Potlatchdeltic Corp (PCH) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Potlatch earnings conference call. [Operator Instructions]. I would now like to turn the presentation over to your host for today's conference call, Mr. Gerald Zuehlke, Chief Financial Officer. Please proceed, sir.

Joining me today is Mike Covey, our Chief Executive Officer. Before we begin let me remind you that 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. Also before we begin, please note that segment information for shipments and prices per unit can be found on our website as part of the webcast for this call.

I would now like to discuss our second quarter results after which Mike Cover will provide some additional comments, including an overview of our markets. Our third quarter net income totaled $24.2 million or $0.62 per share, which included a $9.2 million tax benefit resulting from an agreement with the IRS on closing open tax years. Income from without the adjustment totaled $15 million or $0.39 per share. Revenues totaled $398.1 million, down 4% from the second quarter and a little less than 2% from last year's third quarter. In both cases the revenue decline is attributable to the dramatic fall off in lumber prices that began midyear.

Our Resource segment earnings for the quarter were $19.3 million versus $9.8 million in the second quarter and $20 million in last year's third quarter. The sequentially earnings improvement was due primarily to increased harvest levels as we transition from the seasonally slow spring break up period to a more active harvesting period during the third quarter. Our saw log prices declined slightly from second quarter in both Idaho and Arkansas. The year-over-year difference in segment earnings was due to lower harvest levels in Arkansas and Minnesota combined with the loss at Boardman where our costs were capitalized in the third quarter of 2005 and are now being expensed.

Our Land Sales and Development segment reported earnings of $800,000 and we reported $1.5 million in the second quarter, which included 1.1 million for closing and conservation easement in Minnesota and $6 million in last year's third quarter representing strategic sales. Most of our land sales activity is on hold pending the completion of our ongoing assessment of our land or our alternative values and the identification of suitable property for tax deferred exchanges. Beginning the second week in December in New York we will be meeting with investors to outline our initial stratification of land attributes and our approach to sales and development of these properties.

The Wood Products segment had a loss of $5.2 million for the quarter versus income of $3.5 million in the second quarter and $5.9 million in last year's third quarter. The main driver for both comparisons was poor lumber pricing, particularly in the south where pricing is 21% lower than a year ago and 13% lower sequentially. We closed both of our southern sawmills for approximately four weeks during September and additional downtime is being taken this quarter.

Our Pulp and Paperboard segment continues to improve due to strong market fundamentals, rising prices, continued mix improvement and record operating performance. Sequentially segment earnings from our two Pulp and Paperboard operations in Arkansas and Idaho improved $10.4 million in the third quarter and are up $16.7 million from the first quarter of this year. September 2006 bleached board pricing was 7% higher than December 2005 and we expect market conditions to remain strong into next year. External sales of pulp from our Idaho mill were 10.4% higher sequentially and 35.5% higher than a year ago, which also had a very positive impact on segment earnings.

In addition to strong market fundamentals we are benefiting from reduced energy and transportation costs as national gas and oil prices moderate. Our own efforts to hedge gas prices combined with spot market price declines will result in the fourth quarter's projected earning costs for the two paper mills to be approximately 4.8 million below our costs in the fourth quarter of last year. Higher costs for wood fiber in Idaho and maintenance partially offset the favorable comparisons.

The Consumer Products segment reported income of $6.2 million for the quarter versus $7 million in the second quarter and $2.4 million in last year's third quarter. Earnings slipped in the third quarter due primarily to rising pulp prices, which increased approximately $3 million over second quarter and are up 27% compared to one year ago. Shipments fell 5% compared to the prior quarter following record shipments as part of our targeted inventory reduction strategy. The positive year-over-year comparison was driven by higher average sales price and 12% improvement in shipments, which were partially offset by higher pulp, freight and packaging costs. As I mentioned earlier, higher pulp pricing negatively impacts our tissue business that results in a net benefit to the Company when we factor in external pulp sales from our pulp and paperboard segment.

During the quarter we made our third quarter REIT distribution of $19 million. Year-to-date we have made $57 million in quarterly distributions and an additional $89 million of cash was returned to shareholders as part of our earnings and profits distribution for the first quarter. On July 15th we called the remaining $5.5 million of our senior sub notes. Premium and deferred issuance costs related to the redemption were more than off set by interest rate swap income associated with the notes. We also made an $18.1 million contribution to the Company's defined benefit pension trust. On the positive side, the U.S. and Canada have reached agreement on softwood lumber trade dispute. As a result, we expect to receive an estimated payment of $40 million within the next six months. We anticipate receiving 50% or more of the payment during the fourth quarter of 2006. I would now like to turn the time over to Mike Covey for some comments after which we will open it up for questions. Mike?

Good morning everyone. Well, much attention during the quarter was focused on the decline in lumber pricing and our own efforts to adjust capacity. Our pulp-based business has continued to show improvement due to strong operating performance and pricing. We are also encouraged by the moderation in energy pricing, which will benefit us in the current quarter and hopefully into next year. In nearly business, tissue, paper, wood products and resources, we are seeing transportation fuel surcharges moderate as fuel drops in price. In most cases our margins will improve as fuel prices decline because we were not successful in passing most of these increases through the supply chain in prior months.

As Gerald mentioned, our Pulp and Paperboard segment had strong earnings in the third quarter based on market fundamentals and our own operating performance. Fourth quarter results will slip due to wood cost pressures at our Idaho mill where costs are expected to increase approximately $2.5 million during the quarter. Seasonal holiday curtailments at sawmills combined with market related closures of sawmills in the west will continue to exert pressure on chip markets. In Arkansas, however, wood costs remain stable and chips are in relative plentiful supply.

As we've discussed for the prior two quarters, we plan to reduce inventory in our Consumer Products segment by $25 million by the end of December. We are actually a bit ahead of this plan with our finished goods reaching target inventory levels in September and our parent roll inventory is on track to reach target by year-end. With this effort behind us, we expect our tissue production to increase during the fourth quarter and into 2007. Segment results are expected to improve by approximately $2.4 million annually as we maximize production of our Through Air Drive or TAD towel from our Las Vegas tissue operation.

We begin installation of our new bath tissue converting line in December at our Chicago Elwood location and this new converting line will increase our bath tissue production capacity by about 15%. Despite the weakness in lumber pricing, log prices remain fairly strong in most wood baskets. Demand for logs in Minnesota has declined with the curtailment of several OSB mills in the region. In Arkansas the curtailment of sawmill production at our own mills and others in the region has caused us to reduce harvest levels at least into the early part of next year. Log prices remain strong, only dropping about 5%, but demand is fairly weak. Accordingly, we will defer harvest of approximately 200,000 tons of saw logs this year and increase harvest levels by an equivalent amount in 2007 if market conditions improve.

In the fourth quarter our Wood Products segment, which includes six sawmills, one plywood mill and one particleboard plant, is expected to operate at less than capacity. We have indefinitely closed our Warren, Arkansas sawmill because it was operating below cash breakeven. We have curtailed shifts in other locations and will initiate additional closures if we cannot operate above our shutdown costs. We expect log prices to moderate in some regions if lumber prices stay at or near current levels for an extended period of time. Until at least the spring building season we do not foresee-- expect significant improvement in lumber markets and the spring rally will be dependent on a number of factors. It will take time for the North American Lumber Industry to adjust capacity to meet demand. Fortunately mechanisms are now in place with the Canadian tax on lumber exports to take some uncertainty out of the market.

Potlatch is well positioned to withstand a prolonged downturn in lumber prices due to weak housing starts. Our quarterly dividend of $0.49 was set by our Board of Directors based on the expected base line cash flow from our timber and to some degree our land business. To date our land sales activity has been de minimus, only contributing $2.7 million so far this year as we focus on stratifying our entire ownership reviewing every acre to determine its best use and highest value. Through the third quarter the cash flow generated by our Resource segment alone was in excess of $60 million.

Our total capital expenditures this year will be between $50 and $60 million and our maintenance capital, or that amount required to comply with regulatory issues and meet stewardship requirements for reforestation, is about half that amount. We're very comfortable with our current dividend level and remain focused on finding ways to sustainably grow the value of Potlatch to our shareholders through accretive land acquisitions, dividend increases or the buyback of shares. Candace, we're now ready to take questions from the participants.

[Operator Instructions] Our first question comes from the line of Rich Schneider of UBS.

Just wanted to get some further details on the improvement in pulp and paper operations. It looks like your bleached board prices were up about $20 a ton and that would have contributed about $4 million of the $10 million improvement sequentially and I guess you got $1 million recovery from not having the addage that you had last quarter at Cypress Bend, which leaves about $5 million that I'm trying to account for. Is the majority of that coming from pulp and reduced energy costs or could you give me a little more detail on that?

Rich, this is Gerald. For certain the pulp would have been a major contributor with us shipping almost 15,000 tons in the third quarter versus 10,000 tons externally in the second quarter and at about a $50 plus price improvement, so that's quite a difference right there.

And so would that have been at least a $3 million contribution because you've got a $3 million hit in Consumer Products on pulp?

We certainly would have had a hit in consumer products for the pulp shipped internally. You're right. The other side of that, of course, is Consumer did better in the quarter based on their price improvement as well.

Okay and in terms of resources looking out to the fourth quarter, the expectation is that that will be lower because of the drop off in your harvest levels where you're deferring harvests?

This is Mike, Rich. Yes that's correct. I think we're going to-- we expect our results in the fourth quarter to be down from where we were in the third quarter. That's partly due to seasonality although most of it is due to the harvest deferral that we plan in Arkansas and a slightly lower log pricing, although at this point so far that's not material, but we're seeing roughly saw log prices dropped about 5% on the last quarter. They continue to be weak so those two things will result in lower earnings from the fourth quarter in Resources, although I guess I characterize it as really a deferral. Most of that comes from trees that we intend to leave standing and not cut until next year if conditions warrant.

Of the 200,000 tons you're deferring, how much of that is fourth quarter deferral?

I don't have that answer right at the top of my head. We can get that for you. That's kind of a-- that's a matter of it's 200,000 tons that we'd planned to harvest this year and that's of saw logs that we're going to defer. The Pulpwood number would be in addition to that.

Okay and just a question on taxes in the quarter and corporate expense, I'm trying to understand how you had such a-- even excluding the tax refund that you had, the large tax benefit you had, which was about $4.6 million in the quarter, and then on the other hand you had very high corporate expenses, which I think when you deduct those then it helps the tax benefit. But could you explain why corporate expenses were so high in the quarter and why the tax benefits seem to be much higher than one would have expected?

Well, the tax benefit, obviously taxes are very complicated and, as we go through the year, we further refine exactly what we believe our tax liability will be based on earnings or loss at the various TRS businesses. The settlement of the tax years and its impact on deferred taxes also has some impact on current taxes based on those taxes in future years that we won't be paying and the associated interest accruals on those taxes so some of that ends up in the current year as a benefit as well.

Okay and then corporate expense, just last question, why it was at-- it looked like it was something close to $18 million where you've been tracking something closer to the $10 - $11 million level?

I'd have to research that a little bit but I show $17 and almost $17.5 million last quarter. Certainly as we've gone through the year we have some additional staffing over what we've had previously with the addition of new REIT related personnel as well as having both Mike and [Pen] employed this year, whereas last year we had one person in that position. As you know, Pen will be retiring at the end of year and we will have a normalization of that cost.

Okay yes I guess my number adjusts for interest expense and other income and that's how I get to more the $10 or $11 million level but I can--

Corporate other includes a lot of different accruals and some of those get adjusted as you go through the year based on either performance measures and how we accrue for other salary and benefit related costs.

George Staphos of Banc of America Securities.

I just wanted to follow up on Rich's question again. Can you-- I realize the tax calculation is complicated and if it's complicated for you folks then it's certainly even more so for us but can you give us a little bit more color in terms of why you got the benefit with some of the taxable businesses doing presumably relatively well? And then the second question I had more ticky tac, in terms of the eliminations line, which jumped a fair amount, what was behind that? You went from a positive 1 million to a minus 6.6. Thanks, guys.

Yes well let me tackle the second one first because I'm not sure how much clarification I can add on the tax situation. On the second one, we have as we bill logs into our Dax and sell logs mainly into our own Dax we would have an adjustment of profit and inventory because those logs are not making it fully through the system and that is a fairly sizable number as you build log inventories to hold during the winter when you can't be logging so that's a kind of a traditional thing, although we had a fairly massive buildup in the third quarter relative to what we've had seasonally in the past. So that's the major portion of the inter-company elimination. In addition, with higher pulp prices and pulp moving its way through our tissue segment, we'd also have a fairly large profit in inventory as that pulp moves its way through the tissue operations.

Got you. And on the tax then, Gerald, you basically have relayed what you can relay at this juncture?

Yes you know we can research it some more, George, and talk off line a little bit but it is extremely complicated and it's a matter of quarter-by-quarter and then year-to-date and looking at your whole relationship as you figure it will end up for the year so we can talk a little bit more about it.

On particleboard where prices jumped pretty significantly sequentially, I know it's been a relatively strong market but with-- what were the moving pieces there? What were the driving factors?

This is Mike. Our particleboard business is very small. We have one plant, which is actually quite small by industry standards and scale. The business has been doing fine with the price of particleboard being up on the year. I think challenge wise going forward in that business the issue that we face there is increasing raw material costs for the residuals, planer shavings that are the major raw material source for that. I don't know if that gets to your question or not.

Well, it just is a small business I realize but nonetheless relatively big move in pricing but nothing out of the ordinary from what you see, Mike, right?

No I think it's trended with patterns in the industry. We've made some steps to make the business more competitive with a different resin process and I don't think there's anything remarkably unusual in it that's happened to us recently.

Last question and then I'll turn it over. Can you comment at all on what you're seeing in terms of the tissue market these days? It seems to be perhaps a little bit more promotional strategy being taken by the various larger tissue producers looking at the numbers that have been put up recently. What's your thought? How might it affect you as we look out? Thanks, guys.

This is Mike. There's been I think perhaps some mixed signals as we try to read the tissue business. Everyone certainly faces rising raw material costs for pulp in our tissue business. I think in the away from home sector we've seen some increases in the commercial and industrial side of that tissue business that have been passed through but that hasn't happened as much in the at home sector that we serve in the private label business. Comments by Kimberly Clark and others lead us to believe that there's going to continue to be more promotional pressure as you indicated but we really haven't seen our pricing and our business fall off at all yet. It's been very steady for several months and still remains quite strong so I wouldn't say that we're anticipating that we're going to see opportunities to increase pricing. There continues to be some initiatives on a sheet count with reductions in tissue products but I don't see price increased coming through the system quickly.

Is there a lag at all in terms of if promotional activity increases say in month one that you'll start to see it filter back into private label in month six or month twelve or any kind of rule of thumb that you might be able to provide us?

I guess I can't speak to a lag pattern that we can anticipate and give you clear guidance on. There's probably a small one but I don't think it's material in any way.

Okay thanks, guys. Fair enough.

Mark Weintraub of Buckingham Research Group.

I just wanted to clarify on the eliminations line. Does that over time tend to zero? So is the negative 7 million we had in the third quarter, will there be a positive 7 million offset as you work through the logs on a go forward basis?

Yes, Mark, that's exactly right. Over time those eliminations come back to you as the finished goods make it out the door.

Okay and then I realize that the tax situation is complicated but maybe help me out a little bit more, if I'm looking at the third quarter then if I had a lot of my profit in that, or the losses in the elimination, was related to logs and so I've got a positive $15 million from my taxable REIT subsidiaries before I allocate corporate or interest. I'm just-- I'm befuddled how I can get a positive 5 million provision for taxes and more importantly, how on a future going-- what should we be looking for in the fourth quarter or 2007? And can you give us any help in how to begin to model it?

Well, short of going through models on this call, we'd certainly do that as we talk individually and talk about models but one thing I think as you talked about eliminating corporate and other expense items, the lion's share of all of those expenses are attributable to the TRS businesses. There's very little in the way of overhead and other expense that's attributable to REIT income and so there's a large proportionate amount of expense to TRS, which makes those profits lesser when you analyze them for tax purposes. And I don't know if that's helpful but that's something we can talk about again as we talk about models.

Okay great so basically-- I mean it seems like third quarter maybe was a bit of an anomaly because even if I look at all the profits and put all the corporate and interest, you just-- it's hard for me to get to a 5 million provision but on a go forward basis that is still the best way to look at it?

Yes, yes that's right. And, again, because of that sizable-- there were a lot of tax years involved there and there's a lot of moving pieces to it.

Okay so there are a lot of elements going into the third quarter, which hard for you to summarize?

Exactly.

Okay fair enough. One more question on taxes and I'll move on. That 40 million on the duty refund, will that be taxable or not?

The way we're looking at it right now, that is strictly to do with lumber and so we would assume that we would paying tax on that money. We're going to continue to research that.

Okay and then lastly on the harvest, can you update us what your-- how much is the 200,000 fund reduction? Is it kind of percentage of total harvest for the year of saw logs?

This is Mike, Mark. Company wide that number is probably about roughly of saw logs it's probably roughly 10%. Of our total harvest it's probably 5%. We can give you a better number off line but that's a quick guess at it.

Okay great and then finally is it right to assume that as you're still going through that the process of identifying best uses for your land that land sales will be very small in the fourth quarter as well?

Yes we do not have any significant land sales transactions planned to complete in the remainder of the year with the exception of we continue to negotiate on a fairly sizable conservation deal for some property in Arkansas that we don't know if it's going to be completed in the fourth quarter yet or not. But there won't be any significant land sales per se. The conservation easement is kind of a one-time deal.

Steve Chercover of D.A. Davidson.

I guess my questions will jump around a little bit as well. Starting with the lumber business, which fell so dramatically in Q3, you know it was difficult to even shut the mills fast enough I'm sure. Now that some of the mills, especially in Arkansas are closed, do you expect the results will be quite as bad in the fourth quarter?

Steve, this is Mike. We've got one of our sawmills completely curtailed in Warren, Arkansas. We've taken some shifts off of other mills. We're not anticipating, as I mentioned earlier, any dramatic fall off in log pricing. If that happens that would be a surprise to us and so I think our best characterization of our lumber business, especially since we're going to continue to incur some shutdown related expenses in this quarter, is that quarter-to-quarter it's going to be relatively the same.

Steve Chercover. Thanks for that. Now with respect to chips, especially here in the Pacific Northwest, clearly there's a looming almost crisis. Can you mitigate any of that by taking fiber from the Boardman Oregon tree farm? I mean that was initially planned to deal with just such a kind of situation.

Yes we are, in fact, doing that as we speak. The chips from the hybrid poplar Boardman tree farm, which is a cottonwood type tree, we are chipping and putting them in our sawdust digesters in Lewiston, Idaho. They can come both by truck and by barge up the river system to Lewiston, Idaho, which is roughly 100 miles and we will begin displacing higher cost sawdust and woodchips with the Boardman product. It is still a quite expensive product. It will offset some of our costs in our paperboard operation but it does not have a material financial improvement to the operations at Boardman. It's better but at the end of the day we still are in an operating loss position at Boardman.

And I think you indicated that the costs at Lewiston will be up 2.5 million in Q4? Is that including any offsetting chip shipments?

Yes that's our best guess at this point. As you know, this chip market moves almost daily and our best guess is 2.5 million. I mean that could be a bit higher. It could be a bit lower but that's the ballpark effect that we expect. Holiday shutdowns this market in the curtailment situation are going to keep that number in flux.

Okay maybe just a couple more question and then I'll turn it over as well. With respect to paperboard the pricing currently is it similar to the Q3 average or is there any additional momentum?

We're seeing a little bit of additional momentum related probably more to mix than we are to absolute price increases. We continue to renegotiate contracts for this quarter and into next year for some of our least valuable product mix and liquid packaging will replace that with higher value board to a different customer mix and we continue to receive orders and build our product in our coated two-sided board, which is a new product for us in Lewiston, Idaho. So the mix enhancements will serve to increase our sales realization slightly still in the fourth quarter over Q3, but no big ramp up in price like we saw Q3 over Q2.

Got it. And last one and I guess I would throw this in the realm of a wish list, do you think that you can start to give us log volumes and pricing maybe northern and southern, however you want to segment it, as part of your disclosure going forward?

Yes we will sure look at that and I guess based on the comments from the callers we need to provide a little more clarity in our tax issues, which we'll try to provide as well.

Frank Dunau of Adage Capital.

I've got a few questions too. Seasonality in the resources business, I know the third quarter is as strong as-- is the fourth quarter stronger than the second quarter? Are they about equivalent or how does that work?

Frank, this is Mike. Typically the fourth quarter would be quite strong relative to second. Second quarter would be the weakest. Third would be the strongest. Probably first and fourth are kind of a toss up depending on weather conditions around the country.

Okay but then I've got to start subtracting whatever the deferred harvest is to try to figure out what the fourth quarter is, right? Fourth quarter will still be better than the second quarter even with the harvest deferral? Would that be reasonable?

Yes it will.

Okay and are you guys on LIFO or FIFO?

It depends on the product line. We're on LIFO for most wood.

How about for tissue?

No.

Okay and I also echo the tax questions because I can't figure it out either. Unless you're pulling in some out of period things other than the thing you said, the 9.2 million, I can't get to the benefit either. Maybe I can ask it in a different way. When I look out into the fourth quarter should I expect a benefit or a charge on the tax line?

It depends on how out TRS businesses do.

Okay because I mean the TRS business I think as you pointed out earlier, I mean as far as I can do it with info on corps they look kind of flat sequentially second quarter to third quarter and going from a $1.3 million charge to a $4.6 million benefit implies that somewhere it went down $17 million unless you're pulling in something from out of period. I'm looking at that figuring-- if I'm thinking about it right.

Yes and, again, just to generalize as you go through the year you also have the cumulative effect of your assumptions on taxes that do have some impact out of period. Try to get it all within the period as much as you can.

I know so would it be fair to say that maybe if you could go back and do it all over again, you'd actually have had a tax benefit in the second quarter and not such a large benefit in the third quarter?

Well, I don't want to go there.

[Roger Bognar] of [Bognar Enterprises].

Gentlemen, a little more color on the tissue shipments for the third quarter versus third quarter of '05, was your volume movement almost all converted tissue or was there a large amount of parent rolls in that number?

Just in general I would say that there was more parent roll activity certainly in the third quarter '06 than there was in the third quarter '05. I don't have all the detail in front of me but I would say that converted product also was and probably was the most significant improvement there.

Would you be willing to give a converted percent increase so to speak over last year or approximately-- up 2%, 3, 4%?

I can't do it right off the top with what I have here.

[Andy Seinman] of [Airdyne Asset Management].

Your pension payment was $18 million. Do you get-- is that it? Are you done for the year?

Yes.

And then okay so then the fourth quarter end of the year net debt, I mean this quarter it was $311 million. Forget about whether or not you get any of the $40 million in this quarter but just normal seasonal year-end I think you generate a lot of cash so can you estimate not including things that aren't part of operations what your net debt might be at the end of the year? I mean you've got to pay the-- I guess you've got to pay another $19 million in dividends right in the fourth quarter?

We will have a fourth quarter distribution to make of about $19 million. The debt position will change relative to other cash flow issues during the quarter including how well we perform on an income side. I can't really predict whether it will be a plus or a minus by the end of the year.

Well, if it was a minus that wouldn't be normal would it? I mean usually you're generating a lot of cash in the fourth quarter don't you?

Well--

Or is it the third quarter where it's the best?

Well, third quarter is the best quarter, as Mike was just expressing, and the fourth quarter would have some drop offs normally seasonally but we've explained some reasons why it could be different.

Right, right.

So that would be very difficult to predict at this point.

[Aaron Deswanson] of [Jay Goldman].

I was just curious on your assessment on supply demand on logs. I just didn't understand the statement in the Press Release is that several months' capacity to adjust to housing starts.

I'm sorry. Can you repeat the question?

You have a statement in your Press Release that says, "We expect it may take several months for the capacity in North America to adjust to housing starts."

Correct.

What is that in reference to? Logs, lumber or I'm not--

Aaron, this is Mike Covey. The statement refers to really North American lumber capacity if you looked at the previous twelve months the annualized lumber capacity in North America was probably something in the order of 65 billion board feet to support approximately 2.2 million housing starts. If housing starts are annualized going forward now let's say call them 1.7 million, that 500,000 drop in the housing starts translates to something in an order of 57 or 58 billion board feet of lumber that's needed so there's call it 7 or 8 million board of lumber capacity that needs to come out of the system to get things back in balance and that just won't happen overnight. That's dozens and dozens of sawmills that have to modify their output and that just takes time.

So there's been some shuts in Canada and would you expect more in the southeast or you don't expect anything material in the near term?

Well, I think there's two ways that it manifests itself. One is in complete shuts of which we've done that with one of our mills indefinitely and probably the more common way is people begin to reduce hours or take shifts off and that's typically not announced or it's done quietly. And I think if you just look at statistics from the industry you begin to see a drop in production both in the south and the west and in Canada. But in that-- I guess the point of the Press Release and my comment here is that that does not happen overnight. It takes several months for that to work through the system.

Okay so the other part I was trying to get to is just kind of bridge going forward if I were to take a look at what you said on resource so it should be above the second quarter but below the third quarter and then wood will continue to suffer from some of these price and oversupply issues. And then paper I guess is about even with-- and pulp with the third quarter and same for consumer? Is that fair assessment or-- ?

Well, we expect our tissue business actually to begin to improve going forward absent any changes in promotion or pricing that we see from the branded products just as we work through our own inventory position and add some capacity. I think that that's certainly got some upside. Our pulp and paper business while we continue to enjoy strong pulp prices and good paperboard, as we mentioned on the call, the raw material costs for this sector are going to be significant. Also, as we enter the winter months we typically see increases of energy costs for natural gas at these facilities so we don't expect our paperboard business to be robust in the fourth quarter as it was in the third.

[Operator Instructions]. Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn it back to the speakers for any closing remarks.

Thank you all for joining us. We'll look forward to talking to you next quarter.

Thank you for your participation. Have a great day.