Potlatchdeltic Corp (PCH) 2003 Q1 法說會逐字稿

Good morning, my name is Tina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Potlatch Corporation First Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Mr. Zuehlke, you may begin your conference.

Thanks, Tina. Here with me today is Pen Siegel, our CEO, and welcome to our first quarter results call. Before we begin, I remind you this call may contain forward-looking statements within the meaning of the U.S. Securities Laws. These statements include statements about the company's future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch's recent filings with the SEC. I would now like to turn the time over to Pen Siegel who will discuss first quarter results and provide an overview of our markets. Pen?

Thanks, Jerry. What I'll do first is make a couple of broad comments that cut across the company related to energy and wood costs that many people in our industry have issued releases on. We did not. Gas prices, as you know, spiked in the first quarter and were quite a bit above a year ago and so that clearly had an effect on costs. For Potlatch, our overall energy costs in the first quarter were actually down a couple of million dollars from a year ago and that reflects, in spite of the gas price increase, continued changes we made in processes at various plants to decrease the amount of external energy we buy either in electrical or gas form and increase the amount we generate internally. Our costs in the first quarter, though, were up something more than $5 million from fourth quarter of 2002 as a result of the spike in gas prices primarily and in part because of the normal cold weather we get in winter. But I'd say it's probably more on the gas side with most of that falling in the pulp and paperboard segments. The other comment would be in wood cost in the south, we had an extremely wet winter and a number of manufacturers, I think, were forced to take downtime because of inability to deliver wood to their pulp mills and, in some cases, their sawmills. We did not take any downtime, and given the road system we've got in the south and our fee ownership, there really was not much effect in the solid wood business. We did have to, because of the water and because many of the places you normally find hardwood pulp woods are seasonally under water in the first quarter, we did have to pay more for wood and bring it in from further away and so that affected our wood costs to a degree in our Arkansas paperboard operation.

I'll now go - - those are really the only two things I think are semi-unusual. I'll go to each of the businesses. First quarter for us is, as most of you know, a seasonally weak quarter and there really are three basic reasons irrespective of natural gas or wood costs. It is the seasonally weakest demand period for solid wood products in terms of consumption just because of weather and the effect that has on construction. Secondly, and probably more importantly for us, it is the low point in our resource division income and that relates to the inability to deliver wood at certain times of the year, February, March and April, but it really peaks in the first quarter because of road restrictions and operating in the far north. We are unable to deliver wood. It doesn’t affect harvesting to much degree but it does have an effect on the deliveries and clearly until you deliver it, its not a sale. So that is always a seasonally weak quarter for resource and is our lowest quarter of the year by far. And the third factor is winter. With plants in Idaho and Minnesota, it costs more, not just from a natural gas standpoint, but it costs more to keep plants and costs more in terms of frozen wood and wood yields and that's a normal phenomenon which happens in the winter.

Moving to the various segments of the business and what's happening, resource had, I believe, a normal quarter affected by winter, but there's nothing unusual going on in resource. We had slightly more sales of excess timberland in the first quarter. Land had really higher and better use values than we did in the first quarter a year ago but it was a small number. And that's something which will change a little bit quarter to quarter just depending on when sales of non-strategic land, which are worth more to others, happen to close In the wood products segment, the lumber business was over-supplied. It remained over-supplied in the first quarter. The panel business started off relatively weak, strengthened somewhat in February and March, and has strengthened a little bit since then. Our OSB, which is our big product in panels, markets were slightly better than a year ago. Jerry will go through later some specific statistics on each of these businesses in terms of giving you some idea of shipments and realizations. But that business is somewhat stronger than it started the year at this point in time and there do not appear to be substantial inventories in the field and as we get further into spring and the northeast and parts of the south dry out, we would expect somewhat better demand in that area.

Moving to pulp and paperboard, in the pulp and paperboard area, our - - from a market standpoint, the pulp market has strengthened quite a bit over the last three months. That isn't a big factor for Potlatch because on balance we're about very slight net sellers or net buyers in a given quarter. But all of the pulp that we sell in paperboard to our own tissue operation plus pulp we sell to others, shows up as a revenue in paperboard and shows up as a cost in the tissue side. Pulp pricing has improved about $100 a ton over the last three months. Paperboard pricing has begun to improve with price increases just having gone in for the low end of bleached paperboard, the plate dish and tray markets, and price increases also having gone in in the cup markets. None of that really was effective in the first quarter. (Indiscernible) pricing has not, as yet, gone up.

As I look at the operations of our paperboard operations, our Cyprus Vend mill has continued to run well, as it has for a number of years, in the first quarter. In Lewiston, we have seen substantial improvements on a year to year basis in both pulp production overall, productivity, and in paperboard production which has resulted in a fairly substantial decline in unit production costs in that mill. That mill ran well in the first quarter. We also began to benefit from a more competitive labor contract which was approved in January and went into place in the first quarter.

In the tissue business, tissue has remained competitive. Promotional expenses are quite a bit higher than a year ago and probably slightly higher than fourth quarter of 2002. That is, I'll say, a normal cycle. It's the kind of cycle that we go through in that business periodically. Our operations ran well there. We would anticipate promotional expenses probably will remain high for a number of months going forward looking at the competitive status of that market. Jerry, I'll turn it back over to you for some financial data.

Thanks, Pen. As we normally do, I will go through some shipments and realizations statistics. Shipments I will continue to do the same way as I have in the past. Realizations I will now be giving what is GAP equivalent realizations. In prior periods, we gave segment information for realizations based on price net of freight and that is not a GAP approved statistic. So effective March 28th, the SEC requires that all either verbal or written statistics that are given to the public be in a GAP form or reconciled to GAP. So I will give GAP pricing this quarter and forward.

Shipments for OSB were up 1.1%; lumber was up 21%; plywood was up 21%; particle board was up 63.2%; pulp was up 9.3%; paperboard was up 5.3%; and tissue was up 1.2%. For pricing, OSB, again under GAP, pricing for OSB - 162; lumber - 341; plywood - 275; particle board - 200; paperboard - 650; pulp -382; and tissue 1,847. I would also like to just give you a couple of other statistics that you will need. Cap ex for the quarter was 13.5 million and DD&A was 26.9 million. With that, Tina, we would like to open it up to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Joe Stilevetti with Goldman Sachs.

Yeah, hi. I just wondered if you could talk a little bit more about what you're seeing in the tissue market. What you expect to see. Is there any hope that maybe with higher pulp prices out there we'll start to see less of this promotional activity and maybe along those lines, too, to update us on how your progress is going with your new tissue facility.

Joe, I'll take a shot at that, although you were cutting out a little bit in terms of volume. But I think the question was related to activity we see in the tissue market. What we believe may - - what's going on today, what may happen. I think you asked a question, as well, about pulp and affect on tissue and then a comment on the new machine we have going in in Las Vegas.

Right, that's it.

Okay, with regard to the tissue business, it began to become more competitive in the promotional sense, last spring and became more competitive as 2002 went on. The competition in tissue, as many of you know, is really increased promotional expense per ton overall sold and as that promotional expense is lead by one of the majors, be it Georgia Pacific, Kimberly Clarke or Proctor & Gamble, or perhaps by all three of them with different products, we tend to follow, as do others, if the market is more competitive. So that market has become more competitive with more promotional - - buy two and get an extra one, or two for the price of one - - in tissue, there is always something in the supermarket for sale on promotion. I don't think I've ever gone into one and not seen something being promoted. It's just - - there are more promotions at this point in time. We expect that to continue for a number of months.

With regard to pulp prices, we really have only had one cycle in pulp price after Procter & Gamble and Kimberly Clarke sole off their pulp assets, so we've only had one prior cycle. It used to be, prior to their sale, that tissue prices were not particularly sensitive to pulp prices because the majority of pulp consumed by the majors as well as by us and most other people, not all, was self-produced. And so the pulp price might have represented a transfer in profit from one division to another internally, but did not seem to drive tissue prices very much. In the last cycle we had since that sale, tissue prices began to react six to nine months after pulp pricing which is quite a bit sooner than prior cycles. This time around, we have seen an increase, the first increase, in tissue pricing led by Proctor & Gamble in towels and that price increase appears to be a reduction in the volume of towels in a given roll. The towel is bulkier, each sheet is slightly bulkier, so the roll size doesn't change, but the number of sheets in the roll does change and is reduced and the fiber and chemicals and everything else that's part of it is also reduced. That's the first change we've seen. I would anticipate seeing some more as we go forward.

With regard to the tissue machine, it's scheduled for start up January of next year. It's being manufactured in Italy. The building is going up, the ancillary equipment, some of it is in already from a converting standpoint, but we anticipate to date, everything appears to be on schedule and on budget.

Great and just one other quick question. Your situation with your revolver right now in terms of availability.

We have $150 million revolver. There is currently 60 million out borrowed against it. We also have some lines that are against it in a sub-limit. I think we have about 40 million or so available to us and actually cash flow is now turning around seasonally. We've hit the peak of our inventories in the first quarter, so cash will start coming back to us, so it's going to get better.

Wood inventories, Joe, in the resource end and log inventories at wood plants collectively drop very sharply and they have to be built up each year as you know because of inability to move logs across roads with road restrictions. So that dropped pretty quickly and sales are picking up also, so first transfer the working capital inventory into receivables and then transfer it into cash. That process has already started.

Great, thank you.

Your next question comes from Rich Schneider with UBS Warburg.

Jerry, I was wondering if you could give us the comparable numbers to the fourth quarter for these prices because we don’t have anything on the same basis to compare them with.

I'd be happy to do that Rich. You could actually do the math off of our little public quarterly for the fourth quarter, but I'll just read through them quickly just to make sure. Fourth quarter OSB -145; lumber - 335; plywood - 288; particle board - 226; paperboard - 665; pulp - 338; and tissue - 1,883.

I'm sorry. Tissue was 1,883?

Correct.

Okay. Just on corporate expense, obviously that's come down pretty dramatically here in the quarter. Could you go through the components of that? I think when you were in New York you may have said you expect that line to be in the low 20s. Is that still the case?

Yeah. It'll actually be pretty much along the lines of what you're seeing. We were estimating that it would drop significantly and it in fact has and on an ongoing basis, you should expect to see it at about where it is now.

What were the components in that reduction from last year's level? What were the key drivers there? I mean, the labor contracts, etc., those were all issues coming out of the segments, right?

Yeah, that's hourly in the segment. However, a fair amount, at least of the rift that we had in the fourth quarter, would have been salaried. Actually all of those folks are salaried. Not all of them would have been corporate, however and that was going to be about $7 million a year. We have also cut other administrative budgets including travel and all of the other things that we have tightened the strings around so we would anticipate much lower corporate admin going forward.

So, I'm sorry, the salaried $7 million, is that?

That's not all corporate and I don't have a breakdown. Some of it would be salaried folks within administration in the division

Now this is all above the sort of million a month of savings that you're getting under the revised labor contracts?

Yes. Well, - -

The million a month really includes the labor contracts and the $7 million. The labor contracts number we gave out, Rich, was about something in excess, just in excess of $5 million.

All right. But you had two different labor contracts, right? One down in Warren and one in Lewiston?

Correct, but the Warren contract, while we received a competitive contract, it is not a large enough number, given the size of that facility, for you to do much with as an outside analyst.

Okay. Then again, the labor contract savings doesn't include any flexibility savings, right?

Correct.

Okay. When you look at your interest expense, it rose here. Is that just related to the bank debt - - the downgrade of the bank debt?

No, it doesn't have anything to do with downgrade on the bank debt. It's just a higher number on average for the first quarter because of that additional build in inventories, we ended up borrowing more in the first quarter, but that will start declining again. The accruals for the $100 million credit sensitive is $3 million a year difference roughly and we would have accrued that portion in the first quarter, so roughly a quarter of $3 million.

Okay, so interest expense should come down in the second quarter because - -

It will, yes.

Your next question comes from Steve Sheercover with D.A. Davidson and Company.

Good morning. Yes, my question is centered around the resource unit. Clearly, you're not selling logs, I suppose, to the Minnesota operations and yet, at least not internally so we see the top line coming down and the bottom line is around the same. Are you still selling to the Minnesota operations on an arm's length basis?

A couple of things we probably should have pointed out, Steve - - included in these numbers, if you take a look at the highlight page in the earnings release which shows net sales by division and then operating income by division, net sales in resource are way off. That is not Minnesota pulp and paper related. It's a change we made internally in reporting relationship where last year all wood procurement flowed through resource who procured wood for our pulp and paperboard operations and then sold it to them at cost. And we have the same people doing the same thing, but we changed, we believe, for management efficiency, we changed the reporting relationship. So you will see resource sales are way off and you will also see down three or four lines inter-segment sales are way off because resource is no longer buying all the wood for our pulp and paper operations and selling it to them.

I see. So for the full year with a little bit of seasonality, net sales for resource will be a couple hundred million less, not 400 million?

Correct.

The profit - - you know, the operating income should be kind of consistent?

Basically the resource operation provides those services at cost to the paperboard operation and now the paperboard operation is providing those services at its own cost, so the cost doesn't change, resource profits don't change and the change in reporting relationship has no direct effect on profitability of either entity.

Gotcha. So the one other questions then is I did go through some of your prior releases and I don't recall seeing specifically higher and better use land sales before. There was something small, I guess, with respect to the Oregon properties in the fourth quarter, but do you have a new policy now that you will monetize HBU?

We do - - we started this about three years ago to transform resource into a profit center and that includes, has included looking at all of our lands, not just as a source of raw material, but also some of them clearly have higher value for things other than growing trees. This is almost - - in the first quarter this is almost all a Minnesota phenomenon where we sell - - we may have land worth $500 or $600 an acre on a discounted cash flow for timberland but it's worth $1500 an acre to somebody who wants to have a hunting camp. And so we've gone through our lands in all regions. We've actually had these sales going for us for a couple of years and they were a little higher last year than the prior year and they'll be higher this year, I think, than last year. It's not a big factor, but in each quarter we will have some sales of lands which are worth more to someone else than they're worth in a timber growing mode.

I'm totally in favor on monetizing that. I just want to know how to treat it. I mean, should I look at this - - you know, if I were to back off the extra, call it million dollars in operating earnings, that's pretty significant to your result. So I want to know how I should treat it on an ongoing basis.

I would treat it as an ongoing operation, but the problem will be that we're not managing this, Steve, from an earnings report or quarterly basis, we're managing it from what makes sense for the corporation. So what was actually about $800,000 in the first quarter, higher profit from sales of higher and better use land, may be $400,000 in another quarter or $4 million in a different quarter. So it's going to jump around based on when we actually close sales and it's an ongoing and normal part, I think, of the resource management business.

All right, so I know it's lumpy and it was worth 3 cents to you guys in the current quarter. Okay, thanks.

Your next question comes from Kyle Bass with Legg Mason.

Hi. While I agree that Mr. Loeb's letter is somewhat unorthodox, we support shareholders' rights and Mr. Loeb's initiatives in improving the corporate government structure of Potlatch. Can I ask you what steps you're taking right now to overturn the phase voting provision in the company's bylaws to demonstrate that you're serious about corporate governance?

We've had comments from a number of shareholders in the fairly recent past about that. It's been in place since 1985. Our board will discuss it. The board could not remove it. It would take a vote of shareholders if the board elects to do that and it's on agenda items to be discussed by our board. The next time that the board could formally take it to shareholders for a vote is May of 2004 at the shareholders meeting. So it is something we are looking at.

Your next question comes from Daniel Loeb with Third Point.

Hi, gentlemen. I was just wondering, this was, as Rick Schneider pointed out in the analysts' meeting that the operations - - the margins on the resource division have been declining and it seems like this decline has continued in the first quarter. But you said things look promising. Can you give us a sense of when you think margins might start picking up again in the tissue division? I meant to say tissue division earlier.

Oh, okay - -you asked two questions.

Yeah, I know. I meant to say there was a decline in margins in tissue division and it continued in this quarter. You just started breaking that out. I'm wondering if you see any evidence yet that the promotions or whatever it is that's causing these declines has abated or if we should see continued pressure in that area?

We do not see any signs at this point in time that promotions have abated nor do we expect them to over the next six to nine months. The other side of that question is net pricing and Proctor & Gamble has led something in the Bounty towel. We do not have a product yet to - - which tracks exactly with Bounty and we will not have the super premium towel until that Las Vegas plant starts running. So we would anticipate pricing probably will begin to rise in tissue if the last cycle, and we only have one really to use as a proxy - - tissue pricing will probably generally start rising sometime during the second half.

Would this new pricing environment have affected your decision to open the Las Vegas plant?

No.

It's still an economic project for the company?

We believe it's a highly economic project and we do not - -we can't forecast cycles exactly and I don't believe anyone else can either, but when we look at a capital investment as this, we don't make the mistake of saying when promotions are at an all time low, boy, this is a profitable business, let's put money in. So we look through a cycle and we have these promotional cycles every four or five years.

This is the last question. As you look through your portfolio of businesses and different assets and you look at the debt outstanding, what are the priorities in terms of dispositions or other types of things that the company could do to sell assets and use the proceeds to pay down debt?

We basically - - I'll give you a long answer to this one. We took a look a number of quarters ago at the board level, at all businesses to see what strategy we should be pursuing and what would work and what would not work. The test we have applied to all of the businesses we're in is that we have to have to have a business which can earn its cost of capital throughout a cycle in order for it to be something we are willing to retain. We exited coated paper and hardwood lumber. We made changes in our wood products segment to move it towards specialty products and we believe that is a business which we can succeed in in the specialty side. The results are promising but I think we won't know the answer to that for 18 months or so. We have called that a core business. We call our resource business a core business where we can do that quite well, and we call tissue a core business and paperboard we have not called a core business at this point. We have one very attractive plant in Arkansas which, maybe all years but one, earns its cost of capital, so I would say that virtually always more than earns its cost of capital. And we have a Lewiston plant which had been a poor performer. Operationally, we've gotten that Lewiston plant to run well now and we're in the process of doing what we did at Cyprus Vend over the last two to three years which is to upgrade the product mix in terms of customers. We look at all assets to the extent are they worth more to someone else than they are to us. Clearly when you go through that process, if we - - if the board elects to do something, we do not announce that until we have something to announce. So that is a process that actively is underway and we discuss at each board meeting, but it is not something that is beneficial to shareholder value if we reach a decision to sell something, to announce it.

Thank you very much.

Your next question comes from Andrew Seamen with Meridian Asset Management.

Thanks.

Is that a new name?

Well, it's close, it's Fineman. Just following up on Rich's question on corporate overhead. The $19,624,000 includes the 12.7 million of interest, so if you net that out, you have $6.9 million of actual corporate overhead and I think you said it would run at that rate for the whole year, so does that mean $28 million for the whole year is a reasonable estimate?

Well, that actually should be fairly close because we are running at a rate that we think is sustainable given everything that we've done to hold down costs.

Okay, I just wanted to make sure.

We're not going to predict exactly what it will be. It also includes some other pluses and minuses in there for accruals and so on that can vary, but basically that should be close to the number.

If you look strictly at what we call corporate overhead, that number includes an "other" category as it does each year and when we discuss corporate overhead, we always look at the corporate overhead line, not the other line. The other line tends to be about the same year after year but it's an additional expense.

Right, and I guess that was the point of my question was to try to figure out if there is something else in there besides true corporate overhead that I've accounted for elsewhere in my forecast so I don't want to double count it. So I don't know what else you've got in there, but - -

Right now, it's a very clean quarter, Andy. If you just took one example from last year as we paid down our $470 million of debt we had premiums to pay in order to do that and the premiums went into corporate other. So that was a pretty big number last year that is not receiptable until you have the same kind of event again. And so, unless you saw us paying down debt with a huge premium, that wouldn't go into other. But it was in there last year and it was a big number.

But there are, from a corporate accounting standpoint, there are probably 20 to 25 different items on a monthly basis, some of which go one way, some of which go the other way. In general, it is a corporate expense on a month to month basis.

Gotcha. Okay, thank you.

Your next question comes from Noah Eckles with Clovis Capital.

Hi guys, My question was on tissue. If you look at the tissue results from the last few quarters reported by like Kimberly Clarke and Proctor & Gamble, particularly Kimberly Clarke, but they both have reported very strong results. GP and yourselves, the results have declined as we've discussed on the call. Is there something - - is there a difference in the cost structures between the various competitors that are causing this to happen? Is there something else that's characteristic of the market and the competitors that causes this to happen? I wonder if you could shed some light on that. Thanks.

I'm probably the wrong guy to do that. We do not spend a huge amount of time internally trying to analyze Kimberly Clarke's or P&G's results so I'm not familiar with exactly what they have in that category. Ours is all domestic tissue, only North America. Clearly, both of those companies are worldwide and do a variety of things that we don't watch because they don't affect us. They also have a number of ancillary products which we do not make. So I can't answer that question. Perhaps the question is better asked to a security analyst who covers those companies as well who may have a better idea. What I do know is that promotional expenses for all players in the business have increased and as we have looked at margins, we do the overall margin look on an annual basis and our margins have compared favorably in the tissue segment with everyone but Kimberly and it trails Kimberly somewhat.

Okay, great. Thanks.

Once again, if you would like to ask a question, please press star one on your telephone keypad. We do have a follow up question from Rich Schneider with UBS Warburg.

Yeah, I was wondering if - - looking at the tissue area, did your pulp prices, and I know you gave some of the outside pulp realizations, but did your pulp cost in your tissue business go up much from the fourth to the first? It was pretty flat I guess?

Let us take a second and review the specific data Rich and then we'll decide whether - - how much we want to answer. Most of the increases in pulp I would say probably has not hit tissue to the extent that we're selling pulp to ourselves. There have been some increases in pulp from where they were beginning of the year in pulp we've purchased for softness which is usually eucalyptus pulp, Rich.

Okay, so then looking forward, you know, second quarter, tissue is probably going to be squeezed further because of the rise in pulp process. On the other hand, this will improve the profitability of the pulp and paperboard segments?

We would say that's very accurate. In a given month, we are pretty much in balance on pulp as a company.

Okay. Just a couple of other ones. On bleached board, you talked about the improving pricing in bleached board. Is this playing off of the price increases that were announced last summer and it's still working their way through?

No, these are new increases in plate, dish, tray and cup which we believe - - especially the plate, dish and tray is the low end of the bleached board market. It's what most producers produce when they don't have enough orders to produce as much as they'd like to. I think all of us produce some of that each year. That's probably the most closely allied to pulp pricing. You have a number of companies, like Potlatch for example, who could tend to, as pulp prices rise, sell more pulp and less board at the low end. So I think that price is being driven by what's happening in pulp markets. The cup pricing is not, but most of those really are effective today but were not effective in the first quarter.

Well, could you give us what the announcement was in those areas and when it's supposed to go into effect?

I will give it to you and then we may have to correct ourselves. It was $40 and $50 and my recollection is that the $50 is cup and the $40 was plate, dish and tray effective the end of March. And it's possible, Rich, that I have flip-flopped those two.

Okay, and what percentage of your mix would be affected by this?

Eight to ten percent is probably in the plate, dish and tray category. Cup is a larger percentage. I'd say roughly 15%. Some of the cup increase though, Rich, will be phased in because dealing with cup customers you generally have three to six month contracts. So that will not all be effective immediately. I'm not aware of anyone in the plate, dish and tray business, or at least we don't have contracts in that end of the business. So that's immediate and the cup gets phased in over a three to six month period.

Okay, and just one last question. On pension - - you're still using this year a 9.5% rate of return assumption?

That's correct.

Okay. Could you go through that? I mean, most of your competitors are down to about 8.5 for this year.

Rich, so far we have chosen not to impact that one. We have monitored our active pension fund management for the last 25 years and have, through the end of last year, still out-performed that 9.5% assumption by about 200 basis points over a long period of time. Certainly the trend has not been in our favor the last year or two and depending on what happens this year, we will certainly revisit that. But for the time being, we felt that 9.5 was still justified based on our long-term experience.

Would you know offhand what impact it would have if you went to 8.5?

Not off the top of my head, I don't. We will be having that kind of meeting with our actuaries in a couple of months to look at all of the ramifications and do a little forecasting based on where we're headed this year to see what we want to do by the end of the year.

On all parameters, not just that one, but for discount rates, and we run through a whole series of what ifs.

Okay, thank you.

We have a follow-up question from Steve Sheercover with D.A. Davidson and Company.

This is a request for guidance so I'm not sure how far you'll take it. But within your own internal forecasts, do you foresee yourselves returning to profitability later on this year? What's your comfort level in diminishing the loss in Q2 and hopefully even getting back in the black?

We historically don't forecast externally. Clearly, we do a lot internally, Steve, in budgets. And when we put our budget together for this year, we attempted to take a conservative look with zero price increases in any product line and some price decreases in places like tissue where we saw increased promotions and in a couple of other product lines. The first quarter is clearly a seasonally very low quarter. We believe we will have a much better year than last year.

So if I were to tell you for instance that I saw the loss diminishing by two thirds in the second quarter and actually going into the black in Q3, would you say I'm crazy or optimistic or that sounds feasible?

I think I would say you're a security analyst.

I try, anyhow. Okay, thanks guys. Good luck.

We have a follow up question from Noah Eckles with Clovis Capital.

Great, thanks. This is the first quarter, I think, in a long time, that you guys had a positive surprise relative to what people were expecting and it seems like there's some real change occurring at the company that is positive. I was wondering if you could give us a little more granularity on - - you talked a little bit about it but I wonder if you can give us greater granularity on what you're doing to the cost structure in your various businesses to improve operations and what has been done so far. Then can you give us more granularity on what do you think is still to come? Thanks.

From an operational standpoint, Noah, we believe as we look at all our facilities, everything is running pretty well. The one very large facility we had which was not running well for a number of years was Lewiston and the labor contract has helped us in a number of ways, not just cost. The bigger factor there was our need, we believed, to have almost a wholesale change of management. So we have a number of different people and for a variety of reasons, productivity at that plant is now quite good We have a long way to go in Lewiston, I believe, in upgrading product mix. You can't do that until you're running quite well consistently on grade and that's really in the paperboard business only been the case for about four months. On the pulp side, we had largely fixed that from a pulp quality consistency and productivity standpoint by last summer. But it took us, at our Arkansas mill to give you an example, we upgraded that mill in 2000 to finally allow us to produce a quality paperboard which was, we believe, the equal of the best products in the market. And it's taken us two plus years to upgrade the mix as you gain customers and that's about the process I think we have in Lewiston. We've got an 18 month to two and a half year process of upgrading mix moving into more profitable accounts who would like to deal with us now that we have very good product quality. On the cost side, we, like everybody else, is constantly working on unit cost and that's a function of - -part a function of people - - I think we have that behind us by and large although we continue to look on a job by job basis, but we don't see large changes there. It's also given the high capital cost nature of our business, it really is a productivity or units out the door. So I mentioned, for example, that plants are running well. I mentioned that lumber markets are over-supplied. As you can tell from Jerry's shipment numbers, we're one of the guilty parties. But that's the nature of the business to drive costs down. So that's a continuous process that we're in and I don't think there are - - the Lewiston operation - - there are very large opportunities, I think, there, now that we've got the plant running consistently well, to upgrade mix and have a very substantial effect on income over a two year period.

Gentlemen, we have no further questions.

Thank you very much

All right. We appreciate it. Thanks, Tina.

Thanks, Tina, and thank you everyone for joining us and we'll look forward to talking to you next quarter.

This concludes today's Potlatch Corporation First Quarter Earnings Results Conference Call. You may all disconnect.