, thank you.

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

Mike, as I recall back in the great recession, I think, once as you said a timber REIT becomes uneconomic if it approaches a million acres in size. So should we infer that you could sell up to 600,000 acres over the next several years?

Well you've got I don't recall that conversation, but we may have talked about that. I think certainly, Catchmark is an example of a timber REIT that's only got 400,000 acres, and certainly it's got a market cap and a trading level that seems adequate to exist. I'm not sure that, I think you have to be cautious of the amount of public company overhead that can come down on any public company, and that certainly is something we're mindful of. But we haven't targeted a specific amount of acreage for sale, other than the last earnings call, we spoke to the fact we would execute a strategy and hope to purchase between 5% and 10% of our outstanding shares, which puts that into that $100 million zip code for round figures.

Sure, but I mean, if the arbitrage opportunity persists, then is it logical that ultimately you sell the whole thing? I'm not trying to put you for sale, but--

Well, let us execute on the strategy and see what happens. We're hopeful that obviously, the stock price recovers closer to net asset value, and we don't have to go down that path, but we'll take it a step at a time. We've said for a long time that we'll do anything, including selling the whole Company, if that's the best thing for investors, and this is one small step in that direction.

Sure, well we don't want to lose companies. We're already losing some. So with respect to NAV, since you brought it up, you indicated -- hopefully my short-term memory is not that bad, that you're about 40% below the analysts' estimate of NAV. Do you think that those estimates are reasonable?

I think that Jerry can chime in. He probably works on it closer than I do. I think you and other analysts continue to tweak those a little bit, up and down. I don't think any of the timber REITs have traded up to NAV on a daily basis, but I think the Plum Creek transaction with Weyerhaeuser is a great example, where Weyerhaeuser transacted an offer for Plum Creek that I think was probably about its NAV, so I think we feel pretty good about them.

I think the only thing I would add, Steve, is we certainly have our own view internally. We don't share that publicly, but we have very detailed and the best information to run a very detailed discount cash flow analyses, to have a point of reference. And I'm not looking to pat folks on the back, but we do think that even though the approaches are very simplified, that you guys do good work at the end of the day.

Thank you. And then final question, I think we were supposed to be near the point where the beetle kill in British Columbia was going to constrain lumber shipments, and that's part of the reason why Canada cultivated China, was because the quality was going down. But do you have a sense that things are getting tight there, and with a couple hundred thousand more starts in the US, we might actually be at an inflection point?

Yes, Steve, this is Eric. Some of the things we're starting to hear and see in British Columbia would suggest we're at peak number at this point for BC. Now, you have seen the higher levels of production come out of the Eastern provinces of Canada, and there is no doubt that this strong US dollar is influencing some of that production. But to answer your question, yes, we do think BC is topping out.

Every year we see mill closures announced in BC, one or two, and that keeps continuing.

I appreciate you answering my questions. Thank you.

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

Just a question, just on lumber markets. If I could get an idea of sourcing a difference in pricing, especially in the US South between 2x4s, and 2x8s, 2x10s. And 2x4 pricing seems to be very robust. Just wondering what your mix is on your southern mill, and then, how do you describe the reason for the uptick in price on 2x4s?

It's a tough one to get your arms around, Paul, but I'd say our 2x4 production out of our southern mill is in the 5% to 10% range. It is a mill designed more for wider dimensions, but that said, we do have, like I said, 5% to 10% of 2x4. As to why we're seeing 2x4 price spikes, it could be one of a number of different reasons, but a lot of 2x4 lumber goes into trusses, and for a lot of markets, the truss manufactures will tend to prefer to stick with one type of species.

You won't see substitution. So SPF for example, will have a hard time competing with southern yellow pine in that truss manufacturing. So as those truss manufactures look to buy wood, they don't think of SPF being a substitute for southern yellow pine for those trusses, so that will tend to support southern yellow pine 2x4 pricing.

Okay, and do you have the ability to be able to take a 2x8 and split it into 2x4s, or does that just not exist at your facility?

Well, we have the ability to do it, Paul, but the challenge, especially in southern pine, especially with the larger log size that we run at our facility is knot size. You end up with a knot that's suitable for 2x8, and you go to split it, and you end up with a number four 2x4, because the knots are too big.

Very good point. And then just on your strategic plan to maybe look to monetize some timberland. Is there, do you see a bigger disconnect in the US South versus market values? And what you attribute to the market determining your values of your timberland assets, or is it more homogeneous between both areas?

I'm not sure I really understand the question exactly.

Sorry. Let me try it again. Do you see a bigger disconnect between where you think timberland values should be in the South, or in the North?

We haven't, as a Company, transacted very much in the North. Certainly we haven't sold much timberland in Idaho in quite some time, and what we have sold in the past has been fairly small amounts, and there aren't very many other transactions in Idaho that we would consider representative. So I feel like there's probably less known about the North.

I think Southern values, depending on the quality of the timberland consistently are between $1,600 or $1,700 an acre, and $2,100 or $2,200 an acre, all depending on stocking. So there's pretty good book ends in the South. There's a little bit less of book ends around the northern property. The northern property, at least certainly in our case, can be quite different.

We've got northern Idaho timberland that is very well stocked and highly productive, and we've got timberland in central Idaho down near McCall, which we purchased in 2007 for more of a real estate investment then a timber investment, and the stocking levels there are substantially lower. And so from a timberland standpoint, central Idaho is not worth as much as northern Idaho. So it depends on stocking levels and where you're at.

So does that suggest because of the number of transactions we've seen in the US South, that if you were to monetize some of your timberland to take advantage of this arbitrage, that more of the proportion would be in the North to realize that difference?

No, I don't think it suggests that. I think our arbitrage opportunity really comes from the fact that I think the stock is trading around $900 an acre for the Company, and we think southern timberland is worth, as I said, $1,700 to $2,000 an acre, and our northern Idaho timberland we think is worth $2,000 an acre. So there is the arbitrage opportunity.

Fair enough. And just on southern yellow pine log prices, which seem to be pretty much flat for the last two years. And everybody is anticipating a pull up at some point. What is it really going to take in your mind? Are you seeing any signs in terms of regional mix that suggest that prices should be moving up in 2016 or 2017?

It's a difficult question to answer, Paul. This is all about supply and demand in an individual wood basket. Certainly, if you look across the US South, you have seen increases in pulpwood pricing as a result of all of the mills that have gone and particularly pellet mills, consuming pulpwood.

So there is clearly a supply/demand response from the marketplace, and thus far, we've started to see increased capacity in lumber mills in the US South, in our own three wood baskets in the South. Gosh, there's an estimated 3.5 million tons of capacity that's coming in over the next couple years. So at some point, that incremental demand will cause prices to move higher, and exactly when that happens, it's up for debate.

Okay, great. That's all I had. Best of luck. Thanks.

You have a follow-up question from the line of George Staphos, Bank of America Merrill Lynch.

A quick one, to the extent that you can comment. If we held wood prices constant from where they were at right now, would you have a view in terms of what rough EBIT or EBITDA range you'd have within the wood products segment? Then, maybe related question, maybe it's an easier one for you to answer, if you could just remind us, or remind me what the return on the capital projects is expected to be, in terms of 2016? Thanks very much, and good luck in the quarter.

Yes, so George, it's Eric. So the four projects we completed last year, the four large projects, each were roughly $4 million to $5 million in size. Each of these projects had a return of between 20% and 25%. Those are IRRs.

We have done post project reviews, early post project reviews on a couple of them, and in fact, we are getting those expected returns. So we feel our capital was well spent. This coming year, we only have one large project. It's at our southern mill, and it's a log bucking optimization project, and it's a couple million dollars, and it too carries a return of between 20% and 25%. So we're constantly on the lookout for those high return projects that make sense for us, regardless of the lumber market environment that we find ourselves in.

So as a starting point then, should we be assuming that again, holding product pricing constant, and assuming no change for that matter in fiber, that you're looking at maybe a $5 million to $6 million improvement in EBIT and EBITDA year on year?

Yes, so I think that's a fair way to characterize it, George.

Okay thanks very much. Appreciate the help.

Your next follow-up question comes from the line of Collin Mings of Raymond James.

Wanted to go really quickly back to Mark's question. I'm curious how do you think about the risk that timberland values actually fall over the next few years, just given where sawlog pricing is. It really hasn't moved up as people maybe would have underwritten it two or three years ago. So just wanted your thoughts on that, as far as underlying asset value.

Are you speaking to the South, Collin, southern timberland values?

Yes.

Collin, I don't think there's a lot of risk in those prices coming down. Timberland provides nice cash on cash return, and certainly, you're seeing large pension funds, go take a look at the Twin Creeks joint venture. They're taking a sizeable amount of money and they're sticking it in a relatively low return investment. But why are they doing that, because it provides a very nice stable cash-on-cash return. So I don't think in this uncertain economic environment, there's a lot of downside risk.

Okay, thanks.

Ladies and gentlemen, we've reached the allotted time for questions. I will now turn the call back to management for any additional or closing remarks.

Thank you, Angie and thanks to all of you for your interest in Potlatch. I'm available the rest of the day to answer your detailed questions.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.