Potlatch Reports Third Quarter Results

Potlatch Corporation (NYSE:PCH) today reported financial results for the third quarter ended September 30, 2007. Q3 2007 FINANCIAL SUMMARY --   Earnings from continuing operations for the quarter were $41.2 million, or $1.04 per diluted common share, compared to $31.1 million, or $0.80 per diluted common share for the third quarter of 2006.   -- Net earnings for the quarter were $41.0 million, or $1.04 per diluted common share, compared to $25.7 million, or $0.66 per diluted common share for the third quarter of 2006.   -- Included in net earnings were net losses of $0.2 million and $5.4 million for the third quarters of 2007 and 2006, respectively, related to the company's former hybrid poplar tree farm, which are classified as discontinued operations in the Statements of Operations and Comprehensive Income. The tree farm was sold in the first half of 2007.   -- Cash provided by operating activities from continuing operations for the nine months ended September 30, 2007, was $125.1 million. "During the third quarter, our Resource segment continued to benefit from selling additional volume at improved pricing, compared to 2006 when we partially curtailed harvest levels due to poor log markets. Improved markets in the southern region, particularly for pulpwood, and increased harvest levels in both the northern and southern regions also helped to build a strong quarter for the segment,” said Michael J. Covey, chairman, president and chief executive officer. "Potlatch is on course to achieve our goal of selling 15,000-20,000 acres of non-strategic land by year end. In conjunction with the purchase of 179,000 acres in Idaho, we have cued up all planned land sales to match as many closings as possible with 1031 like-kind exchange opportunities. "Pulp and Paperboard results remained very strong throughout the third quarter. Paperboard pricing in the high-end folding carton segment that we serve was strong due to very high operating rates and the weak U.S. dollar. We had outstanding operating performance during the quarter at both paperboard mills. "During the quarter, our Consumer Products segment experienced record converting production and finished goods sales. These production improvements helped to offset the continued high cost of pulp for the segment. "Although we faced a continued slump in housing and weak lumber pricing, we continued to generate positive income and cash flow from our Wood Products segment, mainly due to our positioning in industrial and specialty niche markets, including cedar siding and decking,” concluded Mr. Covey. THIRD QUARTER 2007 BUSINESS PERFORMANCE Resource --   Operating income for the segment was $38.2 million, compared to $24.8 million earned in the third quarter of 2006.   -- During the third quarter, Potlatch announced the acquisition of 179,000 acres of timberland in central Idaho.   -- The purchase price was approximately $215 million, or roughly $1,200 per acre.   -- The acquisition is being made in two phases, the first of which involved the majority of the timberlands and closed in September 2007. The acquisition of the remaining lands is expected to close in January 2008.   -- The acquired land is located in the heart of the central Idaho outdoor recreational corridor. It consists of stocked forests of ponderosa pine and mixed fir that complement Potlatch's core timberland base. In addition, the company believes that the acreage has exceptional recreational amenities and real estate value.   -- Potlatch continued to capitalize on improving markets in the southern region and sold more volume compared to 2006, when harvest levels were partially curtailed due to poor market conditions.   -- Fee harvest levels in the southern region increased 77 percent in the quarter compared to the third quarter of 2006, and increased 4.9 percent compared to the second quarter of 2007.   -- Overall sales prices rose 37.5 percent compared to the third quarter of 2006, and 4.8 percent compared to the second quarter of 2007, primarily due to strong pulpwood markets.   -- Harvest levels in the northern region were up overall compared to the same period last year. The primary reasons for the better performance were increased harvest levels in Idaho and harvested timber from the Wisconsin timberland, which Potlatch acquired earlier this year.   -- Fee harvest in the northern region increased 31 percent over the third quarter of 2006 and rose 83 percent over second quarter 2007 levels, primarily due to normal seasonal logging curtailments in the second quarter.   -- Prices declined 4.7 percent compared to the third quarter of 2006 due to general market price erosion in Minnesota, however, prices rose 3.8 percent in the northern region compared to second quarter 2007. Real Estate (formerly known as Land Sales and Development) --   Operating income for the segment was $2.4 million, compared with $0.8 million for the third quarter of 2006. The improved results were attributable primarily to the sale of more acres of non-strategic lands.   -- During the third quarter, Potlatch deferred approximately $1 million in built-in-gain taxes from REIT land sales by using forward and reverse 1031 exchanges within the allowable periods, such as the purchase of the central Idaho timberland. Upon completion of the acquisition in central Idaho, Potlatch will own approximately 1.7 million acres of timberland in the U.S. In accordance with its intensive land value stratification process, announced in December 2006, the company intends to stratify the newly acquired central Idaho acreage into core timberland for growing merchantable timber and non-core and higher and better use (HBU) lands for real estate sales. Through the stratification process, Potlatch has identified 250,000-300,000 acres over its entire ownership that are non-strategic to its core forestland operations and which the company expects to sell over the next 10 years. Wood Products --   Operating income for the segment was $2.4 million, compared to an operating loss of $5.2 million for the third quarter of 2006.   -- Lumber results continued to be positively impacted by strong sales of inland red cedar.   -- Improved operating efficiencies at the company's lumber facilities helped to lower conversion costs and increase production over the third quarter of 2006.   -- Wood costs for the lumber operations were lower compared to last year's third quarter. Cedar log costs were higher, but the increase was more than offset by reduced costs for southern yellow pine sawlogs and mixed species sawlogs in Idaho. Pulp and Paperboard --   Operating income for the segment was $17.6 million, compared to $16.8 million for the third quarter of 2006.   -- Market prices for both pulp and paperboard products increased in the third quarter compared to the same period in 2006. Pulp prices rose 12 percent and paperboard prices increased 4 percent compared to the third quarter of 2006.   -- The weaker U.S. Dollar and general global demand for pulp created the best global pulp market in approximately a decade.   -- Exports of paperboard to Europe increased during the third quarter.   -- The company's two paperboard mills, in Arkansas and Idaho, ran exceptionally well with near record production attained during the quarter.   -- The Idaho mill's chip supply was ample during the quarter, resulting in an 8 percent reduction in pricing compared to the second quarter of 2007, but still 33 percent higher than the third quarter of 2006. Consumer Products (or "Tissue”) --   Operating income for the segment was $5.1 million for the third quarter of 2007, compared to $6.2 million for the same period last year.   -- Pulp prices increased by 14 percent, resulting in a $3.8 million negative cost impact for the third quarter compared to the same period last year. As the company continued to ramp up production at its midwest converting facility, it has reduced less profitable parent roll sales and reduced its midwest and total freight expenses. Despite the increase in pulp costs, pricing of tissue products in the marketplace remained very competitive, as additional competitive paper machine tonnage has come on line and the company has been unable to increase pricing without negatively impacting sales volume. Other Items In the third quarter of 2007, the company recorded an income tax benefit of $2.6 million related to continuing operations. The income tax benefit was the result of a favorable adjustment of $3.5 million due to the final determination of amounts owed to the Internal Revenue Service for the years 1995-2004. Excluding this benefit, the company recorded an income tax provision of $0.9 million for the third quarter of 2007, which was largely related to pre-tax income from the company’s taxable REIT subsidiary. Dividend Distribution During the third quarter, Potlatch paid a regular quarterly distribution on the company’s common stock of $0.49 per share. OUTLOOK "We believe we are well positioned through the balance of this year to capture strong demand for rural recreational real estate and we expect continued outstanding performance from our pulp and paperboard segment. Log prices are expected to stay strong for cedar and southern pulpwood, however, we do not expect a recovery in housing starts or a bounce in lumber prices for several quarters,” concluded Mr. Covey. CONFERENCE CALL INFORMATION A live Web cast and conference call will be held today, October 25, at 8 a.m. Pacific time (11 a.m. Eastern). Those interested may access the Web cast at www.potlatchcorp.com and conference call by dialing 1-866-383-8009 for U.S./Canada and 1-617-597-5342 for calls outside the U.S./Canada. Participants will be asked to provide pass code number 65659071. For those unable to participate in the live call, an archived recording will be available through the Potlatch Corporation website at www.potlatchcorp.com for approximately one year following the conference call. A telephone replay of the conference call will be available until November 1, 2007, by calling 1-888-286-8010 for U.S./Canada, or 1-617-801-6888 for calls outside the U.S./Canada, and entering pass code number 82200693. ABOUT POTLATCH Potlatch is a Real Estate Investment Trust (REIT) with 1.6 million acres of forestland in Arkansas, Idaho, Minnesota and Wisconsin. Through its taxable REIT subsidiary, the company also operates 13 manufacturing facilities that produce lumber and panel products and bleached pulp products, including paperboard and tissue. The company also conducts a real estate sales and development business through its taxable REIT subsidiary. Potlatch, a verified forest practices leader, is committed to providing superior returns to stockholders through long-term stewardship of its resources. FORWARD-LOOKING STATEMENTS This press release contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 as amended, including without limitation, statements about future company performance, log and lumber pricing, future land sales and closings, like-kind exchanges and tax consequences, direction of markets, and pulp and paperboard sales. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in timberland values; changes in timber harvest levels on the company’s lands; changes in timber prices; changes in policy regarding governmental timber sales; changes in the United States and international economies; changes in exchange rates between the U.S. dollar and other currencies; changes in the level of construction activity; changes in tariffs, quotas and trade agreements involving wood products; changes in worldwide demand for Potlatch’s products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for the company’s products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; changes in raw material, energy, and other costs; the ability to satisfy complex rules in order to remain qualified as a REIT; changes in tax laws that could reduce the benefits associated with REIT status; and other risks and uncertainties described from time to time in the company’s public filings with the Securities and Exchange Commission. The company does not undertake to update any forward-looking statements. Potlatch Corporation and Consolidated Subsidiaries Statements of Operations and Comprehensive Income Unaudited (Dollars in thousands - except per-share amounts)           Quarter Ended Nine Months Ended September 30, September 30,       2007       2006         2007       2006   Revenues   $ 436,066     $ 396,752       $ 1,236,986     $ 1,211,269   Costs and expenses: Depreciation, depletion and amortization 20,864 20,494 59,536 59,473 Materials, labor and other operating expenses 347,179 328,037 1,008,909 1,019,768 Selling, general and administrative expenses 23,244 22,990 65,122 67,985 Restructuring charge     (141 )     -         2,691       -         391,146       371,521         1,136,258       1,147,226   Earnings from continuing operations before interest and taxes 44,920 25,231 100,728 64,043   Interest expense (7,380 ) (7,229 ) (22,271 ) (21,911 ) Debt retirement costs - 53 - 53 Interest income     1,046       355         1,943       1,452   Earnings from continuing operations before taxes 38,586 18,410 80,400 43,637 Benefit for taxes     (2,581 )     (12,665 )       (1,598 )     (64,997 ) Earnings from continuing operations     41,167       31,075         81,998       108,634   Discontinued operations: Loss from discontinued operations (including loss on disposal of $-, $-, $(35,774) and $-) (260 ) (5,542 ) (39,703 ) (15,948 ) Income tax benefit     (106 )     (164 )       (2,892 )     (1,141 )       (154 )     (5,378 )       (36,811 )     (14,807 ) Net earnings   $ 41,013     $ 25,697       $ 45,187     $ 93,827   Other comprehensive income, net of tax   $ 1,366     $ -       $ 4,100     $ -   Comprehensive income   $ 42,379     $ 25,697       $ 49,287     $ 93,827   Earnings per common share from continuing operations: Basic $ 1.05 $ 0.80 $ 2.10 $ 3.04 Diluted 1.04 0.80 2.09 3.03 Loss per common share from discontinued operations: Basic - (0.14 ) (0.94 ) (0.41 ) Diluted - (0.14 ) (0.94 ) (0.41 ) Net earnings per common share: Basic 1.05 0.66 1.16 2.63 Diluted 1.04 0.66 1.15 2.62 Average shares outstanding (in thousands): Basic 39,172 38,724 39,050 35,688 Diluted     39,415       38,858         39,316       35,870     Certain prior period amounts have been reclassified to conform to the current period presentation.   On March 31, 2006, the Company paid a special earnings and profit distribution, consisting of approximately 9.1 million shares of common stock and $89 million in cash, in association with the REIT conversion. Reflected below are pro forma results giving effect to the common stock distribution for diluted earnings per common share for the nine months ended September 30, 2006, as if the common stock portion of the distribution had occurred at the beginning of the period:   Nine Months Ended September 30, 2006   Per diluted common share: Earnings from continuing operations As reported $ 3.03 Pro forma 2.80   Net earnings As reported 2.62 Pro forma 2.42 Potlatch Corporation and Consolidated Subsidiaries Condensed Balance Sheets Unaudited (Dollars in thousands - except per-share amounts)       September 30,   December 31,       2007     2006 Assets Current assets: Cash $ 8,032 $ 7,759 Restricted cash - 6,673 Short-term investments 28,384 21,564 Receivables, net 113,142 135,105 Inventories 167,483 168,816 Prepaid expenses     17,444     16,602 Total current assets 334,485 356,519 Land other than timberlands 8,549 8,554 Plant and equipment, at cost less accumulated depreciation 516,125 562,387 Timber, timberlands and related deposits, net 540,520 391,577 Pension assets 131,532 118,355 Other assets     21,149     20,215       $ 1,552,360   $ 1,457,607 Liabilities and Stockholders' Equity Current liabilities: Current installments on long-term debt $ 3,209 $ 6,157 Current notes payable 110,000 -- Accounts payable and accrued liabilities     182,202     190,107 Total current liabilities 295,411 196,264 Long-term debt 321,291 321,474 Liability for pensions and other postretirement benefits 287,952 289,791 Other long-term obligations 17,228 19,059 Deferred taxes 48,585 53,160 Stockholders' equity     581,893     577,859       $ 1,552,360   $ 1,457,607   Stockholders' equity per common share $ 14.85 $ 14.88 Working capital $ 39,074 $ 160,255 Current ratio 1.1:1 1.8:1 Potlatch Corporation and Consolidated Subsidiaries Condensed Statements of Cash Flows Unaudited (Dollars in thousands)     Nine Months Ended September 30,       2007       2006   Cash Flows From Operations Net earnings $ 45,187 $ 93,827 Adjustments to reconcile net earnings to net operating cash flows: Loss from discontinued operations 3,828 14,807 Loss on disposal of discontinued operations 32,983 - Depreciation, depletion and amortization 59,536 59,473 Proceeds from sales deposited with a like-kind exchange intermediary (16,812 ) - Non-cash cost of real estate sold 879 168 Deferred taxes (4,305 ) (71,634 ) Equity-based compensation expense 4,284 2,970 Employee benefit plans (8,671 ) (1,233 ) Other 572 3,229 Working capital changes 7,113 61,329 Excess tax benefit from share-based payment arrangements (2,447 ) (651 ) Income tax benefit related to stock issued in conjunction with stock compensation plans 2,955 1,233 Funding of qualified pension plans     -       (18,092 )   Net cash provided by operating activities from continuing operations     125,102       145,426     Cash Flows From Investing Decrease (increase) in short-term investments (6,820 ) 48,263 Additions to plant and properties (79,504 ) (35,266 ) Deposits on timberlands (162,280 ) - Other, net     (501 )     (5,232 )   Net cash provided by (used for) investing activities from continuing operations     (249,105 )     7,765     Cash Flows From Financing Change in book overdrafts 2,628 3,228 Increase in notes payable 110,000 - Issuance of common stock 7,955 6,261 Issuance of treasury stock - 513 Repayment of long-term debt (3,131 ) (7,833 ) Distributions to common stockholders (57,439 ) (146,112 ) Excess tax benefit from share-based payment arrangements 2,447 651 Other, net     (1,421 )     (533 )   Net cash provided by (used for) financing activities from continuing operations     61,039       (143,825 )   Cash flows from continuing operations (62,964 ) 9,366 Cash flows of discontinued operations: Operating cash flows (129 ) (6,868 ) Investing cash flows 63,366 (1,316 ) Financing cash flows     -       -     Increase in cash 273 1,182 Cash at beginning of period     7,759       6,133     Cash at end of period   $ 8,032     $ 7,315     Certain prior period amounts have been reclassified to conform to the current period presentation. Highlights Unaudited (Dollars in thousands - except per-share amounts)       Quarter Ended Nine Months Ended September 30, September 30,       2007       2006       2007     2006   Distributions per common share(1) (annual rate)   $ 1.96     $ 1.96     $ 1.96   $ 1.96   (1) Distributions for 2006 reflect the annualized rate, after adjustment for a special earnings and profit distribution of $15.15 per common share paid in the first quarter.     Segment Information Unaudited (Dollars in thousands)   Quarter Ended Nine Months Ended September 30, September 30,       2007       2006       2007     2006   Revenues Resource   $ 99,707     $ 82,332     $ 231,411   $ 212,118   Real Estate     3,679       1,139       12,335     3,810   Wood Products Lumber 91,344 89,703 272,273 302,771 Plywood 14,247 12,657 41,963 42,452 Particleboard 4,721 5,928 15,313 15,138 Other     11,527       10,226       35,934     32,660         121,839       118,514       365,483     393,021   Pulp and Paperboard Paperboard 149,805 131,080 423,292 395,743 Pulp 24,244 23,004 70,479 53,811 Other     241       302       821     915         174,290       154,386       494,592     450,469   Consumer Products     112,429       113,232       328,614     329,909   511,944 469,603 1,432,435 1,389,327 Intersegment revenues     (75,878 )     (72,851 )     (195,449 )   (178,058 )   Total revenues   $ 436,066     $ 396,752     $ 1,236,986   $ 1,211,269     Operating income (loss) Resource $ 38,175 $ 24,804 $ 71,272 $ 59,356 Real Estate 2,405 788 9,412 2,768 Wood Products 2,402 (5,210 ) 10,980 5,855 Pulp and Paperboard 17,559 16,753 28,535 14,358 Consumer Products 5,139 6,186 14,006 20,059 Eliminations     (8,446 )     (6,579 )     527     (4,859 ) 57,234 36,742 134,732 97,537 Corporate     (18,648 )     (18,332 )     (54,332 )   (53,900 ) Earnings from continuing operations before taxes   $ 38,586     $ 18,410     $ 80,400   $ 43,637     Certain prior period amounts have been reclassified to conform to the current period presentation.