Filed
by Deltic Timber Corporation
Pursuant
to Rule 425 of the Securities Act of 1933
and
deemed filed pursuant to Rule 14a-12
of
the Securities Exchange Act of 1934
Subject
Company: Deltic Timber Corporation
(Commission
File No.: 1-12147)
The following transcript was made
available by Deltic Timber Corporation on October 23, 2017.
***
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REUTERS STREETEVENTS
EDITED TRANSCRIPT
PCH - Q3 2017 Potlatch Corp Earnings Call
and Discussion of
Combination with Deltic Timber Corp to
Create Timberland REIT and Lumber Manufacturer
EVENT DATE/TIME: OCTOBER 23, 2017 / 12:30PM
GMT
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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CORPORATE PARTICIPANTS
Eric J. Cremers
Potlatch Corporation - President,
COO and Director
Jerald W. Richards
Potlatch Corporation - CFO
and VP
John D. Enlow
Deltic Timber Corporation - CEO,
President and Director
Michael J. Covey
Potlatch Corporation - Chairman
and CEO
CONFERENCE CALL PARTICIPANTS
Clyde Alvin Dillon
Vertical Research Partners,
LLC - Partner
Collin Philip Mings
Raymond James & Associates,
Inc., Research Division - Analyst
Gail S. Susan Glazerman
Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
George Leon Staphos
BofA Merrill Lynch, Research
Division - MD and Co-Sector Head in Equity Research
Ketan Mamtora
BMO Capital Markets Equity Research - Analyst
Mark Adam Weintraub
The Buckingham Research
Group Incorporated - Research Analyst
Mark William Wilde
BMO Capital Markets U.S.
- Senior Analyst
Paul C. Quinn
RBC Capital Markets, LLC, Research
Division - Analyst
Steven Pierre Chercover
D.A. Davidson &
Co., Research Division - MD & Senior Research Analyst
PRESENTATION
Operator
Good morning. My name is Christie, and I'll be your conference
operator today. At this time, I would like to welcome everyone to the joint Potlatch and Deltic Investor Conference Call. (Operator
Instructions) Thank you.
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.
Jerald W. Richards
- Potlatch Corporation -
CFO and VP
Thank you, Christie, and good
morning. Before we start the call, I want to remind everyone that this call will contain forward-looking statements. Please review
the warning statements in our press release, on the presentation slides and in our filings with the SEC concerning the risks associated
with these forward-looking statements.
Also, please note that a reconciliation of non-GAAP measures
can be found on our website at www.potlatchcorp.com.
This call does not constitute
an offer to sell or solicitation of an offer to buy any securities or a solicitation of any vote or approval in connection with
the proposed merger between Potlatch and Deltic. Stockholders of both companies are urged to read the joint proxy statement prospectus
together with the other important information that will be filed by Potlatch and Deltic with the SEC, including a Registration
Statement on Form S-4.
I would like to welcome you
to the joint Potlatch and Deltic Investor Call and Webcast. With me in the room are Mike Covey, Chairman and Chief Executive Officer
of Potlatch; Eric Cremers, President and Chief Operating Officer of Potlatch; and John Enlow, President and Chief Executive Officer
of Deltic.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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This morning, Potlatch and
Deltic issued a joint press release announcing a business combination to enhance its position as a leading timberland REIT and
lumber manufacturer. While we are excited to discuss the strategic and financial rationale of bringing these 2 great companies
together, I would like to first cover Potlatch's third quarter earnings, which were also released this morning.
This morning, Potlatch reported
GAAP net income of $33.7 million or $0.82 per diluted share in the third quarter. Excluding amounts related to a lumber swap and
an environmental claim related to Avery Landing, our net income was $38.7 million or $0.94 per diluted share. This compares to
net income of $24.3 million or $0.59 per diluted share in the second quarter.
Our Resource segment's operating
income was $41.8 million in the third quarter compared to $19.5 million last quarter. The doubling of this segment's operating
earnings relative to the second quarter was driven by seasonal factors consisting of higher harvest volumes and a larger component
of hardwood sawlogs in the South.
In our Wood Products segment, excluding
amounts related to a lumber swap, operating income was flat sequentially.
Our Real Estate segment generated
operating income of $1.4 million in the third quarter compared to $5.8 million in the second quarter. The decline was primarily
due to the sale of fewer acres.
Our business continues to generate
strong cash flow. And this morning, we announced that the board has increased Potlatch's annual dividend from $1.50 per share to
$1.60 per share. We ended the quarter with cash of $117 million, and we have $20 million of long-term debt maturing at the end
of 2017 and early 2018 that we expect to repay with cash on hand.
At Avery Landing, we do not
anticipate any further environmental charges beyond the $5 million charge that we took in the third quarter. We expect to realize
cash tax benefits of approximately $6 million related to Avery Landing over the next several months. Approximately $4 million of
the cash tax benefits will be realized after we sell the property, which we intend to complete by the end of 2017. Included in
our supplemental slides is an overview of our outlook for the fourth quarter.
I will now hand the call over to
Mike to discuss the merger with Deltic.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Thank you, Jerry, and good
morning, everyone. I'm excited to be in El Dorado, Arkansas this morning with John Enlow to announce the merger of 2 great companies
with a long history of timberland ownership and wood products manufacturing. Potlatch and Deltic share nearly identical business
models in the Resource, Wood Products and Real Estate segments we both manage. The combination significantly increases the scale
of the company as we will own nearly 2 million acres of timberland across 6 states. In Wood Products, we will produce 1.2 billion
board feet of lumber and an additional 300 million square feet of panel products. Upon completion of the merger, we will continue
to be the timber REIT with the most leverage to lumber prices, and we will enjoy the upside from the continued improvement in U.S.
housing.
Given our similar business
models and long history, we felt it was appropriate to continue the legacy of the 2 companies with the name PotlatchDeltic upon
completion of the transaction. The company will be headquartered in Spokane, Washington, and I will serve as Chairman and CEO,
and Cremers will continue as President and Chief Operating Officer. Upon completion of the merger, John will serve as Vice Chairman
of PotlatchDeltic, leading the integration effort. The new company will continue to have a presence in El Dorado, which will serve
as our Southern operational headquarters.
As you know, Deltic is one
of the few remaining C corp's in the industry, and the conversion of these assets into a REIT structure will be more tax efficient
and allow PotlatchDeltic to return more capital to shareholders. There are 3 major benefits to the combination of the companies
that will provide meaningful synergies and operating improvements going forward. First, there is an opportunity to increase harvest
levels on Deltic's timberland by 30% to 40% and convert older and mature stands -- natural stands of timber into faster-growing
plantations. Second, Deltic has been operating at sawmills below a full 2 shift basis. And this transaction enables an increase
in output -- total output up to 375 million board feet
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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once additional dry kiln capacity
additions are complete in 2018. Finally, while this transaction creates a much larger company, there is also an opportunity to
reduce corporate overhead, which is currently required to run 2 separate standalone public companies.
There are series of slides accompanying
this presentation which provide more deal about the merger and outline the benefits. Before we cover those, let me offer some background
about how we got here, and then, John, will provide some comments on why he and his board feel this is the right combination for
Deltic.
We approached Deltic about
combining our company several months ago. John joined Deltic in March and quickly identified the opportunities I mentioned as to
optimize harvest levels and mill output. Over the next several months, we continued discussions with John and his team regarding
a merger, and we are pleased to have reached an agreement that benefits both companies.
Under the terms of the transaction
agreement, Deltic shareholders -- stockholders will receive 1.8 shares of Potlatch stock for each Deltic share valuing the company
at approximately $1.2 billion, plus approximately $240 million of Deltic debt. Importantly, this stock structure will provide shareholders
of both companies with the opportunity to participate in the significant upside potential of this combination. We are confident
that combining our complementary assets and operations will allow us to create stockholder value in excess of what could be achieved
by either company independently.
The merger is expected to close
in the first half of 2018 subject to the completion of customary closing conditions, including approval by both Potlatch stockholders
and Deltic stockholders in compliance with the applicable Hart-Scott-Rodino requirements. And we look forward to the benefits of
the combination.
Now let me turn it over to John
for some comments.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Thanks, Mike. Let me echo Mike's
comments wholeheartedly. We're very excited about the potential of the 2 companies combined to unlock value. As we've indicated
in previous communications for the past many months that Deltic board and I have explored a wide range of strategic options, both
internally and externally. We conducted a robust and competitive exploration process with a number of external parties, while also
developing a comprehensive transformation plan to maximize value on a standalone basis. Having considered all the options, the
board and I were convinced that this is the best path forward to maximize value for Deltic and for both companies combined.
I'm personally committed to
my role as Vice Chairman of the new PotlatchDeltic to work with Mike, the other senior executives and the Board of Directors to
ensure we have a successful execution on the potential of the 2 companies combined to unlock value and to capture the significant
upside in the Deltic assets we've highlighted previously.
Now let me turn it back over to
Mike for additional comments.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Thanks, John. We very much
look forward to working with you to continue our strong presence in Arkansas' communities and to make PotlatchDeltic one of the
nation's leading timber REITs. We're confident about the financial underpinnings of this merger and the benefits for the stockholders
and employees of both companies.
Excluding one-time cost needed
to achieve the synergies, we expect cash available for distribution, or CAD, per share will be modestly positive in year 1, and
we expect accretion of approximately 5% in year 2. As you can see on Slide 11 in the materials, we've identified an estimated $50
million of operational improvements in synergies that will lead to an increase in CAD.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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On Slide 12, we expect combined
CAD to grow from $133 million on a pro forma basis in 2017 to $183 million using the same benchmark year with run rate synergies
achieved.
We're confident in our ability
to attain these synergies, especially with John's knowledge and experience working with Deltic this year. Upon completion of the
merger, we will issue approximately 22 million shares of Potlatch stock to Deltic shareholders. Once the merger is complete, Deltic
stockholders will see their dividend increase more than 7x the current Deltic rate.
To complete the conversion
of Deltic to a REIT, PotlatchDeltic will need to purge an estimated $250 million in retained earnings and profits before the end
of 2018. This will be completed with a special dividend of cash or 20% of the amount, and the balance will come from the issuance
of shares to all PotlatchDeltic shareholders.
Before opening it up to questions,
let me say, again, how excited we are to be combining 2 great companies that will offer investors more scale and liquidity, a larger
geographic footprint, more market diversity and sustainable long-term value. For the employees of each company, there will be more
opportunities for growth and advancement.
We're also pleased to continue
a strong presence in El Dorado and throughout the rural commodities in Arkansas where both companies operate today. As Jerry noted
in his comments, we continue to have strong earnings from our core business and expect another excellent fourth quarter.
Christie, we'll now turn the
call over to questions.(Operator Instructions) And your first question comes from Gail Glazerman with Roe Equity Research.
QUESTIONS AND ANSWERS
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
I guess, a few questions. In terms of the ramp up
in the harvest activity, how quickly do you expect that to happen? What has been the hold-up to-date? Has it been markets or just
physical capacity?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Gail, this is John. We expect
it to happen -- it's actually beginning already. We've been working over the past number of months to develop the market, put in
place the production capacity. All of that is starting to gain traction in the late third quarter and particularly gaining momentum
into the fourth quarter. And we feel really confident that will carryover into next year. So it's underway, and we feel like we're
off to a good start.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Gail, let me add, I think especially
the positioning of the Deltic assets and the Potlatch timberlands in this area of South Central Arkansas that a number of new mill
starts and restarts in this area, which really fit nicely with the timing of an increased harvest level, especially at mature large
sawlogs. Conifex here in El Dorado is starting a new mill. They're in the process of that today. We had a lumber company, Canfor,
just announced a large expansion at Urbana, just up the road here. I think they announced that this morning or last week. So it's
a dynamic and growing market and the timing couldn't be better.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
Okay. And can you talk a little bit about the HBU potential
within the Deltic lands? It seems like it's maybe a little bit different than your traditional Potlatch HBU?
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, I'll speak to it first
and then let John add to it. It's certainly a more downstream business than what Potlatch has been involved in, especially up around
Little Rock where there is residential and commercial development that Deltic's been in for a long time. But there is also a very
large block of rural recreational land in Central Arkansas in the Heber Springs areas and other ideas around Little Rock that we
think is quite suitable for the HBU development work that we've done, which is typically just selling real recreational timberland
after we've harvested it. I'll let John add more.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes. So just a little more
color on our existing Real Estate business there in Little Rock. It's anchored by our Chenal Valley development, which is roughly
4,200-acre mix used master-planned community. And the other thing that we're really excited about and one of the things that attracted
us to the combination with Deltic as a partner is to utilize their expertise to basically jump start the opportunity we saw in
the rural HBU in the portfolio. So that's a really nice add and upside going forward.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
And Mike, this might seem like
kind of a weird strange question in the context to today. But a trade publication a couple weeks ago talked about you looking at
another acquisition in Idaho. And I'm just wondering, I guess, where you stand strategically from you think you'd be able to do
incremental deals at this point? Or is the focus all just beyond integrating Deltic?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, we did -- we completed
a bolt-on acquisition in Idaho in the third quarter as well as another property in Alabama in the third quarter. You will see that
in our -- if you look at our cash position, I think we spent a little over $20 million between the 2 acquisitions combined. And
I don't think that -- I don't think anything with this acquisition or with this merger today really prevents us from continuing
to try to grow the company going forward. We have a strong balance sheet. I think it's only going to get stronger, and the cash
flows in these Deltic assets are going to continue to grow. And I think we're very much still in the market trying to grow the
company where it make sense, particularly with bolt-on acquisitions.
Operator
Your next question is from George Staphos with Bank of
America Merrill Lynch.
George Leon Staphos
- BofA Merrill Lynch, Research
Division - MD and Co-Sector Head in Equity Research
Good luck with the transaction
everybody. I guess, my first question, recognizing it's day 1 of the announcement, can you talk to what you think the upward and
downward tensions might be in the 5% accretion estimate for CAD in year 2 aside from markets, so just for things that are controllable
in your -- from your perspective?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes. George, this is Eric.
The synergies that we've outlined in the presentation deck of $50 million, we're highly confident those are achievable. And of
those, there's really 4 big buckets that we've identified. We've already talked about a couple of those. But Deltic is already
well on its way towards achieving a higher harvest levels as well as expanding their lumber production. The REIT tax savings, it's
a paper exercise basically. There's no issues with us getting those synergies in 2018. And the SG&A rationalization, we hope
to have that complete in kind of 3 to 6 months post-closing. And we feel really good about those synergies. There's additional
synergies beyond the synergies we've outlined on this page. They're more operational
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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in nature, things like getting
the right log to the right mill, optimizing several cultural practices, best practices and preventative maintenance programs in
the mills. So there is a wide variety of additional operating synergies that we expect to realize. It's going to take us time to
get after those. And they're -- collectively, they're large, but individually, they're small. But getting back to your question
around the plus or minus 5%, I don't think that we're expecting to see much variance outside of that 5%. These synergies that we've
identified are pretty hard and fast. And we spend a lot of time in due diligence getting our arms around them, so we feel pretty
good about it.
George Leon Staphos
- BofA Merrill Lynch, Research
Division - MD and Co-Sector Head in Equity Research
Okay. I've lot of question
there, Eric. Can you comment at all on the safety programs in the Wood business of Deltic relative to Potlatch? Are there any programs
that need to be employed in the new combined entity? And can you talk a little bit about what's the capital required is for that
additional kiln capacity that will allow you to then ramp up? I think you said the production of another 300-million-board-feet-plus
in, I guess, year 2 and thereafter?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes, George, this is John. I'll
comment on those. So on the safety program, first, I guess what I would say is they are very similar safety programs. But as Eric
said, part of the opportunity is to look at best practices across the company. Certainly, we'll do that, and to the degree that
there's learnings and improvements, then we certainly want to bring those in. The -- in terms of the kiln project, that's at our
Waldo Mill. That's going to start in the very latter phases of this year and carryover into next year. And it's in the ballpark
of a $4-million-project.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
Okay. Very good. My last question, I'll turn over and
jump back in queue. Recognizing in Real Estate, trends vary quarter-to-quarter, was there anything from a forward trend standpoint
that we should be moderating because of the lower earnings in 3Q versus 2Q and year ago?
Jerald W. Richards
- Potlatch Corporation -
CFO and VP
Yes. So George, this is Jerry
Richards. In terms of Potlatch's Real Estate earnings in the third quarter, our Real Estate business is fairly lumpy. I mean, we
had a couple of larger transactions we completed in the first half of the year. If you recall, our guidance for the year was about
20,000 acres. And when you take what we've done year-to-date through the end of the third quarter plus the guidance of about 3,000
acres in Q4, I mean, that will give you kind of a total for the year of 17,000 acres. There's nothing to be concerned about. Again,
it's a lumpy business. At times, it takes a long -- a bit longer to get funding when the funding sources are from the government,
or other factors can delay deals. So what we have is some transactions that we expected to happen for the year in the fourth quarter,
actually slipping and pushing out a little bit. So it's just a matter of time. Not any concerns whatsoever with markets or what's
happening.
George Leon Staphos
- BofA Merrill Lynch, Research
Division - MD and Co-Sector Head in Equity Research
Yes. I wasn't actually getting into timing issues, so
I appreciate you going through those, just in case, there was anything, again, from a forward trend that we should monitor in terms
of sounding like that was the case. So I appreciate it. I'll turn it over.
Operator
Your next question is from Ketan Mamtora with BMO Capital.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
Just first question on the synergies,
different buckets. From the 35% incremental lumber production, how much capital will be needed to boost that production, and what
sort of a time line is that? And second related to that is, how much of the increase is baked into your year 2 guidance when you've
talked about kind of 5% CAD?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
So Ketan, what we've talked
about was the Deltic is well on its way towards expanding that lumber production. There's just a little bit more capital that needs
to be spent on kilns. They will need to add operating hours at their mills. But for the most part, that expansion is well underway
and we expect to get to it next year. Some of it will slip a little bit into full year 2019 because we won't get the benefit of
the full kiln in 2018. But very nominal amounts of capital required for us to get that incremental amount of production.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
And just to add a little color
on to that, I mean, to kind of reinforces Eric's point, it really is the kiln project at Waldo that we just talked about, a very
small amount of capital. And then at the Ola facility, we invested heavily in a small-log line the latter part of last year and
optimized bucking system for the existing processing line. And it's basically achieving the full potential of those for the remainder
of this year and then carried into next year.
Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
All right. That's helpful. And then, Mike, can you just
walk us through once again on how this kind of earnings distribution of $250 million will work? Just the mechanics of this.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Yes, Jerry can go through that.
Jerald W. Richards
- Potlatch Corporation -
CFO and VP
Yes. So Ketan, in terms of
that $250 million, I mean, what that represents is earnings has built up within Deltic's history as a C corp, and as part of converting
to a REIT that has to be distributed to stockholders, not to go to all stockholders, combined Potlatch and Deltic by the end of
2018. And that will come in the form of 80% stock and 20% cash.
Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
Got it. And that's helpful. And then would there be any
restrictions on sale of any of the assets once the merger is done?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Any restrictions you said?
Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
Yes. Yes.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
No. This business will -- we don't look at anything in
the portfolio today and think that it needs to be sold or should be sold. We think they're all a great fit. In fact, most of the
businesses can grow and improve, but there's no restrictions on revaluating any of the -- anything in the portfolio.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
So one thing I would add to
that, Ketan, is when we convert Deltic's timberland operations to a REIT, there is a 5-year kind of built-in gain window that we
would have to consider. But to Mike's point, that doesn't restrict us from doing thing, but it certainly would be a factor that
we would consider.
Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
Got it. Okay. That's helpful.
And then just 1 of the question coming back to Real Estate, kind of just give us some thoughts on how you all are thinking about
valuing this business, especially the Real Estate component, the 1 in Little Rock because as you said, it's slightly different
from what you guys are doing. So just help us think about how you guys thought about valuation there? And also the issue of absorption,
right, because that's another important element.
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes, Ketan, it is a slightly
different Real Estate model than the one Potlatch operates today. As you know, we generally just sell raw land. We sell that raw
land at values that tend to be multiples of what that land is worth from a timber standpoint. Whereas Deltic's real estate business
tends to be more downstream. It's real estate development around Chenal Valley as John talked about earlier. I think the great
news is that Deltic is well over half the way through developing that Chenal Valley property. There is a lot of momentum in west
Little Rock to continue building out that property. They have a lot of momentum selling both lots and commercial acre -- residential
lots and commercial acres. So they're well underway with that. I think the one thing that Potlatch can do to perhaps add value
to what Deltic is doing on the real estate front as Mike spoke about is we can further expand their rural HBU land sales program.
I think if you look at our track record over the past 5 to 10 years, we've demonstrated that we can sell -- we know there's 20,000
acres a year, we call it same-store sales are generally small tracts of land. But year-in, year out, we'll sell about 20,000 acres
of land. And there's opportunities with Deltic's land holdings for us to bring similar stratification to their business and realize
that opportunity.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
John, you want to speak to absorption?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes, Ketan, just add a little
more color on the Chenal Valley potential going forward. So part of what we've done over the past 7 months is looked at the competitive
position of all of our businesses, understood what the potential was in terms of kind of best-in-class performance. Part of that
for the real estate business was to really understand the market on a deep level kind of the market drivers there in Little Rock
and put together a go-forward plan that captures the full potential of absorption in terms of our go-to-market strategies, the
different products that we offer, all of those kind of things. So the outgrowth of that is, with that work combined with strengthening
commercial activity, we see the absorption going forward being upside to what we've seen over the last couple of years.
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Ketan Mamtora
- BMO Capital Markets Equity
Research - Analyst
Okay. That's helpful. And just 1 last question.
You've obviously became now a very large player in Arkansas, in timberland. I'm just curious, can you do anything to kind of draw
more converters into your fiber basket?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, it sounds big, but in
the scheme of timberland in Arkansas, we're still fairly small. I think there's around 15 million private acres in timberland in
Arkansas, another 5 million is public. So we have a fairly small footprint in the grand scheme of things. But I also think if you
look at the converters that are in place here, West Fraser has multiple facilities; Interfor, Canfor, Georgia-Pacific is in a lot
of places. All of these are world-class manufacturers. Not to mention the PotlatchDeltic facilities, there's 3 mills as well as
an MDF plant now will be when we close. So all these companies have announced capital additions and expansions in Arkansas. It's
a great place to do business. Timberland is plentiful. The proximity of the Texas market is a real plus here. We're a 4-hour drive
to Dallas. And I don't think there's really anybody positioned closer to that market than these mills in South Central Arkansas.
So it's an exciting place to do business, and it's going to get better.
Operator
Your next question is from Collin Mings with Raymond
James.
Collin Philip Mings
- Raymond James & Associates,
Inc., Research Division - Analyst
Congrats on the transaction.
First, just maybe strategically, Mike, just expanding on some of the other questions, just talk a little bit more about just the
concentration of the combined entity in Arkansas. And then, just given this expanded operating platform that the combined entity
will have, how you think about moving forward and expanding in other areas in the U.S. South? Maybe outside of that Gulf South
region that you've talked about, again, looking at bolt-on acquisitions, but maybe further diversifying in the South just given
the expanded platform in particular?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, as you know, the geographic
concentration in Arkansas when Potlatch was a much smaller, certainly, was a risk for us. And mill closures during the financial
recession caused us to have to reduce harvest and lose value. But I think not only is that period in time behind us, but with the
Deltic facilities combined with the Potlatch facilities, we just got a lot more options to work with now, not to mention the external
customers. So I don't think the geographic timberland concentration to me is a concern at all in Arkansas with a -- the wider footprint
we have in a number of customers. Our acquisition strategy to grow the company remains focused in the U.S. Central South, Alabama,
Mississippi, Arkansas, Louisiana, touching those states. And I think we have a good platform in all 3 states. Very small footprint
in Louisiana that Deltic has, but certainly, in Alabama and Mississippi and here, I think that's where we'll focus our acquisition
and growth efforts. We will not venture outside of the Gulf Central South into the Southeastern seaboard. There's just too many
-- too much competition there.
Collin Philip Mings
- Raymond James & Associates,
Inc., Research Division - Analyst
Okay. That's helpful color. And then moving to the
dividend increase, again, normally the board, it seems historically has taken a harder look at this a little bit later in the year.
Can you just maybe touch on that decision? And how the pending deal is factored into the dividend bump?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, as we mentioned, we have
$117 million in cash at the end of the quarter. That was after completing a $20-some-million worth of timber acquisitions in the
third quarter and paying our third quarter dividend. So the cash position of the company continues to increase. The board feels
really confident about the combination of these 2 companies going together. And I think the dividend increase time now rather than
in December
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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is just a signal about the confidence they have
in the business and our ability to generate cash in the combined businesses. So it's time to return some of that to shareholders
in the form of bigger dividend.
Collin Philip Mings
- Raymond James & Associates,
Inc., Research Division - Analyst
Understood. But it sounds like a lot of the decision
was just kind of based on current operating fundamentals as opposed to any sort of incremental accretion, which again would seem
like -- extends the runway for future dividend growth. Is that fair?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
I think it's both. Yes, I think, certainly, our existing
business was doing very well, and we're very confident these combined businesses are going to do better. And so hopefully, this
is the beginning of a longest stream of dividend increases going forward.
Collin Philip Mings
- Raymond James & Associates,
Inc., Research Division - Analyst
Okay. And then maybe switching to John, just particularly
from your position, can you talk a little bit about how the exchange ratio was established, especially given the clear opportunity
that you guys had outlined to better optimize cash flow going forward?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes. So we look at it, we kind
of triangulate it from 3 different perspectives, principally looking at the relative contribution of the 2 companies in terms of
their cash flow contribution going forward. That was 1 perspective. The other was, I mentioned that we were in a competitive process.
So obviously, we thought about the value relative to other opportunities on the table. And then, we also squared it back with our
view of the underlying value of the -- net asset value of the company and the asset. So when we triangulated it in that direction,
we felt like we landed in a really great spot that there was a good value for the combined companies going forward.
Collin Philip Mings
- Raymond James & Associates,
Inc., Research Division - Analyst
Okay. That's helpful. And then
just 1 last one from me as far as -- a more housekeeping. Just thinking about the combined Real Estate platform, again, a couple
of questions already on this front. But just, Mike, just how you think about capital commitment to that going forward? Again, historically,
Deltic had put some more capital in than you guys have. Would you look at kind of ratcheting that up? Are there potential opportunities
to put more capital in some of maybe the legacy Potlatch lands? Or is that something that maybe you'd wind down over time just
to reduce the risk profile?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Well, I think once the merger
closes, we'll certainly take a deeper dive with John and look at what makes sense for the business in terms of how to maximize
returns. We're certainly not averse to continuing to invest capital in downstream real estate business, if that's the best way
to convert those assets to cash for the shareholders. So I do not think it's going to change our view on any legacy Potlatch land.
It's a totally different character of the property that's outside of Little Rock and the Chenal Valley than anything Potlatch owns.
So our land base is strictly with very few exceptions real recreation land. So we'll scrub it once we get closed. But I think that
-- I think John and his work here over the last several months is on a good course and understands it well.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Collin, just to add a little
color to that for our capital requirements on the existing real estate business. The important thing to understand is that, that
development has been ongoing for a number of years, and the real heavy capital lift is well behind us. Going forward, it's really
just the kind of the street infrastructure for the neighborhoods that we open. And so you're talking low single-digits in terms
of millions per year in capital requirements. So fairly modest relative to the cash flow return.
Operator
Your next question comes from Mark Wilde, BMO Capital
Markets.
Mark William Wilde
- BMO Capital Markets U.S.
- Senior Analyst
Congratulations. Just let me
come back to the issue of kind of harvest volumes off of the Deltic land. You talked about kind of pulling them up from the current
rate, which I think last year was a little less than 2.5 tons per acre. I'm just curious, like is there going to be like a 5 or
10-year bubble in a sense that where you really are kind of playing catch-up to bring the harvest age down and clear-off some of
this cumulated inventory? Or should we think about just more of a kind of a steady and sustained ramp up over time?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes, Mark, this is Eric, I'll
take that one. There is a significant amount of mature timber that Deltic has on its ground that we will get after here in the
near term. You will see a ramp up from where they have been operating. And then after, I suppose, 10 years, that will moderate.
But these are not huge swings that we're talking about. So you will see an increase, but not a huge decline after that.
Mark William Wilde
- BMO Capital Markets U.S.
- Senior Analyst
Okay. I was just trying to get a sense of, when you
think about a big deal one of your competitors did out in Washington State a few years ago, they had several years where they could
really accelerate the harvest, and now it's coming back to a more of a normal level.
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes. No, this won't have a significant drop-off.
I mean, it may go down a couple of 100,000 tons from -- I don't know, if I gave you a range, I'd say it's 1.8 million to 2.2 million
tons a year for basically now to perpetuity.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
And Mark, the real driver there
that make sustainable over time is the change in the forest management practices going forward. You've heard us talk about, we've
got roughly 23% of our current ownership that's slower growing, higher quality natural stands. So that's mature volume that can
be brought to market and then put into faster-growing plantations. And then in our -- the rest of our plantation land base, there's
significant opportunity to more intensively manage those to up the growth rate across the estate. So that kind of feels in behind
the initial surge of mature volume and makes that sustainable over time.
Mark William Wilde
- BMO Capital Markets U.S.
- Senior Analyst
Okay. And then John, I'm just
curious will there be some details on just sort of historical numbers on the real estate -- on your Real Estate business coming
out? I went back to a slide deck, we went through with you guys back in May out in Seattle, I think, I didn't see any numbers on
there where you really broke out the financials on the Real Estate component?
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John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes, Mark, we're happy to talk with you offline.
And we can give you -- field any questions that you have. That's probably the most appropriate way to field it.
Mark William Wilde
- BMO Capital Markets U.S.
- Senior Analyst
Okay. That's fine. And then the last question I
had. Mike, is it possible to get an estimate for what kind of cash costs for the synergies would be? And then any change in control
payments?
Jerald W. Richards
- Potlatch Corporation -
CFO and VP
Yes. So Mark, this is Jerry
Richards. I mean, overall, we look at cash costs. They're probably somewhere around $20 million. And that's all-in, including adviser
fees in terms of the transaction, change of control as well as cost to achieve the synergies. And if you were to break that down,
it's probably roughly half in each of those 2 buckets, i.e., transaction-specific costs as well as costs to achieve synergies.
Operator
Your next question comes from Steve Chercover with Davidson.
Steven Pierre Chercover
- D.A. Davidson &
Co., Research Division - MD & Senior Research Analyst
Congratulations. So a quick question on first of all
Deltic and the MDF plant. Is it still the part of the 50-50 JV? And does this deal trigger change of control? It doesn't sound
that way?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Steve, this is John, I'll field that. We bought out
that partnership a few years ago. So it's wholly-owned by Deltic and there's no restrictions in terms of deal implications going
forward.
Steven Pierre Chercover
- D.A. Davidson &
Co., Research Division - MD & Senior Research Analyst
Okay. And then it looks like the Deltic sawmills,
actually, the MDF plant 2 have been operating well below their rated capacity. So once you've finished the kilns and whatever other
debottlenecking, will they be up to that rated capacity?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes, so let me speak to Del-Tin
first since we're on that subject. You're probably aware we talked about that we had a substantial press rebuild that took place
in August. That was complete in the third -- or the third week of August to really address some issues that had hobbled us over
the last year or so. We're extremely pleased with how that has gone. We're 6-or-so weeks away from that startup. The startup went
great. We're operating in the high 90% uptime. And our run rates on a weekly average basis have far exceeded what we had in the
pro forma for the balance of the year and are actually approaching. And in some cases, ahead of the run rate that we had in the
pro forma for next year. So that's been a great success. Product quality is high. Our thin board percentage is right on target.
That's a really high-margin product for us. So that has gone awesome. Back to your sawmill -- your question around the sawmills.
It really goes back to what we've talked about thus far in the call. It's realizing the full run rate potential of the investments
that have already been made in Ola. There's the potential for additional kiln investment later on to even further that
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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at Ola. And then at Waldo, it's the kiln project that
we talked about for the latter part of the year. And those 2 will put us on the pace to achieve the numbers that we talked about.
Steven Pierre Chercover
- D.A. Davidson &
Co., Research Division - MD & Senior Research Analyst
A few other quickly. Evidently, Southeastern Asset Management
has lost the deal. Do you have any idea whether they will remain shareholders in the merged company?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Steve, I can't really speculate on what individual
shareholders will do. I guess, what I can say with absolute confidence, we think this is the right path forward, and we believe
shareholders will enthusiastically embrace that.
Steven Pierre Chercover
- D.A. Davidson &
Co., Research Division - MD & Senior Research Analyst
Great. Last one. There's been very little mention of
Deltic's oil and gas revenues. So is it just not material with oil at $50?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
It's a meaningful cash flow stream for us. And you
can see in our historicals that as oil prices recover, it can be really substantial. And we feel like that potential is out there
at some point.
Operator
Your next question comes from Chip Dillon with Vertical
Research.
Clyde Alvin Dillon
- Vertical Research Partners,
LLC - Partner
I had a quick question. Just
first of all, when we look at the Real Estate, the Deltic -- that division historically, is it fair to say that -- I mean, in a
very rough sense that, I see the book value is around $60 million. You mentioned a lot of the investment has -- is behind you in
terms of getting that ready for sale. And so, I mean, would a rough valuation of present value of like double that number be in
the ballpark of at least how maybe you guys at Potlatch looked at the valuation as you put together your bid?
Jerald W. Richards
- Potlatch Corporation -
CFO and VP
So Chip, if I may, this is Jerry
Richards. I'm going to jump in and just say it's pretty mature to start talking valuation of individual components. We will be
filing, as we mentioned in comments, an S-4 here in the next 30, 60 days. And in there, we will provide pro forma financial statements.
So we have a fair bit of work left to do on that, and that information will be coming.
Clyde Alvin Dillon
- Vertical Research Partners,
LLC - Partner
Understood. And then second
question has to do with the taxation on -- of special dividend. This is the first conversion. And I know this is happening inside
of the new Potlatch that we've seen since the 3.8% additional Medicare tax, I'll say it very objectively, was imposed on folks.
And I noticed in at least on the term sheet that you put up that the 1 pager, that you mentioned that maybe some people would pay
a 20% tax. I don't know anybody that's going to pay 20% tax on federal dividends. That would avoid the 3.8% Medicare tax. If you
know how to do that, let me know. So
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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it's really 23.8%. And then -- then, of course, if you
have folks in California, that number could get up close to 30%. And so obviously, since the full
$250 million is going to be
reflected on people's 1099s, it's going to actually require a number of individual shareholders and maybe even other entities for
(inaudible) et cetera to have to dig in their pockets to pay that tax. And I just didn't know if you thought because things were
different from like when you all, at Potlatch, did your conversion now that we have this Affordable Care Act Medicare tax of 3.8%,
if you thought maybe you might want to change that to like 25-75, and if you're open to that because that might be an issue.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
So Chip, on terms of all of
those factors, Medicare tax, et cetera, I mean, our intent in the slides was just to stay in the high level. So you're right. Those
are all considerations that shareholders would have to consider. I think it's pretty safe to say that we're pretty confident in
the 80-20 split that we didn't -- not necessarily thinking about jumping that cash component up.
Clyde Alvin Dillon
- Vertical Research Partners,
LLC - Partner
Okay. And then I know I think it was you, Eric, you mentioned
that the built-in profits period was 5 years. I thought it used to be 10 years. Did that change somehow? Or why is that 5 years,
for the tax on the built-in gains on the Deltic side once they convert?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes, Chip, that actually did
change here fairly recently. If you recall one of our large competitors converted to a REIT in 2010. And that built-in gain period
only applied to them for 5 years because that change was made before that window lapse. So it is 5 years going forward for the
Deltic timberlands related operations.
Clyde Alvin Dillon
- Vertical Research Partners,
LLC - Partner
Okay. And then one last one.
On Slide 12 of the presentation, which shows the CAD bridge, you mentioned 20% of the $50 million is tax savings. Now I noticed,
for example, last year, Deltic's tax expense was $3 million. I know there was that 1 year -- a couple of years ago it was higher
because, I guess, there was a lot -- there were a lot of sales. But I mean, I know Potlatch's effective tax rate with all the non-reactivities
is 15% to 20%. So I guess, my question is this is, does that 20% include the fact that these synergies will now happen within --
partly within Deltic and now that Deltic is not a C corp, you sort of are giving credit for them not having to pay tax on at the
same rate as they would have had to pay. Does that make sense? Is that fair that's also included?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
The simplest way to think about,
Chip, is that, today, Deltic is not harvesting near the rate they will be in the future. At those higher harvest levels, they're
-- were doing the business. We call it Resource. We'll be generating significantly higher earnings and cash flow. And of course,
as a timber REIT, those earnings are passed through to shareholders. Whereas as the C corp, they're taxed at C corp rates. So that
$10 million is from the higher harvest volumes that we anticipate getting here shortly.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Chip, this is John. The other thing I would add
to that just as a reminder that there's a little bit of noise in our historical tax, particularly, in 2016 where we had the 1-year
benefit of the TREE Act, which reduced our effective tax rate to 20%.
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Clyde Alvin Dillon
- Vertical Research Partners,
LLC - Partner
Okay. And just a housekeeping note. Should we assume
there's not a call tomorrow since we -- since you all have reported and we can call you today?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
That is correct, Chip. We, actually, in the 2 press releases
this morning merger announcement as well as the earnings release indicated that call had been canceled.
Operator
Your next question is from Mark Weintraub with Buckingham
Research.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
First, just wanted to -- on the lumber side, just to
make sure I understand. So the 420 million board feet. Is that where you're expecting lumber production to end up? Or is there
-- as some of these projects are finalized, does this go higher than the 420 million board feet?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes. So Mark, this is Eric.
Our current plans are to continue along the path that Deltic has outlined, ramping up the production of their mills. Our view and
I think Mike spoke to it in the notes is that we expect to get their mills up to combined around 375 million board feet. Certainly,
Potlatch has got a demonstrated track record. Every year, we find ways to increase our production and shipment levels. Each of
the last 2 years, we've been up in the 7% to 10% a year increase. We hope to do that with the Deltic mills going forward. But for
now, I think the plan is to get them up to 375 million feet.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Okay. And so where -- in the synergy and operational
efficiencies table, you talk about $17 million, $18 million from expanded lumber production. That includes going from where to
where?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Well, that would include taking them from their historic
volumes of around 275 million feet up to the 375 million feet that we just spoke about.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Okay. So for a 100 million board feet an incremental
$17 million, $18 million. So presumably, you're using -- in that analysis you're using kind of current run rates of profitability,
or pricing and input costs.
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Correct.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
And then on the -- so on the harvest increase where
you talk about an incremental $10 million of CAD, is that also using current profitability levels? Or does that bake in a likely
improvement in Southern saw timber pricing?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Well, we do anticipate modest improvements in pricing
in the South. However, the majority of that uplift in CAD from the Resource business is going to come from the higher harvest volumes.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
So let me just kind of add
a little color to both of those questions. We normally would report earnings in early November. With this deal, we're working really
hard to try to pull that up and anticipate we'll release earnings tonight. And in that earnings release, we'll provide guidance
on where we expect to land in terms of volumes for the year for all of our businesses. So you'll be able to see in there kind of
what the point is for this year in terms of harvest volume, mill productivity, all of those kind of things.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Okay. And so where also on a net basis would your saw
timber harvest be relative to your consumption -- this is just for the Deltic business, for the consumption of saw timber when
you kind of hit the run rates built into the post-synergies and operating efficiencies being realized?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes. So I don't have a precise
number for you. But I think it's fair to say that with the pretty significant ramp up in, as we talked about in the range of 30%,
40%, our harvest will generally exceed our internal usage. And certainly, the real opportunity is to rationalize marketing for
our margin optimization by further utilizing external markets where that makes sense.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Great. Could you just build on that last one? I didn't
fully understand what you meant on the last point.
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Well, it's a little bit of kind
of going back to the historical approach of Deltic was more bringing the majority of its logs, if not all of its logs also its
own lands into its internal mills. And we see a real marketing opportunity and freight optimization, margin optimization opportunity
that we're already starting to execute on and certainly will even further expand in the combination with Potlatch team.
Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Okay. So based -- part of that 35% -- the $17 million,
$18 million of profitability improvement is a function of -- is marketing changes as opposed to just incremental production. Is
that how to understand that?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
When you say marketing changes, what do you mean by that,
Mark?
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Mark Adam Weintraub
- The Buckingham Research
Group Incorporated - Research Analyst
Well, I thought just -- I thought I was just repeating
what I heard, maybe I heard wrong. They had previously been internally using all of the saw timber. And now some of it's going
to go to other buyers who may be are going to effectively pay more than if they had been used internally?
John D. Enlow
- Deltic Timber Corporation -
CEO, President and Director
Yes. So I don't think we want to confuse the issue there.
The principal and primary driver is going to be the volume increase. And there's some additional added benefit from margin rationalization.
But certainly, the heavy hitter is the volume increase.
Operator
You have a follow-up question from Gail Glazerman with
Roe Equity Research.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
Just to get to a last few couple
of quick market questions and housekeeping. That guidance you gave for Wood Products in the fourth quarter, does that include anything
from the swap? And then just generally, if you can talk about what you're seeing in Southern pricing maybe looking out to 2018
and also some thoughts on the trade dispute?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes. So Gail, so we have not
included anything in the fourth quarter for the swap. As you know, we took a write-down of the swap in Q3. That particular product,
Southern Yellow Pine, 2 x 6, is currently trading very close to the swap price. So we don't expect much of a change from here.
It's too early to start talking a lot about 2018. But I think most prognosticators FEA, RISI, et cetera, anticipate higher lumber
prices next year, modestly higher lumber prices next year over this year. So certainly, that will benefit our Wood Products business,
and that will also flow into our Resource business. As you know, 70% of our sawlogs in Idaho are indexed to lumber prices. So we
expect our Resource business to benefit as well.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
Okay. I was kind of asking more just specifically about
Southern log prices for next year. Any sign of movement or momentum?
Eric J. Cremers
- Potlatch Corporation - President,
COO and Director
Yes. So I think Southern log
prices, it seemed to have found the bottom. You're seeing a ton of steel go up in the South. I mean, just look at these announcements
from Canfor here just recently. And GP announced exploring a new mill. I mean, there's tons of steel going up in the U.S. South.
And we're not yet at levels of consumption to where we were pre-recession. But we are working our way towards that 80-million-ton
a year number across the U.S. South. And I think and do foresee, we'll see modest improvements. And I do think you might start
to see a little bit next year.
Gail S. Susan Glazerman
- Roe Equity Research,
LLC - Senior Analyst – Paper, Packaging and Forest Products
Okay. On the trade dispute, just any developments or
thoughts how that might payout with the final [deed] is coming in place and just continuing negotiations?
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Yes, Gail, discussions continue government to
government on, I think, a fairly regular basis, but I don't see any big cracks in negotiations on either side. The final
determination of the CBD and AD, I think, is November 13 or 14, something like that. But we continue to believe, as members
of the U.S. softwood lumber coalition that a quota system is best and I think best serves the long-term interest of the
industry in the United States, and we continue to push for that.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Christie, I think we have time for one more question
before our time runs out here.
Operator
Sure. And your next question is from Paul Quinn with
RBC Capital Markets.
Paul C. Quinn
- RBC Capital Markets, LLC, Research
Division - Analyst
Just I think I read through something the expected time
on the transaction close is first half of 2018. Maybe you could talk about expected date of shareholder voting, and what other
regulatory approvals are required?
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
So just a big picture. We talked
about closing in the first half of the year. Hopefully, it's towards late in the first quarter, early in the second, we hope we'll
file the S-4 and the proxy in about 40 to 60 days. And the shareholder votes take -- they have I think it's 20-day minimum waiting
period before the shareholder votes and neither company has scheduled those yet. So I'd expect those are sometime in the early
first quarter. Hart-Scott-Rodino approval through the U.S. Government is probably the pacing item. We're not concerned about getting
the approval, but there's a regulatory period that we have to go through to get that. And so all those things still point us on
track for sometime in the first half of the year and hopefully towards the end of the first quarter.
Operator
We've reached our allotted time for questions. I will
now turn the call back over to Mike Covey for any closing remarks.
Michael J. Covey
- Potlatch Corporation - Chairman
and CEO
Thank you, Christie. Thank you for all the investors.
For your questions, Jerry will be available all day to answer your questions. And we look forward to speaking with you. Thank you.
Operator
Thank you. This does conclude today's conference call.
You may now disconnect.
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OCTOBER 23, 2017 / 12:30PM, PCH - Q3 2017 Potlatch Corp Earnings Call and Discussion of Combination with Deltic Timber Corp to Create Timberland REIT and Lumber Manufacturer
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ADDITIONAL INFORMATION
This communication is being made in respect of the
proposed merger transaction involving Potlatch Corporation (“Potlatch”) and Deltic Timber Corporation (“Deltic”).
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation
of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. In connection with the
proposed merger, Potlatch and Deltic will file relevant materials with the Securities and Exchange Commission (“SEC”),
including a Potlatch registration statement on Form S-4 that will include a joint proxy statement of Potlatch and Deltic and also
constitutes a prospectus of Potlatch. Potlatch and Deltic also plan to file other documents with the SEC regarding the proposed
merger transaction and a definitive joint proxy statement/prospectus will be mailed to stockholders of Potlatch and Deltic. BEFORE
MAKING ANY VOTING OR INVESTMENT DECISION, SECURITY HOLDERS OF POTLATCH AND DELTIC ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS
REGARDING THE PROPOSED TRANSACTION AND ANY OTHER RELEVANT DOCUMENTS CAREFULLY IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE
THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. The joint proxy statement/prospectus, as well as other
filings containing information about Potlatch and Deltic will be available without charge, at the SEC’s Internet site (http://www.sec.gov).
Copies of the joint proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the joint
proxy statement/prospectus can also be obtained, when available, without charge, from Potlatch’s website at http://www.potlatchcorp.com
under the Investor Resources tab (in the case of documents filed by Potlatch) and on Deltic’s website at https://www.deltic.com
under the Investor Relations tab (in the case of documents filed by Deltic).
Potlatch and Deltic, and certain of their respective
directors, executive officers and other members of management and employees may be deemed to be participants in the solicitation
of proxies from the stockholders of Deltic and Potlatch in respect of the proposed merger transaction. Certain information about
the directors and executive officers of Potlatch is set forth in its Annual Report on Form 10-K for the year ended December 31,
2016, which was filed with the SEC on February 17, 2017, its proxy statement for its 2017 annual meeting of stockholders, which
was filed with the SEC on April 3, 2017 and its Current Report on Form 8-K, which was filed on May 1, 2017. Certain Information
about the directors and executive officers of Deltic is set forth in its Annual Report on Form 10-K for the year ended December
31, 2016, which was filed with the SEC on March 7, 2017, its proxy statement for its 2017 annual meeting of stockholders, which
was filed with the SEC on March 20, 2017, its supplement to the proxy statement for its 2017 annual meeting of the stockholders,
which was filed with the SEC on March 30, 2017 and its Current Reports on Form 8-K, which were filed with the SEC on September
1, 2017, May 2, 2017, March 8, 2017 and February 27, 2017. Other information regarding the participants in the proxy solicitations
and a description of their direct and indirect interests, by security holdings or otherwise, will be included in the joint proxy
statement/prospectus and other relevant documents filed with the SEC when they become available.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This communication contains certain forward-looking information
about Potlatch and Deltic that is intended to be covered by the safe harbor for “forward-looking statements” provided
by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking
statements. In some cases, you can identify forward-looking statements by words such as “may,” “hope,”
“will,” “should,” “expect,” “plan,” “anticipate,” “intend,”
“believe,” “estimate,” “predict,” “potential,” “continue,” “could,”
“future” or the negative of those terms or other words of similar meaning. These forward-looking statements include,
without limitation, statements relating to the terms and closing of the proposed transaction between Potlatch and Deltic, the proposed
impact of the merger on Potlatch’s financial results, the estimated distribution of Deltic’s accumulated earnings and
profits, and the integration of Deltic’s operations. You should carefully read forward-looking statements, including statements
that contain these words, because they discuss the future expectations or state other “forward-looking” information
about Potlatch and Deltic. A number of important factors could cause actual results or events to differ materially from those indicated
by such forward-looking statements, many of which are beyond the parties’ control, including the parties’ ability to
consummate the transaction or satisfy the conditions to the completion of the transaction, including the receipt of stockholder
approvals, the receipt of regulatory approvals required for the transaction on the terms expected or on the anticipated schedule;
the parties’ ability to meet expectations regarding the timing, completion and accounting and tax treatments of the transaction;
the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be realized within
the expected time period; the risk that integration of Deltic’s operations with those of Potlatch will be materially delayed
or will be more costly or difficult than expected; the failure of the proposed merger to close for any other reason; the effect
of the announcement of the merger on customer relationships and operating results (including, without limitation, difficulties
in maintaining relationships with employees or customers); dilution caused by Potlatch’s issuance of additional shares of
its common stock in connection with the merger; the possibility that the merger may be more expensive to complete than anticipated,
including as a result of unexpected factors or events; the diversion of management time on transaction related issues; the estimation
of Deltic’s accumulated earnings and profits is preliminary and may change with further due diligence; general competitive,
economic, political and market conditions and fluctuations, including changes in interest rates, credit availability, adverse weather,
cost and availability of materials used to manufacture products, natural gas pricing and volumes produced; changes in the regulatory
environment; the cyclical nature of the industry in which the parties operate; and the other factors described in Potlatch’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in its most recent Quarterly Reports on Form 10-Q filed
with the SEC, or described in Deltic’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and its most
recent Quarterly Reports on Form 10-Q filed with the SEC. Potlatch and Deltic assume no obligation to update the information in
this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking
statements, all of which speak only as of the date hereof.
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