Potlatchdeltic Corp (PCH) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the first-quarter 2004 Potlatch earnings conference call. My name is Louise, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

I would now turn the presentation over to your host for today's call, Mr. Gerald Zuehlke, Chief Financial Officer. Please proceed, sir.

Thank you, Louise. Also joining me today is Pen Siegel, our Chief Executive Officer.

Before we begin, I remind you this call may contain forward-looking statements within the meanings of the new securities laws. Excuse me. 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 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 the first-quarter results and provide an overview of our markets. Pen?

Thanks, Jerry. After I go through this, I will turn it back to Jerry who will go through some statistical information on our product lines and sales by segment.

Just quick comments on the quarter itself. To the extent that there's anything unusual I will cover it, and I'll do it by each segment.

In the resource segment, first quarter is a low quarter for us each year seasonally because of road restrictions, primarily, and the inability to move logs in both Minnesota and Idaho, and to some degree in Arkansas across public highways. As there are road restrictions on weight, and so it was a normal quarter, primarily a quarter of log sales, a little bit of surplus real estate transactions, but not much. And those conditions produced a low quarter in the first quarter, and that changes as we get into the second quarter. Those conditions also -- as we look forward, the resource business is tied to a large degree in its income from normal operations to the wood product side.

Wood products, which I'll cover in a moment, is quite strong, as you know, and with a lag, that generally leads to rising log pricing. And that's -- that's true for us and I think true for virtually all other participants in this industry. So nothing unusual in resource -- and the resource business is tracking normally. In wood products, it was a very strong quarter. Prices did drop during the quarter for a fairly short period of time after they rebounded around the turn of the year. Given the fact that it is the first quarter, and it is a weaker quarter seasonally for consumption, we took the opportunity each time it presented itself to extend our order backlogs.

So while prices did drop in the OSB market, especially in late February, or early March, it did not have much effect on us because we were sold out into the second quarter at that time. There was some effect because we sell some wood under contract, and those contracts are based on the -- either random lengths or crows depending on the contract from the -- one of the prior two weeks' prints. So to the extent the prints went down, we had some mild negative effect on pricing during the quarter, which then picked up subsequent to the end of the quarter. Those markets are strong right now, our backlogs are out for all wood products that we manufacture. OSB is clearly the largest and the biggest profit contributor, and we are sold out into -- partway through the week of May 10th at this point in time. The -- we anticipate that market to remain pretty good. Consumption seems to be high and from what we can gather, there is not a great deal of inventory in the pipeline.

There are some substantial problems being incurred by the industry right now, tied to transportation and the ability to deliver wood. At this point, we are in pretty good shape on our deliveries. Although we've had to move some shipments from rail to truck and vice-versa, and change the ways in which we might normally do things.

Moving to pulp and paperboard, which had a loss somewhat smaller than the loss of a year ago. The folding carton market especially, has a weaker period from December, maybe mid-November through January, and as a result, each year we normally take a number of plate orders, plate stock orders, which are lower grade and lower quality demands and, therefore, lower price in that market. And we did so again this year. Those orders we finished up in the month of April, and we do that to keep the machines running to gain machine efficiencies. So pricing was down slightly this year as a result of that.

As we look at the market today, the plate stock market has improved substantially, being the bottom end of the bleach board market. That's normally the first thing to improve. And it has improved. We are taking occasional plate stock orders today, but at much higher prices than we saw during all of 2003.

The cup market has also gone up $50 a ton. In the cup market, most customers are large customers on 6- to 9- to 12-month contracts, depending on customer. So while prices have gone up, we won't see that other than gradually as those contracts roll over. But that market is tighter. We and other producers have raised folding carton prices $50 a ton, effective for us, roughly I think, two days from today. The western market is probably slightly stronger than the eastern market.

Normally, as -- what I anticipate at this time, which I think would also be normal, is that while we will see price increases, they probably won't come quite as quickly as you would guess from the effective dates. They will play in slowly over a two- or three-month period of time. And depending on competitive conditions in the industry, we may not see the full $50 increase, although I'm confident we will see a significant part of it by the time we end the second quarter.

The pulp business, I might just comment, we were hurt to some degree in the first quarter. We took some unintended downtime, or throttled-back the mill because of an inability during extremely cold weather in January to obtain enough raw material for a fairly short period of time, for about a week. And then we had a major maintenance outage in the first quarter, as well, of our big pulp mill in Lewiston, Idaho. And that maintenance now has lasted slightly longer than we had anticipated, as a result of things that we found when we got into the boilers to do repairs. So those both affected the pulp side of our business in the first quarter and reduced our pulp production in sales. None of that is ongoing, as we move into the second quarter.

In the tissue business, we've had a very good startup of our TAD tissue machine in Las Vegas. It's running at a very good startup, has run consistently at rates above what we had budgeted. The product quality is quite good. We have had virtually no shipments in the first quarter. First shipments occurred during March, but they were very small. And shipments are now ramping up in April with packaging approved and -- and the product going out to our customers. That we believe will be a significant plus for us, although it hurt us in the first quarter, because we had the startup costs and other costs with no revenues basically from the machine.

We also had during the first quarter a reduction in force in our consumer products business and took a $1.3 million charge, which is reflected in the numbers. There are a number of increases which have been announced in consumer tissue effective at various items this summer. As a major private label producer in the -- primarily in the West and to some degree, Midwest and East, we are not a leader in pricing. As pricing moves up, we would anticipate we will see pricing moving up, as well. Depending on the market.

I guess I would point out that the increases which have been announced to date are cost-driven increases and do not appear to be supply-demand-driven increases. And as a result, that those increases may be somewhat more difficult to put in place as we move into the summer. And at this point in time, we are -- we're not sure what will happen. We believe pricing will rise.

One other comment before I turn it back to Jerry. We have a press conference a little bit later this morning, which we'll announce that we are certifying our Idaho timberlands under FSC certification. We went through a joint process over the last 15 months with the Gifford Pinchot Institute looking at our Idaho lands, doing an assessment of both the SFI and FSC certification programs. We were SFI certified already, and we also have an ISO 14001 Environmental Management System which we use to manage all of our timberlands. We finished that assessment process with the Pinchot Institute. We found that we could FSC certify because of the practices we have on the ground. And we are electing to do so this morning, and I mention it because there was -- the Pinchot Institute put out a release last week announcing something unspecified between Pinchot and Potlatch this week. And that's what that is.

Jerry, I'll turn it back to you for some statistics.

Thanks, Pen. I'd like to go through some shipment and sales price-per-unit statistics. As I do each quarter. And I will give these as percentage changes from the GAAP measurements.

I will start with shipments in OSB. Shipments were down .4%. And this is sequential quarters, fourth quarter versus first quarter.

Lumber up 4%, plywood up 13.6%. Particleboard up 12.3%, paperboard up 11.8%. Pulp, as Pen mentioned, down 35.2%, tissue down 3.2%.

On sales price per unit, OSB down 2.1%, lumber up 12.2%. Plywood up 2.5%. Particleboard up 12.2%. Paperboard down 1.6%. And pulp up 4%. And tissue is basically flat quarter to quarter.

I would also point out CAPEX during the quarter was 12.8 million. About 4.9 million of that was continuing bills to be paid on Las Vegas as it wraps up. The 12.8 in relation to mid 60s for our budget, which included carryovers for the year. DD & A was 27.1 million for the quarter. And we built cash in a -- also in an inventory-building quarter due to the seasonality. We also built cash by a little over 40 million during the quarter, which reduces net debt by 40 million, which is important to us.

With that, I have no other statistics. So, Louise, we can turn it over to questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered, or you wish to withdraw your question, press star followed by two. Again, that is star-one to ask a question.

And your first question comes from Rich Schneider from UBS. Please proceed, sir.

Yeah, I was wondering if you can talk about those issues that you experienced in the open paperboard segment, on the fiber-related issues and the cold weather and maintenance out in Lewiston. Give us some idea as to what those kinds of things may have cost you in the quarter.

Let me describe the circumstances, Rich. We had -- we had a bout of extremely cold weather in early January. And I'm not sure exactly what it was in Lewiston, but it was minus 21 or 2 in Spokane, which is kind of off the charts for us normally. And what we found was the lumber mills in the inland northwest who are our primary suppliers of chips, including our own, couldn't run. It was too cold.

The mills are not generally enclosed as they might be in northern Minnesota, because we don't experience temperatures like that, and so there was a -- there were quite a few equipment slowdowns and failures among all of our chip suppliers. And we basically shut -- slowed down the pulp mill. We did not shut it down. We slowed it down, and ran fewer cooks on the digesters. That's an expensive process because you have all of the -- you save a few variable costs, but not even many of them, frankly, when you're running the mill. And we lost production. Jerry, I'm not sure--

About 5,000 tons.

About 5,000 tons of production. And you can estimate pretty easily, Rich, what that costs us. Because it's -- other than the wood costs, we saved virtually nothing. The other costs were there.

In the -- with regard to the maintenance shutdown, we were down for -- depending on the piece of equipment -- 24 to 48 hours longer than normal. And not running. And that is an expensive process. We -- we accrued for our major maintenance shutdowns in the pulp mills, but we accrue based on an expected normal -- very few shutdowns are ever what I would call normal, as you get in there. And so the extra time we were down was not accrued for, and that all hit the month of March.

So in combination, those two events were a -- not a majority, but a significant part of the loss that paperboard had in the first quarter.

You know, if you look at paperboard year-over-year, and you lost 9.3 million a year ago in paperboard, and you've done a lot of work to try and reduce costs and improve efficiencies, how much do you think, you know, if we were to put it on an equal footing here and take out some of these issues, would one see a lot more improvement than would have -- than one is seeing right now, just, you know, going to a loss that's only 1.5 million less than a year ago.

Well, in addition to the throttling it back because of wood, Rich, and the maintenance down time, extra time, which was not accrued for, there are other expenses as a part of a maintenance downtime which we don't accrue for. And our maintenance downtime a year ago occurred I believe in May.

Okay.

So it was not a first quarter event. It was this year. And Jerry is shaking his head yes, so it was -- it was a May event last year. So the year-to-year cost is somewhat greater than I indicated due to the unusual effect.

Okay. So in other words, you believe you are showing some key improvement in that business despite --

I -- absolutely do, yes.

Okay. And then on -- on the tissue side, maybe this can be another tough one to answer. But startup costs on the new machine, I thought fourth quarter was going to see most of it. But I guess, because you weren't really selling product off of it, you absorbed costs in the first quarter. Is that correct?

That's correct.

Okay. And how does -- you know, how do you see this progressing here? I mean, in the second quarter? Could you give us an idea of what some of the positives that you're going to see in the same quarter, increased volume, I imagine pricing isn't going to change that much.

Everything is actually running in the tissue business, the converting equipment and the machines are running very well. The TAD product is a much higher priced product per ton. So as we have already started delivering that product to customers, that has a pretty dramatic effect on our overall sales prices in the tissue business going forward. Because that is a product which -- which per ton, sells at a much higher price than anything else we produce, except perhaps facial tissue. The -- I expect the machines to continue to run well, and the tone of the business, I think, is improving a little bit. But it's still quite competitive.

Could you give us an idea of, you know, roughly percentage-wise how much TAD may sell for, more than conventional tissues.

Give me a second . Relative to the mix of tissue that we're selling now, it's something on the altar of 40% higher priced.

And should we be looking at, you know, your real getting the full roughly 30,000 tons here, you know, are you running at that kind of annualized rate?

In March, we ran really at that kind of a rate. I -- I anticipate this machine will do better than that, Rich. I'm not sure we will run at that rate for the full year, in terms of actual shipments. I think we will -- we will run at a rate which I think will probably equal or exceed that in production for the year. But I'm not sure that the shipments will be there, because we do need to build -- this is a new product, so we need to build inventory for -- for each of our customers in this product in order to be able to supply them efficiently as we go forward.

And last two questions. The second quarter, then, should not have anything that should detract from the numbers on the tissue side? You'll, you know, you --

The market is -- the market is still competitive. But no, I do not anticipate any unusual event in tissue. And we'll see whether hopefully I am right.

Okay. Other than continued rising pulp prices, right?

Correct.

Okay.

That -- that doesn't have a big effect on Potlatch by and large because we are -- we are slight net buyers, but only slight. But you're right, it has a larger effect on tissue, and offsetting effect in the paperboard side.

Okay. And then lastly, Jerry, I think you indicated that your realizations in OSB were down 2.1% from the 4th quarter levels --

Right --

Could you work this through? I mean, obviously, random lengths had OSB prices up. Boise just reported numbers this morning, and their OSB prices were up a lot. And I know it all hinges on when you ship the product. But could you give us an idea how that worked?

I don't know that I can clarify any more, other than it's got to be a customer-mixed issue, and whether or not you have contract in there and how much of it --

Prices fell off, as you know, pretty sharply in early December. And we operated, Rich, under the theory, which I think was pretty good for the fourth quarter to push our backlogs as far as we could entering the -- really leaving the third quarter, entering the fourth. So we were affected somewhat less by that falloff than some of our competitors, because had backlogs which went out quite a bit further than the time of the falloff.

Falloff occurred because we had some competitors who did not have backlog. We pushed our backlogs, as well. We sold some product at the lower prices. Prices then recovered, and we have pushed our backlogs, so I think, on average, our pricing in the fourth quarter is probably higher than the industry pricing, because of the backlog situation there. And I'm not sure the first quarter --

Okay. Okay. Thanks a lot.

And your next question comes from Lauren Stivaletti from Goldman Sachs. Please proceed.

Yeah, hi, it's Joe Stivaletti.

I thought so, Joe. How are you?

I'm fine. I -- I just wanted to check to see -- what are you thinking for CAPEX this year in '04?

CAPEX is budgeted in the mid to high 60s, which includes $11 million in carryover from last year, the bulk of that carryover being the wrapping up of the payments on the Las Vegas TAD machine.

Okay. And then are you going to, you know, I mean, what are you guys thinking about if we continue to see this kind of strong operating cash flow. You know, what are you thinking about in terms of the use of that cash, are there -- other than net-debt reduction, are you thinking about, you know, possibly, you know, expanding your, you know, are there any other projects you want to do? Expanding the CAPEX budget like you did the Las Vegas machine?

There are lots of things we would like to do, Joe. But the answer is no. The first priority is to -- is to basically get the balance sheet back to a situation that we like, with substantially less debt.

Unfortunately, as we look at the mix of debt we have outstanding, the debt we can pay off efficiently is -- is extremely low cost, and it's -- it is not wise to do so. And the debt we would like to pay off, we can't pay off officially. So we will build cash until we get to a situation where we can pay off debt very efficiently. And that is probably June of '06.

So we will continue to reduce net debt, but the actual debt outstanding may not come down very much, depending on opportunities to pick off pieces of debt at an attractive level.

Do you think that -- are you rethinking, given the strength in your cash flows, are you rethinking the idea of possibly doing any -- any, you know, tenders or open-market repurchases on some of your bonds ahead of -- realizing that your higher coupon debt is not callable right now.

Well, we've certainly looked at that, and we keep track of what's going on in the marketplace. And -- and we do get an occasional offer for a piece of our debt. So we look at those on individual basis. And we'll continue to watch that, and if we can pick some off or go for some at a reasonable price, we will do that. But thus far, we haven't seen anything that looks all that reasonable.

Okay. So you haven't bought anything yet?

Just a couple little pieces over the last couple of quarters, you know, a million here or there.

And nothing I think, in the first quarter --

Nothing in the first quarter.

Uh-huh. Okay. And I guess along these lines, just two more little things. Your revolver, if I'm -- is it correct that that is scheduled to mature in -- in June?

Yeah, that's correct. And we are in process of talking to our bank group as we speak.

Are you just planning to sort of extend that out or change --

Well, it'll change significantly, but the bank group will probably stay pretty much intact, although we don't have commitments from any of them yet. We would guess that the group would stay intact. We may reduce the size of it a little bit. We don't really need $150 million revolver, as we're building this much cash. But we will have a, you know, at least 100 million, maybe 125. Pretty much the same bank group, but the facility will look considerably different than it has.

Uh-huh. And just finally along these lines, I wondered with S&P having a lower rating on your bonds and obviously that does cost you some money, particularly, you know, on the ratings sensitive, I was wondering if you had any color from them, if they, you know, if you think that they might make some move here or -- given the kind of performance you've been showing.

You know, we stay in contact with all of the rating agencies, including S&P, and have very good, timely conversations with them. They certainly are pleased with the progress we've made over the last couple of years. But I have no current indication that they would be changing anything any time real soon. But we certainly know that as we make progress, they continue to watch that progress.

So there's no particular, you know, sort of benchmark that they've said you've got to hit a certain target to get your investment grade rating back on your senior unsecured notes --

They've not identified it as a strict and hard number. They certainly have a variety of tests that they look at. And you know, we will be approaching some of those in the not-all-that-distant future at the current rate. But we haven't had specific talks about that to date.

Okay. Thanks a lot.

Your next question comes from the line of Steve Chercover from D.A. Davidson. Please proceed .

Yes, good morning. I was hoping for perhaps a few more, kind of, hard numbers in terms of the costs of the start up and whatnot. Can you at least tell us what the target debt to CAP is, if you can provide more color on the costs of the startup and the costs of the downtime in Lewiston.

Yeah. I mean, we're -- we traditionally for years until a couple of years ago, were looking at about .7 to one debt to equity, which is about .4 debt to cap. We would certainly like to be back there at those kinds of ratios. We think the -- the debt ratings would be appropriate. We really like those kinds ratios because of the flexibility it gives us to take advantage of opportunities for CapEx or share repurchase or, you know, all the other options other than reducing debt.

And as you sit there with presumably a growing cash balance, is there any likelihood that you'll raise the dividend in order to return something to shareholders, or do you think that's at cross purposes with your efforts to get your investment-grade rating back?

Well, the Board, Steve, every quarter looks at the dividend and discusses things and looks at the rate and has believed to date that the rate we're paying is appropriate. I won't rule out the Board looking at that at some point in the future and deciding it would like to raise the dividend. I'm just one of -- one of 10 board members and the only inside member. The others are all outside directors. So it is something we discuss quarterly, and we have nothing planned internally as a recommendation to take to them at this point in time. But I won't rule out at some point in the future the Board electing to do something different.

Okay. And switching gears a bit, Franklin Mutual is seeking to change your voting structure. I don't know if -- if a vote actually took place yesterday. Is there any news on that, or is that just an initiative?

The -- our shareholder meeting is May 3. And we have proxies out with that proposal, as well as one other proposal from a shareholder, in addition to the election of directors. The -- I believe Franklin issued a press release yesterday which is -- is merely a press release.

Our vote takes place via the proxy solicitation basis, as you know. And we will have -- we will have a count of that vote on the 3rd of May. And -- and our proxies went out somewhat late this year, Steve, just because when you have a shareholder proposal, you must give -- once the Board elects what its response is, you must give the shareholder 30 days of your response before filing and sending out officially your proxies. So as a result, our proxies went out 30 days after our board made a decision on the -- I believe the 5th of March. So it's a -- it's a little shorter period. And we will probably not have much results from the proxy solicitor until the last week or so before May 3.

I don't recall having read that -- that portion of the proxy. Can you just tell us whether you're in favor of the proposal to change it or do you want to maintain that --

The Board is not in favor, and I'm not either, but the Board is not in favor of changing it because it believes it gives the Board the chance to fend off an unwanted offer from someone which might occur at a time when you are in the bottom of a cycle. I mean, I -- it wasn't but about 12 months ago when our stock was 20. And that would be a tough situation without some protections giving the Board the right to decide what's in the best interest of shareholders. So the Board is not in favor of that. Many institutional investors are in favor of it, which is not surprising to me. And we'll see how shareholders vote.

Okay, thank you.

You're welcome.

Your next question comes from David Segall [ph] from Mutual Series. Please proceed, sir.

Hi Pen. Hi, Jerry. What was your cash interest for the quarter, how much cash did you pay for interest?

How much interest expense --

No, not expense, actually cash paid.

I think the two are the same --

Yeah -- Essentially the same ting.

I don't believe we have we had any capitalized interest --

So that was roughly $11 million or so --

Right. 11.8.

11.8. So -- I'm trying to get to -- reconcile how you achieved 40 million sequential increase in cash. If I -- EBITDA was 74.5 million, working capital was negative it 25. That's 50 million. Cash interest was negative, say 12, and that would bring you to negative -- to 38. CAPEX, let's call it 13, that's 25. And cash dividends were 4.5. So, call that 21. Where's that incremental $19 million in cash coming from?

I haven't done it that way, so -- It is what it is.

It is -- one thing you may have excluded from the calculation, it sounded like you did, is the exercise of stock options by employees, a number of employees including myself, which add to the equity base and, therefore, added to cash, as well.

Okay. And how much -- and how much stock was exercised, roughly 200,000 shares, is that right?

I don't have that in front of me either.

I guess how much --

A significant amount, yeah.

Thank you. So -- would you say that $19 million came from an exercise of stock options?

I don't know, David, because we haven't -- I haven't run the numbers. And the way you did and I didn't follow -- I didn't follow exactly all of your calculations. Because that's not the way I've done it. I would say it's not as large as 19 million.

Okay. And the -- and the individuals that exercised their stock options, did they hold their stock or did they sell their stock?

Some of each. I exercise -- I was the largest -- I exercised 56,000 shares and sold them the same day, took the net proceeds after taxes and invested most of it in the exercise of 10,000 shares, which I held. Some other individuals exercised and held. Some exercised and sold, and for the non-insiders, I'm not sure we know.

Okay. And then those options that were exercised and held, were they four votes or one vote?

No, they're one vote. They're -- they are -- until those shares would have been held for four years, they would have only one vote like any other share purchase.

Okay. And then on -- how much on the resource profit? I know you had mentioned that there was a small gain from the sale of land. What was your gross proceeds and what was the gain?

It was under a million. I don't --

Under a million?

Yeah. It was small. Small amount.

Okay. And there were no cash taxes paid in the quarter, you just drew down on your NOL, is that right?

Correct.

Okay. And I saw other long-term liabilities stepped up a little in the quarter. What was that from?

That would be change in post-retirement medical, mainly.

Okay.

Cancelations --

Oh, well we also -- yeah. Pen points out we did also cancel our swap, which would change that, as well.

You canceled the swap in the quarter?

Right.

Okay.

Took cash from that. That's another source of cash, as well.

The -- the accounting is kind of, I think, bizarre, David. But what happens is you get cash, and -- and since it doesn't flow through income at that time, it's amortized over the life of the bonds that were the underlying dimensions [ph] used for the swap. The offsets of the cash has to go somewhere. Where it goes is that other liabilities.

Okay. So -- the proceeds from the swap were, what, 3 to 4 million dollars?

Six million.

Six million. That did not flow through the income statement?

No. It gets amortized over the remaining life of the bonds. And we've actually had a couple of those over the course of last couple years.

So we have --

We've been in and out that swap a couple of times.

We have, though, in the -- in those other liabilities, there's -- there's $23 million or $24 million -- roughly, which is being amortized over the life of the bonds.

And then was it -- the pension expense, was that -- did that increase at all this quarter, or was that --

Pension income declined slightly, annualized this year versus last year.

Okay. How much was that income?

For the year, it's going to be 13 million and change. So, be roughly a quarter of that.

Okay. Thanks a lot.

Thank you.

Again, ladies and gentlemen, as a reminder, that is star-one to ask a question.

And your next question comes from Mark Wise [ph] from Deutsche Bank. Please proceed.

Good morning, Pen, good morning, Jerry. I had two questions.

Good morning, Mark.

First. Can you just talk a little bit about kind of freight and logistic issues and any kind of costs that you're incurring because of that. And also, you know, how it may be affecting some of your markets. I'm trying to get a handle on how big an impact this may be having in terms of the OSB market right now. But also in terms what it may be doing to you in other businesses.

It's primarily a wood products -- the place we felt it the most is in the wood products area. And that's largely because we move a lot of wood products by rail.

The UP is a primary carrier, and the UP, as you have probably read, is -- has had enough difficulties with their system that they are actually suggesting that people use other sources, which is not what you normally do when you're in a for-profit business. So we have moved -- we have put in a reload in OSB, allowing us to move products shorter distances by truck and reload to a different rail system. We are continuing to ship by rail to some degree. We have moved more product to truck.

It's -- it is more expensive, but I don't have a good feel for exactly the -- the expense numbers, because we don't -- we don't really have much option, other than to delay shipments and not ship product. And at current pricing, that's not a particularly economic decision.

Do you think, Pen, in terms of the overall OSB market, is this contributing at all right now, do you think to the tightness in the market?

I think it's probably helping the market to the extent that -- that people are not able to -- from what I read, and this is hearsay, Mark, from what I read is that product isn't moving to the market as quickly as people are producing it. It's hearsay, because in our case, our shipments are probably costing us some more, but we're basically getting product to our customers more or less on time. And the other offset to that is, truck may be more expensive, but it's almost always quicker.

Okay. Second issue. You sounded, I thought, kind of cautious in terms of pricing on both bleach board with this -- some of these price-hike initiatives, and also in terms of what may or may not transpire in the tissue business this summer. And I wonder if you could just talk about both of those a little bit more.

With regard to bleach board, the market is -- is, in my opinion, clearly tighter and better than it was 12 months ago, or 18 months ago. But having lived through an awful lot of cycles, Mark, prices usually don't go up even in fairly strong markets as quickly as the price date announcements. It usually takes a couple of months for things to phase in.

In the case of bleach board, prices clearly have gone up everywhere except folding carton. And the effective dates for the folding carton increases are, I think some were a little earlier than ours. And maybe one or two are later. So they're just now becoming effective in theory, and it usually will take some time. The market is not tight to the extent -- to the extent that an OSB market is, for example. So there clearly is the ability of the industry to produce what is demanded out there now. It's just it is a better supply and demand situation, and so I was -- I guess cautious may be the right word. I was trying to be realistic on what I thought was going to happen. And as you know, what happens in hindsight versus what you think will happen is usually not exactly right either.

Moving to tissue, that market I think is weaker from a supply-demand standpoint than -- than the bleach board market. On the other hand, there is some -- some very substantial cost pressure on at least a couple of the significant players who are -- Kimberly Clark and Procter & Gamble, who are not major pulp producers at this point. And energy prices I think have affected everyone. So there are some real cost pressures, and the history of cost-driven price increases is somewhat erratic. Sometimes they work, sometimes they don't. And I think -- I think you would -- the very fact that the increases were announced four or five months before they were to take effect tells you that the market is not particularly strong. I expect those prices to begin heading up, but I'm not sure by how much.

Okay. And then finally, if I could, Pen, I'd just like to come back to this issue of the proposal on the time phase voting.

I'm just curious about your response to the proposal. The Board response talks about anybody who's owned for less than four years as being a speculative investor. And from where I sit, it's pretty hard to think of any money manager out there who's in for a minimum of four years. So I'm just -- I'm kind of curious about your thoughts on that. And also whether you'd put your employees' pension money into only money managers who, you know, had a minimum four-year hold.

We're not suggesting that someone should have a minimum four-year hold. But when you're running a company, I used to be in -- sit in the chair you sit in now, Mark, in a different firm. And when you're running a company, the decisions you make, especially in the timber business, if there's ever a long-term business, that's it.

We're making decisions which may cost us money and do cost us money now, which won't generate any revenue for 30 years. That -- that may be the extreme, but in the planning process, the time horizon of Wall Street and time horizon of running a manufacturing company or timber company are quite different. So our board is not to suggest that anyone who holds shares for less than four years is somehow evil, but we have to run this company based on what we believe is in the best interests of the shareholders over the long term.

I guess just, you know, one other thought on that, Pen. It does seem to me, even in the case of landownership that it's in the interest of pretty much every landowner if they're going to continue to have the ability to harvest freely that they manage the asset responsibly. Am I missing something?

No. You absolutely -- we agree with that completely.

There are a fair number of cases that I could point to, but won't because we won't call names, of where that sounds good, but where one can create almost any earnings stream or cash stream you want for five or six or eight years in this industry by managing things not in a sustainable long-term basis. We -- as I announced earlier, we already were SFI certified. We're now FSC certified in Idaho.

We have a very strict environmental management system -- ISO system, which allowed us to do that, and some of our competitors may be able to do that, as well. Many will not. The -- I hear you, but there are -- there are certainly a number of instances of -- of poor stewardship and poor management of timberland done by someone such as myself who has -- must retire in 3 1/2 years and thinks, gee, how am I going to benefit. And whatever the cause of that may be, those actions take place and may be taking place today, but not here.

Okay. Well, just as a final thought, it just seems to me, Pen, that the guys who are buying a lot of the timberland out there now, some of the TIMOs [ph], most of them are up in Boston, that most of these guys actually have quite a good reputation with environmental groups.

I think that some of them certainly do. I think we have a pretty good reputation with environmental groups. The press conference I'm about to go to in an hour -- I kind of have to beat my way through environmental groups to get up there.

Okay. Thanks.

There are no more questions at this time.

Oh, I beg your pardon. You have another question from David Segall from Mutual Savings.

Hey, David.

David, are you there?

Are you there?

Yeah.

Yeah, Pen, since you brought up long-term best interest, how would you define that? Because it seems to be pretty elusive to me. I'm trying to get -- what does that really mean?

Well, I think it means managing the assets in such a way to try to optimize the return without taking on unacceptable risks. The way in which our board looks at return is a total shareholder return tied to share price. And I'm not sure how else an investor -- I mean, I've been an investor on and off for 40 years. I've never looked at return any other way, frankly.

So return on equity doesn't mean anything to you?

Return on equity certainly is a factor in overall returns, but when I buy and sell an investment, be it a bond or a stock or real estate, what I'm interested in really is the total return I get from beginning to end.

Right. But if -- if a company, let's say, generates, you know, lower than 2% return on equity over the past 15 or some odd years, I mean, does that not -- to me, that's sort of a destruction of value. The way I look at it. And stock price will reflect that.

You know, the difficulty, David, is that the work we did, we didn't go to anyone's index. We went to S&P, which we view as the -- probably the best unbiased arbiter, and we took all forest products companies existing today which existed for the 18-year period. And we tracked returns, I don't remember the exact number, maybe our corporate secretary is here. We'll -- I it think -- it was like 7.8% annualized total return --

For the index?

No, for Potlatch which was exceeded the index's return.

That's -- that's not ROE, though, that is from a stock --

That is from the standpoint of someone who buys a stock, what happened to my investment. No, it's not ROE.

Okay. And if you move that number to 1990, what would that return be?

I am clueless. The -- Who knows? We -- we put in time-phase voting in 1985. And so we took it from 1985 until the end of the last month prior to our board meeting, which the Board considered this proposal. And to us, that is the fairest and about the only way to realistically say how have you done --

Well, I understand that. But if you look at long-term interest, I think 15 years is fair time frame to look at that.

Gee, I could say 12. David, you can arbitrarily pick a time. We were very careful not to arbitrarily pick something. Instead we took the entire time frame that this has been in place.

Okay. Thank you.

Thank you.

And you have another question from Steve Chercover from D.A. Davidson.

Hi, there. It's just that this issue seems to be, obviously, quite a hot point for you guys. And it's going to come to a vote on the 3rd. And yet that vote will be determined by, in all likelihood, people who hold the 4-for-1 voting shares. In the spirit of democracy, would you ever consider allowing just on this one issue a one share-one vote election in order to determine the results?

You know, we consider all kinds of things, but we are bound by our corporate charter. And so we have -- there are certain items that can come up for election, or for a vote, which are one vote per share items. This one is not one under the charter. Just as we don't -- I don't arbitrarily decide to do anything, it's -- it is part of the charter. So the answer is no.

Okay. You can't reverse the charter. It's just interesting because, you know, a lot of the folks I speak to, it occurs to me, would be delighted to see that phased out. So I would consider it in the best interests of shareholder value.

I understand, and many institutional investors would agree with you, Steve. As well as, I think, many institutional investors would agree with -- we just got our ISS rankings. And they also don't like staggered boards.

That's true again of most institutional investors. I would point out that ISS's rankings of Potlatch's total governance practices which include time-phase voting and include staggered boards, give us an index of 93.4 against the S&P 400, and 94.6 against the materials companies. Which means 93.4% of other companies that they compared us to have a lesser set of corporate governance practices. So -- That's kind of where we are. Our board has considered this and believes both of those things are really in the best interests of our shareholders. That's why we -- that's why we elect a board.

Understood. Okay, thanks again.

You're welcome.

There are no more questions at this time.

All right. Thank you very much, Louise. And thank you all for joining us on the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Thanks, Louise.

You're welcome.