Jerald Richards - Vice President and Chief Financial Officer Michael Covey - Chairman and Chief Executive Officer Eric Cremers - President and Chief Operating Officer.

Gail Glazerman - UBS Paul Quinn - RBC Capital Markets Mike Roxland - Bank of America Merrill Lynch Chip Dillon - Vertical Research Steve Chercover - D.A. Davidson Mark Weintraub - Buckingham Research.

Good morning. My name is Barney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch fourth quarter 2014 earnings conference call. [Operator Instructions] I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks.

Sir, you may proceed..

Thank you, Barney, and good morning. Welcome to Potlatch's investor call and webcast covering our fourth quarter 2014 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 on 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 will now turn the call over to Mike for some comments, and then I will cover our fourth quarter results and outlook..

Thank you, Jerry. In 2014, we delivered solid financial results, raised our dividend, completed a strategic acquisition and preserved our investment grade debt rating. By most measures, 2014 was a very good year and we expect to continue our strong performance in 2015.

The company grew meaningfully with the acquisition of approximately 201,000 acres in Alabama and Mississippi. The addition of these high-quality timberlands significantly expands our geographic and market diversity in the south. Since our last earnings call, our board raised the quarterly dividend by 7% to $1.50 per share on an annual basis.

This is the second dividend increase in little over a year for a total increase of 20% since December 2013. During 2014, we generated over $130 million in cash from operations, reinvested $24 million in capital expenditures and paid almost $58 million in dividends.

As the housing recovery and economic recovery continue to take shape, Potlatch will benefit from a high degree of leverage to the U.S. housing market. We are the ninth largest lumber producer in the U.S. with approximately 675 million board feet of lumber production and an additional 150 million square feet of plywood production.

Although the housing recovery will take time, we have enjoyed a period of relatively strong and stable lumber prices and strong log prices in the west.

In 2015, we expect about 1.1 million total housing starts and anticipate that lumber prices and log prices will be modestly higher than 2014 with some bumps along the way due to weather, inventory levels, currency and other factors.

We plan to harvest 4.5 million tons in 2015, which is an 800,000 ton increase over our annual harvest volume in the last few years. This increase will be driven by our recent acquisition in Alabama and Mississippi. Jerry will provide more detail about the mix of our 2015 harvest plans in his remarks.

Our harvest strategy remains the same, as what we have described, since becoming a REIT in 2006. We manage our timberlands on a sustainable basis, while maximizing net present value over the long-term. Generally, we attempt to increase the harvest, when log prices are strong and defer harvest during weaker market conditions.

Looking forward, we expect our harvest level to range between 4.0 million and 4.8 million tons each year over the next 15 years. Using 4.4 million tons as the midpoint, we expect to flex our harvest by as much as 10% up or down in any given year, depending on market conditions and other factors.

We have included a supplemental slide on Page 13 that outlines our long-term harvest profile. As we continue to seek ways to grow our timberland base through acquisitions, we expect the harvest profile will improve as well. Turning to our recent acquisition. The integration of the Alabama and Mississippi timberlands is straightforward and going well.

We continue to be very pleased with the quality of the properties, the customer base as well as our new staff and contractors. Looking ahead, we hope to identify and complete bolt-on acquisitions in the south as a platform for continued growth.

We continue to invest in our Wood Products business with a $20 million capital program planned this year, which includes improvements at each of our five manufacturing facilities. This is up from $13 million in capital expenditures in 2014.

During the most recent benchmarking studies we've participated in, all of our mills measure in the first quartile for margin performance, and we intend to maintain that position through prudent high-return capital investments.

Finally, our Real Estate business continues to deliver meaningful value through our strategy to identify rural recreational land that can be sold at a premium to its underlying timber value. The focus of this effort has been and will continue to be in Minnesota, although we also have opportunities in Idaho and in our southern ownership.

Our most recent land stratification review identified about 300,000 acres of land to sell over the next decade or more. That total is up about 50,000 acres from prior estimates.

We have also shifted acres within the stratification categories, none of which we believe have a material impact on the overall valuation of the company or on our annual real estate program. In 2015, we expect to sell about 20,000 acres. I'll now turn it back over to Jerry to discuss the quarter, and then we'll take questions..

Thanks, Mike. Beginning with Page 3 of the slides accompanying this call, our fourth quarter net income was $20.1 million or $0.49 per diluted share. We recorded transaction expenses of $400,000 and non-recurring tax benefits unrelated to the acquisition of $1.9 million in the fourth quarter.

Excluding these two items, earnings were $18.6 million or $0.45 per diluted share. This is down seasonally compared to net income of $33.2 million or $0.81 per diluted share in the third quarter. I'll now review the results of our operating segments. Results of our Resource segment are displayed on Pages 4 through 6.

Operating income for the segment was $23.9 million compared to $34.1 million last quarter. The third quarter is consistently the highest earnings quarter for Resource, because drier summer weather typically results in more operating days and higher harvest volumes, particularly in the north.

Our Idaho sawlogs are priced on a dimensional or board-foot basis, but are reported on a per ton basis. Therefore, even though northern sawlog prices were flat quarter-over-quarter on the dimensional basis, our reported price declined 4% sequentially, because of the fact that logs are heavier due to higher moisture content during the wetter months.

Pulpwood prices in the north declined slightly quarter-over-quarter. The effect of higher prices due to strong demand from pulp mills in the Lake States largely offset lower prices in Idaho, due primarily to shorter haul distances. The decline in our northern harvest volumes is typical, as the onset of winter weather results in fewer operating days.

Moving to the south on Page 6. Sawlog prices declined 7% compared to the third quarter, due to a lower proportion of hardwood sawlogs in the overall sales mix. Pine sawlog prices were flat sequentially. southern region pulpwood prices improved slightly from the prior quarter, due to strong demand for hardwood pulpwood.

Sawlog and pulpwood harvest volumes in the region decreased seasonally. In the fourth quarter, we are able to make up most of the shortfall in planned volumes caused by wet weather in the third quarter. Resource harvested just under 3.7 million tons in 2014. The results of our Wood Product segment are displayed on Pages 7 and 8.

Operating income for the quarter was $9.1 million compared to $15.8 million last quarter. The decline was largely due to 9% lower lumber shipments resulting from fewer operating days. Average lumber prices realized in the quarter were 4% lower than average prices in the third quarter.

In addition, prices at our Bemidji, Minnesota and Gwinn, Michigan sawmills paid for logs were higher due to pulp mill demand remaining strong in the Lake States. The results of our Real Estate segment are covered on Page 9. Operating income for the quarter is $1.6 million compared to $4.6 million in the third quarter.

We sold 20% fewer acreage this quarter. Land basis as a percent of revenue was higher than normal in the fourth quarter due to mix. For the year, this segment sold 33,400 acres and land basis was 23% of revenue, both of which met or slightly exceeded our expectations. Moving to Page 10.

We had cash and short-term investments of $31 million as of the end of the year. We used $75 million of cash to close the acquisition of the Alabama and Mississippi timberlands in the fourth quarter. Our $250 million revolver remains undrawn.

We have $22.5 million of debt maturing in the fourth quarter of 2015, which we expect to pay with cash generated by operations. Capital spending was $7 million in the quarter and $24 million for the year, excluding acquisitions.

Our pension and post retirement liability increased $32 million as of the end of the year due to a drop in the discount rate and the required adoption of new actuarial mortality tables. We are not required to make any contributions to the pension trust in 2015. Now, I'd like to comment on our outlook for 2015.

As Mike mentioned, we plan to harvest approximately 4.5 million tons this year that is comprised of 2.2 million tons in the north and 2.3 million tons in the south. We expect pulpwood sales to be approximately 200,000 tons in the north and approximately 1.3 million tons in the south.

We expect quarterly harvest volumes to follow typical seasonal patterns. The first quarter harvest is planned to be between 850,000 tons and 875,000 tons, with a little over half of the volume in the north. Approximately 90% of the first quarter harvest in the north is expected to be sawlogs.

Approximately 40% of the first quarter harvest in the south is expected to be sawlogs, which is consistent with the first quarter of 2014. We anticipate northern sawlog prices decreasing modestly in the first quarter due to seasonal factors.

We expect the average price that we realize for southern sawlogs in the first quarter to decline due primarily to a seasonally lower mix of hardwood sawlog and a lower mix of pine plywood logs.

Our southern timber depletion rates have increased, as a result of pooling merchantable timber in Alabama, Arkansas and Mississippi together, for purposes of calculating depletion rates. We estimate that total resource DD&A will be between $5 million and $6 million in the first quarter.

We estimate that resource earnings in the first quarter will be slightly lower than the segment's first quarter 2014 earnings. This is due to slightly lower sawlog volume in the north on a year-over-year basis and the higher depletion rates in the south.

This winter has been unseasonably warm in Idaho, which could result in our harvest volume falling short up to 100,000 tons relative to our plan in the first quarter. We expect any shortfall in hauling would result in a shift of volume to other quarters, not a loss in volume for the year.

If diesel prices were to remain at their current levels for the rest of 2015, we estimate that this would increase our earnings by approximately $5 million. This would begin to show up in the second quarter given the lag to negotiate log and haul contracts. Turning to Wood Products.

We expect to ship approximately 165 million board feet of lumber in the first quarter. Our forecast assumes that average lumber prices will increase 5% in the first quarter relative to the fourth quarter. Wood Products earnings would increase modestly on a sequential basis at these volumes and prices.

We expect lumber prices to recover in the first quarter after starting the year on a soft note. We are not planning any large sales in real estate in 2015. We expect to sell approximately 20,000 acres this year with approximately one-third in each of our three stratification categories; HBU, rural recreation and non-strategic timberland.

We estimate that land basis will be approximately 40% to 45% of land sales revenue for the year. The land basis percentage is driven by mix, which includes land in Alabama and Mississippi that was recorded at market. We expect to sell about 2,000 acres in the first quarter.

Approximately 60% of the first quarter sales are anticipated to be rural recreational real estate and we expect land basis to be in the mid-teens in the quarter. Shifting from real estate, we expect corporate expenses to average a little over $9 million per quarter this year.

This is up due to an expected increase in non-cash pension expense for the year. We expect interest expense to be about $8 million in the first quarter. Approximately a-third of our debt is exposed to changes in three-month LIBOR. We estimate an annual tax rate of 15% to 20% for the year.

Given seasonality and resource earnings, almost all of which are non-taxable, we expect the consolidated tax rate to be in the mid-20% range in the first quarter. We have budgeted capital expenditures of $36 million for 2015. Approximately $15 million is for logging road construction and reforestation costs in our resource operations.

As Mike mentioned earlier, we are planning to spend $20 million on our Wood Products operation. To summarize, we expect the pace of the U.S. housing market recovery to be modest in 2015, which will translate into another good year for Potlatch.

We expect incremental cash generated by our Alabama and Mississippi timberlands and slightly higher northern sawlog prices to offset lower real estate activity. That concludes our prepared remarks. Barney, I would now like to open the call up to Q&A..

[Operator Instructions] Our first question comes from Gail Glazerman of UBS..

Just in terms of a little more color on the recent acquisition, obviously things are going well.

Were there any surprises, either positive or negative?.

Yes Gail, there have been a few things to note. I would say that in Alabama and Mississippi, the log and haul contractor market isn't quite as tight as we're seeing it over in Arkansas, so we're pleased with that development. In those markets, we hear our customers continue to plan on putting meaningful capital into their mills.

We are hearing of potential new sawmill being announced in Mississippi, so we'll see if that comes to fruition. And there are also very attractive pole markets in those states, telephone poles and that's a very high priced product for us. And we didn't realize that going into the acquisition.

But as Mike said, we are very pleased with the customer base, we are very pleased with the employees that we picked up to supply agreement, so far we're very, very pleased..

And I think I ask this almost every quarter, but all the investments we're hearing about in southern sawmilling activity, are you starting or expecting to see any of that really flow in to 2015?.

Into 2015 that might be a little on the early side, there is rumors floating around about sawmill over an El Dorado, Arkansas that we've talked about previously. Somebody now owns an option to develop that mill, and they in fact develop it. But it's not going to happen in '15. We hear West Fraser is expanding a mill over in Alabama.

That will probably happen in the second half of '15. And then in Mississippi, there is talk of that new mill going in, but its not, it won't be in 2015..

I think that the trend of Canadians, especially, investing in those southern sawmill manufacturing continues and most of those improvements kind of happen quarter-by-quarter, and I think overtime we expect to see demand capacity ratios continue to inch up..

And I guess since you did talk about bolt-ons over time, can you just give a little bit of perspective on what you're seeing in the industrial timberlands market, in terms of both volume as well as valuation?.

Well, last year was pretty active in terms of the number of acres that were sold. I think the single largest transaction was the one that we completed. And there's a couple of smaller deals in the market today in the South.

But I think the nature of bolt-on acquisitions for us would be to identify and execute on transactions in Arkansas, Alabama and Mississippi that were more in the 10,000 to 25,000 acre range that we can draw upon our revolver if necessary and enclose those quickly. So that's the nature of our strategy as we referenced bolt-on acquisitions.

But I think there's still a lot of money on the sidelines, there's institutional money, it's been there for a while, it's just there's not been a lot for sale..

And in terms of rural land interest, have you seen any change or development as consumer confidence, employment markets are improving? Are you seeing any more interest in some of those properties than in the recent past?.

Gail, there hasn't really been, what I would say, a noticeable change from the past. I mean, yes, gas prices have come down and consumer confidence has come up, but this gas price drop just happened very, very recently. And the majority of our land sales are still out in Minnesota.

And as you might expect that Minnesota real estate activity that we have is somewhat seasonal. So it hasn't showed up yet, but we're optimistic that it will..

And just one last question.

When you talk about that kind of 10% flex on harvest activity and maybe kind of linking it together with better logger capacity maybe in Alabama and Mississippi, but issues in Arkansas, would you foresee any constraints in being able to implement that flex, based on the infrastructure that's in the market today?.

No. I don't think so, Gail. I mean, it's deciding where to increase or decrease harvest levels is a function of many, many factors and log and haul is just one of those factors. Frankly, wood demand and pricing in the given region is probably the larger concern that we might have.

But I don't think that that would impact our ability to operate in the flexible nature going forward..

Our next question comes from Paul Quinn of RBC Capital Markets..

Just a question on, looking at Timber Mart-South data for southern yellow pine sawlogs, they seemed to jump in Q4.

I can't recall what that was on a state-by-state basis, but did you guys see that pickup?.

Timber Mart-South data, we've taken a look at it across the south, and I think I saw, the last couple of years pine sawlogs pricing is up in about eight of those 10 states. We have not seen the change in our operating area in Arkansas. We have seen a firming of demand in Alabama and Mississippi.

It hasn't totally showed up in price yet, but we are little bit of a disconnect from the Timber Mart-South data..

And then in terms of the revised land stratification up to 300,000 acres over the next, I think you said 10 years, which is up 50,000.

Is that increase in the 50,000, is that related to or what percentage of that is related to the recent acquisition in Alabama and Mississippi?.

Yes. So Paul that restratification, those acres that were referenced, that already excluded Alabama and Mississippi. So if you look at the jump from total of 235,000 to about 300,000 acres, which is what we're going to start reporting out now in our IR materials, about 15,000 of that increase was due to Alabama and Mississippi.

The remainder is really due with the restratification. And the primary driver behind that restratification was that a recognition that the Minnesota market is not really a viable timber market for us. We harvest less than, I don't know, 100,000 tons a year and we make less than a $1 million of cash flow in that market. So it's tiny.

And you compare that to the real estate values that we're achieving in Minnesota, those real estate values are at many multiples of what the timber value is worth. So this is recognition that those acres in Minnesota, there are now all in one of the real estate buckets..

And just on the wood product side, you mentioned CapEx at $20 million.

What type of projects are you doing in 2015?.

So as we sit here today, we've got new planer optimizers and auto-graders going into two of our mills, St. Maries and Warren, they're each going to get new equipment that's going to cost us about $4 million each in those mills. Gwinn is going to get a new small log line this year, which will allow us to run a little bit faster.

And then we hope to implement -- Bemidji is going to get a new in-feed system that's going to cost us about $5 million. So all these projects, I've got IRRs in the 25% to 30% kind of range and they'll continue to improve recovery and increase production volume going forward..

I think the biggest meaningful benefit for us, Paul, after they are put in place, as we look at say 2016 numbers, we expect to see our production, especially in our stud mills up pretty significantly..

And then just, I guess, going forward here, we got Softwood Lumber Agreement with Canada up at October this year.

What's your expectation going forward?.

Well, the agreement has been in place for over a decade. And I think looking back I think it's worked about as expected for both sides. And I think the expectation is it needs to be renewed in some form. Can it be tweaked a little bit and improved? Probably. But I think the agreement will be renewed and I think it needs to be renewed..

Our next question comes from Mike Roxland of Bank of America Merrill Lynch..

Just had a quick question in resource. Obviously you had better earnings in resource, even though volumes and pricing were generally in line with our forecasts. I'm wondering if there's anything from a cost advantage point that positively affected the Resource segment during the quarter..

I don't know from a cost standpoint anything necessarily moved the P&L a whole lot, Mike. So I am not sure what difference maybe..

I think going forward, as we noted in our remarks, we do expect to see some cost improvement in fuel related cost to the tune of approximately $5 million for calendar year 2015, mostly starting in the second quarter and beyond, if diesel prices stay at their current level.

But other than that, our cost pressures in resource have been kind of inflation based, I would say. It's clearly log and haul are the biggest piece of that..

So on real estate the higher land basis in 2015, 40% to 45%, should we expect lower earnings then from real estate relative to the close to $27 million you had in 2014?.

I would say the first key point in real estate when you think 2015 versus 2014 is we're going to sell quite a few, a lot fewer acres. So we had two large transactions that we closed in the first half of '14 that we don't expect to repeat.

So we're going to go from about a little over 33,000 acres down to 20,000 acres, and that will be the biggest change in earnings. There will be slight effect or a smaller effect, if you will, due to higher basis..

And should we expect that, going forward, that basis will likely be maintained? So if you look at 2016 and 2017, the 40% to 45% that you guided to, something that's likely to be continued going forward because of the acquisition of the land you just recently acquired?.

Yes. I think, Mike, when I think about that, real estate sales are very lumpy. And quite frankly, the biggest factor that drives land basis is mix. So we have some portion of our properties that are at much lower basis on our books and others that are higher. So I wouldn't necessarily take that 40% and 45% and expect that that's a new norm..

And just last question, and then I'll turn it over. On the 3Q '14 call, I think you were guiding to a modest sequential decline in lumber prices. That said, it looks like lumber was down about $15 per thousand board feet sequentially.

Was that what you expected in terms of your guidance? And if not, what transpired during the quarter to drive that lower than what you are expecting?.

Yes, Michael, so we declined in Q4 relative to Q3, right along with Random Lengths. I think Random Lengths was down something like $17 in the quarter, and our FOB number from our mills was down about $15. So we did decline along with Random Lengths. I think our expectation was for prices to be a little bit firmer than how it played out.

But there is volatility in the lumber markets and things got a little weak as we finished out the year..

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

Few questions on 2015 line items. It looks like you guys do a great job of kind of being conservative; I'll put it that way, on your tax assumptions. And then you usually have a good surprise for us, like you did this year, where you don't have a tax expense.

What's a good guess in the next year? And of course, I recognize that a lot depends on how much the lumber business makes.

But should be below 10%?.

We expect that our tax rate on a consolidated basis for '15 will probably fall within 15% and 20% for the year. Now, that will bounce around quarter-by-quarter, because the biggest factor that drives that rate is the mix of our earnings between our non-taxable REIT and our taxable REIT subsidiary.

So as we guided, it's probably up in the mid-20% range in the first quarter, because of the seasonally lower resource earnings..

Now, also I know that when you look at resources in recent years, even though log prices haven't been so great, the operating margin, if I look at EBIT, not EBITDA, has been 31% to 34%, let's say. And with the acquisition, I would expect with a higher basis or higher depletion that that number should come down.

And based on your, let's just assume relatively flat log prices as a starting point, if we look at the increase in the harvest, how much should that margin come down? Again, recognizing the cash flow doesn't come down, just the EBIT margin comes down..

I'll start with the first question.

And in terms of the affect of the acquisition, as we guided in the third quarter, we do expect because of the higher depletion, which should be in the range of $10 million to $15 million for the year, the incremental depletion, and the interest expense, we will be modestly dilutive to earnings per share, but we'll be accretive to FAD..

Got you. So that hasn't changed. And so again, if we look at the $26 million of DD&A, not counting basis of land sales in '14, you're saying that should be $36 million to $41 million in 2015 still..

So could you repeat your question, Chip?.

That the element of the depletion, basically depreciation and depletion together, it looks like it was around $26 million, $27 million in 2014, we just add $10 million to $15 million to that?.

Yes. That's correct..

And then whatever we think land basis is, which you've told us, on those sales.

And then lastly on interest expense, would something in the mid-30s for the year makes sense, given the incremental debt?.

Yes. We think it's probably an incremental $10 million, Chip, which would get you up to the low $30 million range..

So low 30s.

And then I guess the last question is on, I know you mentioned earlier, I might have missed some of the commentary, but some of the sawmill activity, any update on what might be happening with the big Arkansas plywood plant that's near your lands, if you've heard anything about that? And also if you see the pellet activity out there is, I know that tends to buy lower-end wood, but is that something that also could enhance your returns?.

Yes. In terms of the Crossett plywood mill, the GP plywood mill, so what we heard sometime ago is that GP said they were eventually going to restart one plywood mill. And they said its one of I think four different mills that they have that were being idled at the time.

They've since announced that one of those mills is not in a mix, so Crossett is potentially one of three that could be restarted. Now, over the last couple of years, we have seen pretty vibrant plywood markets and strong plywood pricing, and yet GP has not restarted a mill. We have no idea what their plans are, as it relates to that mill.

And frankly, I think from an operational planning standpoint, we've kind of moved on and we've assumed that mill is not going to restart..

Now, let's say it did restart, and you're at the $4.5 million level now.

I know it would take some time, but would that maybe in '16 have a couple of hundred thousand ton impact possibly for you guys?.

Well, I think we'd have to look at what markets were doing, and probably more importantly what pricing is doing. We've put out a harvest profile guideline for the foreseeable future and we anticipate operating within those guidelines. So it depends upon what markets are doing and what pricing is doing at that given point in time.

Now, you also asked a question about pellet mills in the south. Drax has a pellet mill in Bastrop, Louisiana, that is in the process of starting up and they're filling up their log yard. We do think that's going to positively impact pulpwood prices in our wood basket.

And we also have seen two announcements for pellet mills in Pine Bluff, Arkansas as well as Monticello, Arkansas. Now, both of those mills, its early on, they're not going to start up in 2015, but certainly, that's going to be continue to put upward pressure on pricing for pulpwood. And frankly, you're seeing it throughout the south.

Pulpwood prices are moving higher, not just due to pellet demand, but a lot of other wood products, including OSB and pulp and paper. So the pellet mills that have been announced are really having a nice impact on our Resource business..

And last question, I guess you just did raise the distribution in the fourth quarter.

And should we think about that as being more of an annual decision at this point, like it was last year as well?.

Yes, we have. Obviously, the Board could choose to revise the dividend whenever they choose, but we typically review that in detail on an annualized basis.

And both in the fourth quarter of '13 and the fourth quarter of '14 we reviewed it and made adjustments to it and raised it, so I would expect that those revisions and reviews would continue to take place in the fourth quarter of the year..

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

A lot of my questions have been answered.

But the incremental harvest in 2014, can you just clarify how much of that is a result in the 200,000 acre acquisition and how much of that is just resuming harvest on deferred -- recapturing deferred harvest?.

Steve, as we mentioned in the call script, almost the entirety of that incremental harvest volume is coming from the acquisition..

Must' have missed that. And then for the next 15 years, I guess, the midpoint is around $4.5 million.

Can you give us the growth rates by region?.

The growth rate in the harvest by region? Well, what I'd tell you --.

No. Actually, the biological growth is what I was looking for..

Biological growth, sure. In the south, it obviously depends upon the age of the particular stand you're talking about, but it's probably anywhere from 6% to 9% for young trees, they're growing fast. If they're old trees, they're growing slow.

And then I would say, if you go up into Idaho, again depending upon the age of tree, it's probably a 3% to 5% kind of growth rate..

And obviously that volume projection incorporates roughly 30,000 acres of divestiture a year?.

Its 20,000 acres a year, and in fact it doesn't reflect the divestitures, Steve. But if you look at where we're divesting land, like primarily Minnesota or if you take into consideration the fact that when we divest acres quite frequently we will cut those acres before we sell them, because we don't know which acres exactly we're going to be sell.

So it's very hard to model it. We expect it to have a very, very de minimis impact on our harvest projection..

I know its 20,000 acres to be sold this year.

But I guess I came to 30,000 acres over 10 years by virtue of what you said of the new land stratification?.

Well, I think, Steve, in our prepared remarks, we said 300,000 acres which would be sold in 10 years or more. So I expect our run rate to stay in this kind of 20,000 acre range. We may have some opportunistic sales that allow us to step it up periodically.

But that's kind of the absorption rate in these markets, given the current real estate activity we're seeing around the country. Now, lower gas prices and attractive interest rates and better economy, maybe the run rate will ramp up. I think 20,000 a year is a better thing to use in models..

And you told us a-third, a-third, a-third would be HBU, rural and non-core. But is it safe to say that the days of selling core timberlands are long gone, and hopefully we don't have another economic downturn that would necessitate that kind of behavior..

Well, I look back at the decisions we made to sell timberland, whether it was core or non-strategic, and I think they were all done for the right reasons and enhanced shareholder value. So I'd never rule it out. But our current plans are to sell land that has been stratified for real estate dispositions.

In our core timberland, we don't anticipate sales of that in the near future..

Steve, one quick thing, just to add on a-third guidance of each category, I want to make it clear that that's 2015 guidance, not necessarily our full stratification..

Our next question comes from Mark Weintraub of Buckingham Research..

I just want to make sure I am understanding the moving parts here. So as you're taking the harvest up to 4.5 million tons, that probably includes about 800,000, 900,000 tons from the newly acquired lands. But that's still about 300,000 tons less than what you expect to average over the coming five-year period.

First of all, is that accurate?.

No, it's not Mark. So we're saying, there's a range that's out there in the future, including those acquired lands that has between 4 million tons per year and 4.8 million tons per year. And we're going to operate within that band for the foreseeable future..

So you're basically in that band next year.

And is the mix pretty much within what you would expect the band to be from a saw timber versus pulpwood and from a regional balance?.

It may skew a little bit more to pulpwood next year in the south, but, yes, there is not significant shifts in the outlook. I mean, overtime you will see a gradual decline in the north, a little bit to the south. But I don't think it varies over any five-year period, plus or minus 5%..

And then lastly, recognizing crystal balls are always cloudy. But a competitor had suggested that, they felt in a 1.2 million housing environment, there would be an acceleration of pricing down in the South. That's not that far from where we are.

Do you think we are close to that tipping point? Because you've obviously forecasted flat pricing for pine saw timber in 2015.

Do you think we're getting close to a tipping point in your specific markets?.

Well, I think we're certainly getting closer, and I would say, it's probably a little bit tighter in Alabama and Mississippi than it is in Arkansas. We're not there yet, but you are seeing price moment for sawlogs in the south. I guess that in eight of the 10 states, we're seeing price increases. So I do think it's inevitable.

And I don't know if it's 1.1 million, 1.2 million or 1.3 million starts, but certainly we're starting to feel it and see it in some of these markets..

Demand capacity ratios in the industry, particularly in the south, continue to creep up. And I don't know they're in the low-to-mid 80% range today and expected to go higher. We are seeing investment by principally the Canadians, but others in additional capacity. The margins in the southern manufacturing business are extraordinarily attractive.

We have great margins in our mill in Warren, Arkansas. And I think all of those things eventually point to more production, and that's going to eventually drive up log prices..

Do you have a view, kind of more recently lumber has come back in a bit in the South, and is that just a function of typical seasonal demand issues or are you actually seeing that there has been maybe a step up in production already, and that that's what is maybe helping some of the timber pricing in eight of the 10 markets, as you noted.

But at the same time, lumber prices actually now seem to be coming in.

Is it more a demand or supply issue on lumber, as you see it right now?.

Lumber prices are extraordinarily volatile. And as you noted, there is seasonality, as you get to the end of the year people tend to drawdown inventories and demand tends to slack in the winter time. And we have seen pricing to be a little bit sluggish here in the first quarter.

Our expectation though is that inventories, dealers and brokers, they're relatively low. And as soon as we get into a period of time, when people are going to be thinking about building for the spring season, we do think there is going to be a bit of a snap back in pricing.

So I wouldn't try to read too much into what's going on with lumber prices here in the last month or so. You've got consumer confidence moving up; you've got mortgage rates down; you've got credit conditions are easing.

There is lots of reasons to be optimistic about the housing market and that should prompt more building and that should prompt lumber prices to move higher and then in turn move log prices higher..

At this time, there are no further questions. End of Q&A.

All right. Thank you, Barney, and also thanks for all your interest in Potlatch. I'll be heading back to my desk shortly and look forward to your detailed questions..

Thank you. This concludes today's conference call. You may now disconnect..