Feb 6, 2008
Executives
Michael J. Covey – Chairman of the Board, President & Chief Executive Officer Eric J.
Cremers – Chief Financial Officer, Vice President Finance
Analysts
Gail Glazerman – UBS Mark Weintraub - Buckingham Research Steven Chercover – D.A. Davidson & Co.
Peter Ruschmeir – Lehman Brothers
Operator
My name is Francis and I’ll be your coordinator for today. At this time all participants are in listen only mode.
We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today’s call, Mr. Eric Cremers, Chief Financial Officer.
Please proceed.
Eric J. Cremers
Good morning. This is Erick Cremers Chief Financial Officer for the company and joining me this morning by phone is Mike Covey, our Chairman and CEO.
And following my remarks on the quarter Mike will provide comments on our 2008 outlook. Before we begin let me remind you that this call may contain forward-looking statements within the meaning of the US Securities laws.
These statements include statements about the company’s future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the company undertakes no duty to update them.
Although these statements reflect management’s expectations today they’re subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call.
For a discussion of certain factors that may cause actual results to differ from the results anticipated please refer to Potlatch’s recent filings with the SEC. Also please note the segment information as well as a reconciliation of Non-GAAP measures can be found on our website www.Potlatch.com as part of the web-cast for this call.
I would now like to discuss our fourth quarter results. We reported fourth quarter 2007 net income of $11.2 million or $0.28 per fully diluted share as can be seen on page 3 of the slide accompanying this presentation.
This compares to net income of $41 million or $1.04 per fully diluted share in the third quarter 2007 and $45.3 million or $1.16 per fully diluted share in the fourth quarter of last year. It is important to note that our fourth quarter 2006 net income included two non-recurring items.
First we had $39.3 million of non-recurring pre-tax income or $24 million after tax from the settlement of the Canadian Softwood Lumber trade dispute. Second, we had a $3.9 million increase in our tax provision resulting from a transfer of assets from the REIT to the TRS.
Netting out the two non-recurring items fourth quarter 2006 net income was $25.2 million or $0.65 per share. From this point forward in this discussion when I refer to recurring earnings it will be without one time items such as the Canadian Lumber settlement.
I’d now like to focus on our fourth quarter results broken down by segment. Our resource segment results for the fourth quarter were below both the third quarter of 2007 and the fourth quarter of 2006.
Operating income in the fourth quarter of 2007 totaled $10.6 million compared to $38.2 million in the third quarter and $22 million in the fourth quarter of last year. Lower fee volume was the primary contributor to the negative comparisons.
With fee volume down 14% in the Northern region and down 12% in the Southern region versus the fourth quarter of 2006. Compared to the third quarter 2007 volume was down 34% in the Northern region and down 40% in the Southern region.
Pricing has been relatively stable. On a sequential basis pricing was down 7% in the Northern region but down just 2% in the Southern region.
Compared to the fourth quarter 2006 pricing was down 1% in the Northern region but was up 26% in the Southern region due to the strong Hopewood market. As our recent results suggest and as Mike will discuss in a minute, we have yet to see material weakness in log pricing despite the weak housing market.
Now let me comment on why we reduced our fee harvest volume in the fourth quarter 2007, specifically in December. We chose to curtail harvest and differ deliveries primarily for three reasons.
First log inventories at our own mills were high and we saw no reason to tie up additional working capital at year end. Harvesting conditions have been ideal throughout the third quarter as well as in October and November resulting in log sales and deliveries that were well ahead of schedule.
Second many of our resource customers were planning reduced operating hours through the holidays and they welcomed the opportunity to defer deliveries into the first quarter of 2008. We did not curtail harvesting due to weak pricing but the slow down certainly helped ease pressure on log prices as we negotiated first quarter pricing.
Finally going into the fourth quarter our RET net income was running well ahead of our plan distributions for the year due to our exceptionally strong harvest levels in the third quarter. So rather than pay excise taxes on undistributed RET net income we elected to defer some volume into 2008.
We think it’s important for investors and analysts to compare full year 2007 harvest volumes to full year 2006 harvest volumes to get an accurate view of our planned harvest level growth. Quite simply comparing quarterly volumes can be very misleading.
Comparing full year 2007 with full year 2006 total Potlatch fee volume was up 20% with fee volume up 7% in the Northern region and 47% in the Southern region. Adjusting for the impact of the 200,000 tons we deferred in the Southern region in 2006 but harvested in 2007, fee volume growth was still a robust 7%.
As Mike will discuss in a minute, this total company year-over-year increase in the harvest level is consistent with out long term view of anticipated harvest growth. Our real estate segment closed sales totaling nearly 7,000 acres for $11.8 million during the fourth quarter of 2007 resulting in operating earnings of $7.9 million.
These land sales consisted primarily of rural recreational land located in all three regions, Arkansas, the lake states Minnesota and Wisconsin and Northern Idaho. The $7.9 million in operating earnings compares to operating earnings of $2.4 million in the third quarter 2007 and $9.1 million in last year’s fourth quarter.
Last year’s fourth quarter included nearly $7 million from a conservation easement sale. Importantly we set a goal at the start of the year to sell at least 15,000 acres in 2007 and we’re proud to announce we hit that goal by selling over 16,000 acres.
Further and as Mike will discuss later we are optimistic about the outlook for our real estate program in 2008. Our wood products business had a disappointing fourth quarter due to poor lumber pricing and lower shipments as well as market related down time at our two southern mills.
Wood products had an operating loss of $9.1 million in the fourth quarter of 2007 below the $2.4 million of operating income in the third quarter of this year and below the $5.7 million operating loss in the fourth quarter of 2006. The decline in sequential performance was primarily due to low lumber prices, the decline in shipments and the cost related to taking down time at our two southern lumber mills.
The pulp and paper board segments had operating earnings of $15.7 million during the fourth quarter of 2007 versus $17.6 million during the third quarter and $9.2 million during the fourth quarter of 2006. Our earnings declined sequentially due to major maintenance costs at our two mills during the fourth quarter which amounted to $3 million.
As you are aware in prior years we accrued major maintenance costs over the course of the year which had the effect of leveling quarterly earnings. We no longer accrue for these costs and now simply expense them when incurred.
In 2008 we anticipate major maintenance in the third and fourth quarters at our two mills and they are forecast to cost $15 million and $3 million respectively. So in total our major maintenance costs at our two pulp and paper board mills are forecast to increase from $11 million in 2007 to $18 million in 2008.
Our pulp and paper board segment continues to perform very well due to excellent production volumes and a very favorable pricing environment. Consumer products reported fourth quarter 2007 operating income of $5.2 million versus $5.1 million last quarter and $7.2 million in last year’s fourth quarter.
In many respects our consumer segment had an exceptional quarter. With record production and finished goods sales volumes.
Further this segment has been successfully undergoing a product mix shift away from relatively low margin parent roll sales towards higher margin finished goods sales and I’m happy to report that in the fourth quarter we were successful and that we had no parent roll sales. Importantly our finished goods sales tonnage increased approximately 3% sequentially and increased 12% versus the fourth quarter of last year.
The slippage in earnings compared to prior year was largely due to high pulp and energy cost. Comparing fourth quarter of 2007 to the fourth quarter of 2006, higher pulp cost negatively impacted operating earnings by $2.6 million and higher energy costs negatively impacted earnings by $2.3 million.
As Mike will discuss shortly we expect higher operating earnings from our consumer segment in 2008 due to price increases we have recently announced. Eliminations had a $1.3 million negative impact on operating income during the fourth quarter of 2007 compared to a negative impact of $8.5 million last quarter and a positive impact of $1.1 million in last year’s fourth quarter.
The main driver for the negative elimination entry in the fourth quarter was a result of higher cedar and pulpwood log inventory’s which also resulted in a negative LIBO adjustment. Corporate administration including interest expense totaled $22.2 million for the quarter compared to $18.6 million in the third quarter and $17.6 million in last year’s fourth quarter.
Interest expense totaled $8.4 million in the fourth quarter of 2007 compared to $7.4 million in the third quarter and $7.2 million in last year’s fourth quarter. Two comments as to why our administration costs were relatively high in the fourth quarter.
First our interest expense has increased as we took on debt to pay for the Central Idaho acquisition. And having now closed on the second phase of the acquisition, we currently have roughly $158 million of our revolver being utilized.
Second, we had several one time costs in the fourth quarter totaling roughly $4 million. I won’t get into the detail on all of those one time expense items but they include things like re-location of approximately 20 employees from our Lewiston mill to our corporate headquarters in Spokane as well as significant litigation expense related to a OSB anti-trust law suit which will be coming to trial in mid 2008.
Some of these expenses are expected to spill over into early 2008 but then should begin to diminish. Note that we had a $4.7 million tax benefit in the fourth quarter of 2007 which came as a result of lower earnings in our taxable RET subsidiary than we had been accruing for primarily due to higher corporate expense coupled with poor results from our wood products segment.
Recurring EVADA totaled $35.4 million in the fourth quarter versus $65.8 million in the third quarter and $52.5 million in last year’s fourth quarter. Funds from continuing operations or FFO for the quarter totaled $31.7 million versus $62 million sequentially and $47.6 million a year ago.
As we announced on December 7th, we increased our quarterly distribution 4.1% to $0.51 per share per quarter up from $0.49. As a result we paid a normal distribution of $20 million during the fourth quarter.
It’s important to note that we increased the distribution because we believed and continued to believe that the long term sustainable cash flow from the company can readily support the increased distribution. Given our outlook for increased harvest volumes going forward we are optimistic about continued measured increases in the dividend.
Pages 5,6 and 7 provide additional detail by segment for the variances I have described. Despite having just completed the $215 million Central Idaho acquisition utilizing debt and available cash on hand our balance sheet is in great shape.
Net debt to capital at the end of the year was just 42% and if we include the debt from the second phase of the central Idaho acquisition on our year end 2007 balance sheet, debt to capital still is just 44%. I would now like to turn the discussion over to Mike to provide some additional comments about our outlook for 2008.
Michael J. Covey
Looking ahead to 2008 we expect improvement in cash flow from three of our five core businesses and I will briefly describe our outlook for each of them beginning with our resource segment. As we’ve discussed the driver behind cash flow generation in our timber business is harvest volume and quality.
As Eric indicated our year-over-year harvest increase in 2007 was 643,000 tons or 20%. Again in 2008 we are planning to increase harvest levels by 300,000 to 500,000 tons or an additional 8 to 13% over 2007.
This increase is driven by three factors, first as Eric mentioned we deferred volume in December which we anticipate harvesting in 2008. Second, we completed two acquisitions in 2007 which added more volume in our Northern region and finally we have planned harvest increases in our Southern region where we believe the optimum harvest stage can be reduced from forest stands in their mid to late 30 year old age class to mid to late 20 year old age class.
These steps maximize net present value and result in increased harvest for the next several years. Now an important caveat about our planned harvest activity, if the continued weakness in housing starts and weak lumber pricing results in a significant deterioration in log prices we will defer a portion of our planned harvest volume into 2009 or beyond.
As Eric discussed log pricing has slipped 2% to 7% since mid 2007. Depending on supply and demand in each region, we anticipate an additional 9% erosion in log pricing in our 2008 budget.
However, this amount is not significant enough to stall or defer planned harvest of over mature trees in Idaho or Arkansas. If we see prices fall more than what we’ve anticipated we will consider harvest deferrals beginning in the second half of 2008.
We have completed the sale of all of our first quarter 2008 volume at pricing levels that were in line with our expectations. Second quarter is seasonally our lowest harvest period due to the spring thaw so we will evaluate our second half harvest plans in late spring.
In total we expect our 2008 resource segment performance to be in line with our 2007 results with most of the plan volume increase being offset by price erosion. In our wood products business we generated 2007 operating income of $1.9 million which was slightly better than our 2006 results when putting aside the $39.3 million Canadian settlement we received in the fourth quarter of 2006.
We are fortunate to have Mitch Marketson, Cedar Lumber and Industrial Plywood which has been somewhat insulated from the housing market down turn. We expect these product lines to be strong again in 2008 however, the capacity over hang in North American lumber production will likely hold pricing down for most of 2008.
We do not expect material improvement in our wood products business in 2008. We have three businesses that we expect will generate higher cash flow in 2008, our real estate segment, consumer products and pulp and paper board.
In 2008 we plan to increase the number of acres sold 20% to 30% from the 16,000 acres we sold in 2007. As we discussed in December 2006 we identified about 18% of our ownership at the time, or 250,000 acres that would be sold over the next decade.
With our two acquisitions in 2007 the pool of land identified as non-strategic for sale will grow. We completed about 140 real estate transactions in 2007 at an average price breaker of nearly $1,500.
This year we expect a greater mix of higher value HPU versus non-core lands and therefore are expected price breaker in 2008 should be 25% to 30% higher. Our real estate revenues are forecast to increase over 50% in 2008 as a result of increased acres sold combined with higher price breakers.
As in 2007 we expect this to be a lumpy business with 30% to 40% of the sales closing in the first half of the year. We have not seen a decline in demand or price for the typical rural recreational parcel that we plan to sell in 2008.
As we approach late spring and summer which is our most active period for perspective buyers we will have a better gauge of price trends and demands. 2007 was an exceptional year for our pulp and paper board business, returned $44 million in operating income in 2007 compared to $24 million in 2006.
We benefited from strong pricing and outstanding improvement in our operating results in both our Arkansas and Idaho mills. Regarding our outlook for 2008 for pulp and paper board the industry continues to operate at high capacity utilization levels and thus we expect continued improvement primarily due to announced pricing increases but also anticipate continued production increases of nearly 2%.
Sales realizations are forecast to improve $16 million or 2% Regarding our outlook for 2008 for pulp and paper board the industry continues to operate at high capacity utilization levels and thus we expect continued improvement primarily due to announced pricing increases but also anticipate continued production increases of nearly 2%. Sales realizations are forecast to improve $16 million or 2% due to price increases that have already been negotiated and are in the process of being implemented as well as continued paper board mix improvements.
Although we expect higher wood costs at our Idaho mills due to the decreased output of wood chips from area saw mills these should be more than offset by improvements in yield and paper board price increases. In late 2007 we completed a chip screening capital project in Idaho at a cost of almost $3 million which will allow us to shift more saw dust and pin chips into our M&D digesters reducing our raw material cost while improving pulp yield and production.
By nearly every measure our consumer products business improved in 2007. We achieved record sales of $25.8 million cases of finished goods with a net selling price of $2,348 per ton which was also a record.
Our four tissue machines which included our tad machine in Las Vegas also achieved record output of 213,000 tons. However, much of this was overshadowed by the rise in pulp cost which Eric already addressed.
We have announced price increases of 4% to 7% on selective products effective April 7th. We are expecting additional increases in pulp costs in 2008 but these costs should be more than offset by the price increases mentioned above resulting in stronger financial results in 2008.
Capital spending for the company excluding acquisitions is expected to be $50 to $60 million in 2008 with $11 million of that earmarked for our resource segment which is primarily for our reforestation cost. The remainder is dedicated to our TRS businesses, mostly to improve productivity, reduce cost and improve quality.
In summary we had strong performance in 2007 and our optimistic about 2008. Excluding non-recurring items operating earnings from continuing operations before taxes in 2007 were $87 million up from $69 million in 2006.
Our resource and real estate business generated $115 million in EVIDA for the year which was an 8% increase over 2006. We expect combined cash flow from these two business segments to improve again in 2008.
We generated $173 million in funds from continuing operations compared to $155 million in 2006 and after completing our second year structured as a RET I believe our model for delivering value is working well. In December we raised our dividend by 4.1% to $2.04 per share per year.
An amount that we feel is sustainable and fully supported by our resource and real estate businesses. We grew our land base through acquisitions by 18% in 2007 and expect additional increases in our harvest levels.
We believe our RET structure provides investors with liquidity in a tax efficient way to invest in the timber asset class. Before we take questions I want to mention that Eric and I are both dialing into this investor call from different locations due to travel schedules so we will do our best to coordinate answers to your questions.
Francis will now begin the Q&A session please.
Operator
(Operator Instructions) Your first question comes from the line of Gail Glazerman with UBS. Please proceed.
Gail Glazerman – UBS
You gave very clear guidance on why you see your harvest picking up and what’s been going on but I’m just wondering if you could go into any detail. Are there any particular market regions that are giving you concern where you are seeing kind of, more weakness than you might have expected?
Michael J. Covey
Not really. We don’t have any exposure to the West Coast Oregon, Washington timberlands where I think there’s been a larger decline in log pricing.
In the inland markets in Idaho I think there’s a lot of installed capacity and I think markets are behaving about as we expected. If we have a surprise it’s probably on the upside, the pulp wood market in the south has been very very good and has helped our results there significantly.
So there’s no place that gives us a particular concern now. As I mentioned when we finished the traditional spring break-up period at least in the west and I get through the rainy spring in Arkansas, we’ll reevaluate where we’re at and talk about that in June.
Gail Glazerman – UBS
Okay and also can you just talk in a little more detail about your pulp volume in the fourth quarter and I guess how sustainable that is moving into 2008? It does seem particularly strong.
I mean I know you’ve been raising it but it was almost 30,000 tons.
Michael J. Covey
Well I think there’s a couple of things there to speak to, the acreage base is growing and that supports more pulpwood harvest particularly.
Gail Glazerman – UBS
I’m sorry I’m talking about actual pulp sales, not pulpwood.
Michael J. Covey
Okay I’m sorry so go, so rephrase your question if you would then please.
Gail Glazerman – UBS
Your volumes were very strong in the fourth quarter almost 30,000 tons and I’m just wondering how sustainable that is moving into 2008. What type of rate should we be looking at specifically for pulp sales?
Michael J. Covey
I think we’ll have to get back to you or do some research on the sustainable rate and if we want to give some guidance on that. But obviously with pulp prices as strong as they are we have tried to maximize the through put of our pulp dryer in Lewiston, Idaho where that’s the only place that we sell market pulp.
So it’s in our, obviously in our interest, we have a good margin to sell as much as we can and increase the output of the mill. But 30,000 tons in the quarter sounds like a little bit above where our annual expectations would be going forward.
We’ll look into that.
Gail Glazerman – UBS
Okay and on the consumer tissue side I guess your increase isn’t until April but I believe some of your larger competitors have actually gone out more for February and I’m just wondering if you have any read in the market on how that initiative is being expected and how the market is responding?
Michael J. Covey
I really don’t at this point. I don’t have any feedback to offer there.
Gail Glazerman – UBS
Okay and just finally last question, you made some healthy acquisitions in 2007 I’m just wondering what the markets look like? Are you seeing any kind of better opportunities for acquisitions moving into 2008 given the uncertainty related to housing or not really, it’s still a pretty tough competitive market?
Michael J. Covey
By all indications from publicly reported transactions it still remains very competitive and we certainly have not seen any evidence from transactions that we’ve looked at that have been publicly reported that the price of timber land is dropping due to the weakness in the housing market so we expect landscape to be very similar in 2008 to what it was in 2007.
Operator
Your next question comes from the line of George Staphos from Banc of America Securities. Please proceed.
George Staphos – Banc of America Securities
Question on maintenance spending, you noted that I think this year will up something like $7 or $8 million bucks from the 2007 level. You might have mentioned it but I missed it if you did, what are the reasons for that large ramp up this year on a relative basis and where might you be putting some of your maintenance dollars?
And then similarly within the TRS businesses where is some of that cap ex going?
Michael J. Covey
Eric do you want to address that?
Eric J. Cremers
Yes you know it’s down in our Arkansas mill we take a bi-annual outage every other year and what we’re looking at we did not have that outage in 2007. We are going to have that outage in 2008 and that describes the major difference of 2007 to 2008.
George Staphos – Banc of America Securities
Thanks Eric and on the cap ex side relative to our earlier question?
Eric J. Cremers
I’m sorry I missed the cap ex question.
George Staphos – Banc of America Securities
Well the question that I had mentioned was in your TRS businesses where you deploying capital?
Eric J. Cremers
You know I think its spread around the company; it’s not in any one business segment versus another. We are obviously watching our capital very closely particularly as it relates to the wood products side but I don’t think it’s skewed any one business segment versus another.
Michael J. Covey
I guess just to add a little bit to that George, there’s no single large project. The capital spending levels that we’ve got in our budget for 2008, almost all reflect projects that are less than $2 or $3 million, most of them less than $1 million that are almost all aimed at productivity and yield, or cost recovery or quality initiatives that spread really throughout all three TRS businesses.
George Staphos – Banc of America Securities
Okay, that was more what I was after. Thanks Mike.
And then just a question I know you’ve probably run it through your models but I was curious why with the potential for log pricing to come off a bit, I know from your advantage point not at necessarily an alarming pace, why you wouldn’t be deferring your harvests a bit more. I’m curious you have volumes up, pricing down, contribution the same, why not defer a bit more of your expectation might be that prices recover?
Michael J. Covey
Well I guess the important caveat to mention again is that we may do that after we get through this. Our plates kind of already set for the activities here for this quarter and early into spring and I think coming out of this traditional slow down we have in the spring with the weather.
We’ll revisit that decision, but on a net present value basis as you mentioned we run all these scenarios through the models that we have and we think that going ahead with the planned increases still make sense. I’d also mention that some of the uplift is in harvesting comes from acquisitions that just add more volume to the plate.
And finally the other thing to mention is the pulpwood market both in the west and in the south is very attractive and so some of the initiatives are around capturing pulpwood volume as well.
George Staphos – Banc of America Securities
I understand and again there’s some granularity here that obviously you can’t share or provide us with but if it’s positive from a NPV basis but you know, this first period here that we’re measuring leads to a net wash versus 2007, you know, how as we think about it, how is it positive for NPV basis on a going forward basis?
Michael J. Covey
Well I guess without going through the granularity as you mentioned to kind of go through the details of the modeling, I think when we look at commitments that our employees contractor capacity that’s in place, planned initiatives with different species of log commitments, all those things lead us to believe that we ought to stay about where we’re at. But you know, we’re very prepared to cut back as we did in the month of December if I think we get to the spring period and look at things and say we ought to do that.
The log market, we set our plans in late fall of last year, the log market so far has behaved about like we expected. But on the other hand, if anything I would say the lumber markets maybe behaved a little bit worse than expected, so that probably puts a little more pressure on the downside than we anticipated earlier.
Operator
Your next question comes from the line of Mark Weintraub with Buckingham Research. Please proceed.
Mark Weintraub - Buckingham Research
First curious how much would the deferred December volume cost you in the quarter roughly?
Eric J. Cremers
I’m sorry your question Mark was how much did it cost us?
Mark Weintraub - Buckingham Research
Yes. The deferral of the December volume?
Eric J. Cremers
I think we deferred roughly, I want to say 80,000 tons, something like that.
Mark Weintraub - Buckingham Research
Okay and you know roughly that would have translated to value wise or relative to an earnings basis?
Eric J. Cremers
It’s probably in the $5 to $6 million range.
Mark Weintraub - Buckingham Research
Second question is you’ve stated that your dividend is fully supported by your timber and your real estate businesses and if you look out there, obviously a lot of investors value your company on a yield basis in fact, you also are trading at a higher yield than the other timber RETs out there. So I guess the question I have is do you think investors, are you running the business and paying out the dividend in such a way that investors are getting paid for the value of the manufacturing assets?
Are you concerned that running it in the fashion that you are you might not be getting the value for the manufacturing assets in your stocks?
Michael J. Covey
Mark I guess you know, that’s a complicated question and I guess the best answer I can give you is we try to optimize the performance of every business that we have and we do it as tax efficiently as we can and the RET model that we’ve got and, I guess the market decides what the evaluation of the company is on a yield basis. We’re certainly smaller on a market cap basis, smaller than the other two larger timber RETs and that may have something to do with it as well, not so much the manufacturing piece of it, just sheer size.
So I feel pretty comfortable with the way that we’re structured today. We are continually look at opportunities to unlock value with our manufacturing businesses or other businesses that don’t have a fit in the company.
We have a track record of doing that.
Mark Weintraub - Buckingham Research
Just in curiosity you mentioned that there were some onetime costs related to relocation of folks from Lewiston to Spokane. Curiosity what was that about?
Eric J. Cremers
It’s kind of an interesting situation Mark when I arrived here almost my entire finance staff and IT staff was down in Lewiston Idaho which is about 100 miles from our corporate office here in Spokane. There can’t be too many large public companies in the United States where the CFO is separated from his staff.
So we undertook a project to relocate those folks up to our corporate offices in Spokane.
Mark Weintraub - Buckingham Research
Okay and then lastly on the real estate for 08 you indicated the revenues will likely be better than 50% higher than in 07. Would it be fair to say the profits then would be at least that size of an increase in all expectations or would there for some reason be a big difference in the cost of real estate sales?
Eric J. Cremers
You will see the acreage that we’re going to be selling in 08 is going to have a higher basis than the acreage that we sold in 07. I want to say basis was roughly 20% in sales in 07 and it is going to move up into the 30% range in 08.
Some of that acreage is going to be from the Central Idaho acquisition. So I wouldn’t expect all the sales increase to flow through the P&L.
Mark Weintraub - Buckingham Research
Obviously the cash does but not necessarily on an earnings basis?
Eric J. Cremers
Correct.
Operator
(Operator Instructions) The next question is from the line of Steven Chercover with D.A. Davidson & Co.
Please proceed.
Steven Chercover – D.A. Davidson & Co.
First question, seems avoiding [RETing] excise taxes are a great reason for harvest. Did you have an inkling that that was going to happen during the fourth quarter?
Eric J. Cremers
As we got into the fourth quarter, yeah, we had an inkling that was going to happen. Our harvest lines as I mentioned were exceptionally strong in the third quarter and as we gauged where we were at relative to the distribution moving through the fourth quarter it became apparent that we had excess income in the RET.
Steven Chercover – D.A. Davidson & Co.
I suppose that’s something that we should be able to figure out on our own going forward?
Eric J. Cremers
Yes. With the caveat that you don’t know what our planned distribution increases are going to be so that is one thing to bear in mind.
Steven Chercover – D.A. Davidson & Co.
Well we’ll just count on you doing it once a year. Second question, lumber prices for the whole industry I think are below cash cost and it seems that no one can raise prices.
So is the only recourse for lumber producers to bid down log prices? Is that what you’re facing and do you see an end to this?
Michael J. Covey
Obviously there will be an end to it. I think it’s clearly coupled to the housing starts situation and there’s various estimates whether this is going to be 2009 or what quarter in 2009 as to when the housing situation will begin to turn around.
We’re very optimistic about long term housing starts and have a lot of reason to believe that over a decadal period the country’s going to build something like 18 to 20 million houses over a decadal period and that will return us to more normal levels. I do think that there’s not a lot of options left if log prices do not come down then I think you’ll see producers curtail or stop production which we’ve begun to see.
I mean, it’s clear where the pressure is and I don’t think that will happen on a pro-rata basis equally around the country. Every region is unique, logs don’t move more than 100 or 150 miles from where they’ grown and we’ll see how the pressure amount on log pricing over the next 12 to 18 months.
Steven Chercover – D.A. Davidson & Co.
Just a couple of more clarifications, Mike did you say that pulp in paper board you expected 2% higher volume and then $16 million higher contribution due to price? Is that correct?
Michael J. Covey
Yes. We did.
Steven Chercover – D.A. Davidson & Co.
Okay and then the lumber business will be flat to down in 2009.
Michael J. Covey
That’s correct.
Operator
Your next question comes from the line of Peter Ruschmeier with Lehman Brothers. Please proceed.
Peter Ruschmeir – Lehman Brothers
I was curious on the Central Idaho acquisition, now that you’ve owned it and had time to take a closer look at it, how those acres might break down between just pure timber harvesting opportunity versus HBU and over what kind of period of time might you expect to extract some HBU out of those properties?
Michael J. Covey
Well clearly that property had a thesis that was based on both a real estate outcome and a timber outcome. We’ve not given information out about how we valued those two pieces.
I think compared to a traditional property acquisition around the country this probably is skewed a little bit more towards a long term real estate outcome but we think but we think that comes from a very small percentage of the acres that are there and over the next decade we’ll begin that process of identifying and selling those. That process starts this year but it’s not going to be quick.
The values per acre there in some areas are quite high. We’ll be very patient and thoughtful about that to try and maximize value.
Peter Ruschmeir – Lehman Brothers
Okay sounds good. I also wanted to ask if I could on your rotation comment and maybe just to clarify did you suggest your rotation in the south across your whole southern mix would be coming down from the mid to high 30s to the mid to high 20s.
Is that correct?
Michael J. Covey
That is correct.
Peter Ruschmeir – Lehman Brothers
And what period of time do you think, I mean, given the duration of asset it just seems like this could take you years, which is a good thing right? You could have accelerated harvest for years I would think, but how long do you think it will take you to bring that rotation down to a more sustainable level?
Michael J. Covey
Well your observations are correct. It can and will take years.
Some of that depends on how robust the markets are and how fast we want to push that. The market for pulp wood is very good but most of the older stands aren’t really a pulp wood theme they are a saw wood theme and with the weakness in saw log and pricing relating to the housing business we may slow down a bit more than we might otherwise do as I mentioned to a caller earlier.
But we haven’t given a specific number but this is something we’ll accomplish over the next several years. It won’t be the next two or three and it won’t be 10 or 15 either.
In that range
Peter Ruschmeir – Lehman Brothers
Okay. Last question on that topic if I could, you know, I know that you cut for sustainable cut but you’re clearly indicating that you more mature stand and now it’s going to be a little bit of a younger stand going forward.
Can you comment on what kind of drop in the inventory level you’d expect from start to finish. Presumably you would end up with an inventory that would be a little lower but growing faster than the one you have today which is older and growing more slowly?
Michael J. Covey
Your observations are exactly correct but I don’t have those numbers to give. I just don’t know how much the inventory drop is but clearly it will come down.
Peter Ruschmeir – Lehman Brothers
Okay and then just lastly if I could Mike, any updated thoughts on your thoughts on how Potlatch may participate or not in supplying fiber for buyer refineries?
Michael J. Covey
Well we’ve been an avid proponent of free and open market for the evaluation of the forest resource trees for whatever end market you know, generates the most value, and whether it’s pulpwood outcome or a bio fuel outcome, we are very interested in that. We own about 450 acres in Arkansas and at this point in time we think that’s where the bulk of the opportunity lies in the near term in the South.
I think there is not a lot of reason to expect to happen in the West quickly. So, to the extent that we can participate in the South, we’re able and ready to do that and working actively to support free and open markets for that kind of activity.
Operator
And there are no other questions in the queue at this time. I would like to turn the call back over to Mr.
Mike Covey for closing remarks.
Michael J. Covey
Thank you very much and we’ll talk to you all at the start of the next quarter. Thank you.
Operator
Thank you all for your participation in today’s conference. This concludes the presentation.
You may now disconnect.