Potlatchdeltic Corp (PCH) 2011 Q2 法說會逐字稿

Good morning. My name is Chastity, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch second quarter earnings conference call featuring Eric Cremers, Vice President of Finance and Chief Financial Officer; and Michael Covey, Chairman, President and Chief Executive Officer for Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the conference over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Thank you, and good morning. Welcome to Potlatch's investor call to discuss our second quarter 2011 earnings. Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the warning statements in our press release on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements.

Also, please note that segment information, as well as a reconciliation of non-GAAP measures, can be found on our website www.PotlatchCorp.com as part of the webcast for this call. Now, I'll review our second quarter results, and then I'll turn the call over to Mike Covey, our Chairman and CEO, who will make some remarks regarding our outlook. And then, we'll open it up to Q&A.

As you can see on slide 3 of the supplemental materials, we reported second quarter 2011 net earnings from continuing operations of $8.4 million, or $0.21 per diluted share. This compares to net earnings from continuing operations of $11.8 million, or $0.29 per diluted share in the second quarter of last year and $7.7 million, or $0.19 per share in the first quarter of this year.

I'd now like to review our second quarter results broken down by segment. Slide 4 highlights operating income and margin trends in our resource business. As shown on the slide, our resource segment results for Q2 were down from both Q1, as well as the second quarter of 2010. Operating income in the second quarter totaled $7.5 million, below both the $15 million we earned in the second quarter of last year, as well as the $14.1 million we earned in the first quarter of this year. The primary driver behind the earnings variance from both the first quarter and the second quarter of last year was lower harvest volume in our Northern and Southern regions, which resulted from unrelated causes.

Slide 5 highlights volume and pricing trends for the northern region of our resource business. The lower harvest volume in the northern region was a direct result of an excessively long spring breakup this year, which lasted three to four weeks longer than normal, limiting our ability to harvest in Idaho. We expect to get much of this missed volume in Q3 as customer log inventories are somewhat depleted. Northern region sawlog pricing remains firm, and we continue to indirectly benefit from strong Chinese demand.

Regarding pulpwood in the Northern region, harvest volume was also lower also impacted by the aforementioned spring breakup, and pricing dipped modestly from Q1 due to mix issues.

Slide 6 highlights volume and pricing trends for our resource business in the Southern region. As shown in the charts, pricing for both sawlogs and pulpwood have declined considerably from year-ago levels when prices spiked due to the very wet weather in the region, coupled with low inventory levels throughout the North American wood products supply chain.

Comparing Q2 to Q1, sawlog prices dropped about 2% due to weak Southern yellow pine lumber markets. Sawlog harvest volume was also lower, as we elected to defer about 100,000 tons of our planned Q2 sawlog harvest in the South, as we had indicated on the last call. And we expect to move that volume to the North, where pricing has remained relatively firm. As I mentioned, logging conditions were challenging in Idaho during Q2, so there's a timing mismatch of moving this volume from the Southern to the Northern region from Q2 to Q3. Pulpwood pricing dropped about 3% in the South in Q2, as harvest conditions were excellent and plenty of fiber was available across the region.

Next, I'd like to review our real estate business. As shown on slide 7, our real estate segment closed sales totaling $19 million during the second quarter, with revenues coming from HBU, rural recreational and non-strategic timberland activity.

Slide 8 highlights operating income trends in our real estate segment. And as you can see, our real estate segment continues to perform very well, having generated $11 million of operating earnings in the second quarter.

Slide 9 highlights our real estate sales by product type. In Q2, we sold just under 12,000-acres of non-strategic timberland, with a little over 5,000 acres coming from the second phase of the previously announced three-phase Northern Idaho transaction, and another nearly 5,500 acres coming from a non-strategic timberland transaction also in Northern Idaho. The additional 5,500 acres sold in Q2 were considered non-strategic because of generally lower stocking levels and difficult operability due to steep terrain. In addition to the non-strategic timberland sales, we also sold 665 acres of HBU property and over 2,100 acres of rural real estate.

Slide 10 highlights price trends for our real estate business, broken down by product type. HBU and rural recreational land pricing was firm at around $2,000 and $1,300 an acre, respectively. In total, we had 47 real estate transactions in the quarter, up from 30 transactions in the first quarter, and coincidentally, the same number of transactions as in Q2 of last year.

Page 11 highlights operating income trends for our wood products business. And as you can see, our wood products business had comparable results to Q1, generating operating earnings of $2.8 million. Included in the $2.8 million is a $2.4 million benefit from our previously discussed lumber hedge, as lumber prices retreated from the run up we saw earlier in the year.

Slide 12 highlights price and volume trends in the lumber part of our wood products business. And as you can see, both shipments and pricing were relatively lower in comparing Q2 to Q1. We expect our wood products business to remain cash flow positive in the second half of the year and expect better performance in Q3 versus Q4 due to general seasonal weakness in lumber markets later in the year.

Returning to slide 3, eliminations and adjustments provided $2 million of operating income during the quarter, driven by lower inventory levels. Corporate administration costs, excluding interest expense, totaled $5.9 million for the second quarter, down from $10.3 million in Q1. As we discussed on the last call, we took two non-cash charges in Q1, totaling $3.5 million, one related to deferred compensation associated with the increase in our stock price during the quarter, and the other due to deferred costs associated with the reduction in our credit facility. So effectively, our corporate expenses were $3.5 million higher in the first quarter.

In the second quarter, our stock price declined, and consequently, we booked a $1.2 million mark-to-market income benefit for our deferred compensation plan, effectively lowering our corporate administration costs for the quarter.

Finally, we booked a $2.7 million tax provision in the quarter, due to the strength of earnings in our taxable REIT subsidiary. Note that this is a book entry only, and does not represent actual cash taxes paid.

[EBITDDA] totaled $29.5 million in the second quarter, versus $33.1 million in last year's second quarter, and $27.8 million in the first quarter. Funds from continuing operations for the second quarter totaled $20.6 million, versus $23.1 million in last year's second quarter, and $20 million in the first quarter. The Company paid a $0.51 per share cash distribution during the quarter, for a total of $20.5 million. In fact, after paying the dividend, we finished the quarter with over $75 million of cash and short-term investments on the balance sheet.

Next, I'd like to make a few comments about our release of some acreage out of the collateral pool, securing our revolver and another $66 million of debt. As you may have read in our 8-K filing, we lowered the number of acres in the collateral pool down to approximately 352,000 acres. We did this because we were significantly over-collateralized to begin with, and lowering the revolver down to $150 million from $250 million in Q1 further increased our over-collateralized situation. The driver of this move was to have the debt rating agencies reevaluate our rating. Our goal was to have them rate us more favorably with less of the Company's assets now being encumbered.

In fact, on Friday, Moody's upgraded our outlook from stable to positive, so our results proved successful. It is also important to note that the smaller collateral pool now also gives us more operational flexibility.

As I mentioned, we finished the second quarter with over $75 million of cash and short-term investments on our balance sheet, very comparable to the nearly $81 million we had on our balance sheet at the end of the first quarter. Yet, in the second quarter we paid over $20 million in cash dividends to shareholders. Furthermore, as we sit here today, we have nearly $80 million of cash and short-term investments on our balance sheet, and we're going into our strongest quarter of the year. As you know, the second quarter is a seasonally weak quarter for us, so we're pleased with our balance sheet going into Q3. Now, I'll turn the call over to Mike to make a few comments about our outlook for the remainder of the year.

Thanks, good morning. Our resource business performed modestly below expectations in the second quarter, though this was due to lower harvest level than we had planned, a direct result of the late spring breakup in Idaho. As we enter Q3, our anticipated full-year 2011 harvest is running a little behind plan. Our current forecast calls for a harvest level of approximately 1.5 million tons in the third quarter and about 1 million tons in the fourth quarter, with the mix skewed a little to the Northern region, and specifically Idaho, where prices remain relatively firm.

Needless to say, market conditions for wood products remain challenging. The unanticipated run up in lumber and plywood prices in the first quarter came under pressure in the second quarter, negatively impacting our wood products results.

Finally, our real estate segment continues to post solid results in spite of weak consumer confidence and the sluggish economy. Despite these weaker-than-desired operating results, we were able to generate healthy cash flow in support of a strong balance sheet.

I'll now make a few comments about our outlook for the remainder of the year. Since wood product prices have now rolled over from where they were in the first quarter, we expect a more challenging second half of this year from the segment, with the third quarter being a little bit stronger than the fourth, due to seasonal factors, as Eric mentioned. In spite of the challenging market conditions, we still expect our wood products business to remain cash flow positive in each quarter.

There are important geographical differences developing in both log and lumber markets. In the South, markets remain generally oversupplied, and lumber and log prices remain weak as the region is only marginally benefiting from the strength in Chinese demand. With continued weakness in US housing starts, we have no reason to believe prices in the South will improve, at least over the near term.

Conversely, in the Pacific Northwest, log and lumber prices remain supported by continuing strength in Chinese demand, from which we indirectly benefit. And although there are recent reports of a slowdown in China, we believe it is only temporary, partly due to seasonal factors and partly due to the higher interest rates China has been putting in place to cool inflation.

As we move through Q3, we expect Northern region sawlog prices to modestly increase, primarily due to low log inventory levels at our customers' mills.

In total, we expect to harvest at our original guidance level for the year, which is around 4.2 million tons.

Regarding the outlook for our real estate segment, we remain optimistic. As Eric indicated, we closed 47 transactions during the quarter, and this was our second best quarter over the last two years. The third phase of our non-strategic timberland sale in Northern Idaho was all set to close in early September, which will further bolster cash flows.

At the start of the year, we indicated we expected to sell about 35,000 acres for the year. Given our strong year-to-date results, we now expect to be a little bit ahead of this estimate.

In summary, we have not changed our optimism about the long-term underlying fundamentals that will drive our results in the future. Diminished log and lumber supplies from Canada, due to the pine beetle, increased demand for logs and lumber from China as it builds out its infrastructure, and a return to normal housing starts here in the United States. Coupled with our overmature forest and higher harvest potential of high margin sawlogs, we are well positioned for improved market conditions. Chastity, that concludes our prepared remarks, and we'll now take questions from the participants.

Thank you. (Operator Instructions). Mike Roxland with Banc of America.

Thanks very much. Just a quick question. Can you remind us how many non-strategic acres you currently have left after the additional 5,500 acres that you sold this past quarter?

Mike, this is Eric. In total, we have between 200,000 acres and 250,000 acres that we would consider to have values greater than what the core timberland is worth on those acres. Most of that is going to be in rural recreational or HBU-type acres, but if you look at strictly non-strategic timberland, that piece of the pie, it is probably in the 10,000 acre to 15,000 acre range. But acres can shift from quarter to quarter or year to year.

Yes, I guess I'm asking that question in relation to the comment that you made with respect to your collateral pull, and how you have a small collateral pull gives you more operational flexibility. So basically, you have more of an option or more of an ability to sell land out, given that less of that land is encumbered.

Correct. We do have more operational flexibility, although we have no plans at this time to sell any of that non-strategic timberland.

Got you. So how much non-strategic timberland did you free up from that small collateral pool?

Well, that collateral pool was core timberland all along to begin with. So really none was freed up. This was strictly a move to get the rating agencies to view us more favorably. A small side benefit is that if we did want to sell some of those acres, we now have that flexibility.

Mike, the collateral pool was originally around core Idaho timberland. We removed about 350,000 acres from the pool.

Got you, okay. Can you talk about what you're currently seeing in the timberland market? We've seen some transactions recently that may indicate that conditions are improving relative to conditions 6 to 9 months ago.

We haven't -- the only transaction I can recall that's recently been announced, Mike, is the Plum Creek transaction for that four-star property, and that looked like it was at a pretty reasonable price. We are hearing some rumors of another transaction or 2 coming down the pike. And we hear they're going to be at pretty good prices, so we haven't seen it announced yet.

I think generally speaking, the level of interest and activity from the [TMOs] that inquire about timberland purchasing opportunities I think is the number of inbound calls that we get is probably increased a little bit. And I think the funding levels behind those companies that traditionally we've worked with in the past is a bit stronger than it's been.

Got you, but they have yet to really execute?

Yes, as Eric said, there's just been a couple of the Plum Creek transaction, which wasn't TMO money, obviously. And there's rumors of a couple of other transactions about to take place, but that's all we've seen.

And what particular regions?

The US South.

Okay. Got you, and just last question before I turn it over. Think about capital allocation going forward, how would you have us think about how you're prioritizing your allocation of excess capital? Is it still going to be targeted toward maintaining the dividend, and what follows after that?

Yes, I think clearly, until we see fundamental recovery in the US housing markets, which will allow us to increase harvest levels from their currently deferred pace, we will use the capital that we have on hand to support our dividend through this downturn. Once we get on the other side of the downturn, then I think we'll have to look at the suite of options, whether it's acquisition opportunities, buying back the Company stock or continuing to support the dividend.

Got you. Thanks, Mike. Thanks, Eric.

Thank you.

Gail Glazerman with UBS.

Good morning.

Good morning.

Can you talk a little bit about Northern log prices? Was there anything other than market movement? Was there a mix impact in your pricing in the quarter?

Yes, Gail, this is Eric. There might have been a small mix impact in the quarter, but I don't think it was material at the end of the day. We're continuing to benefit, as we said, from that Asian demand. And we actually expect prices to move up a little bit here in the third quarter, so I wouldn't -- it's not driven really by mix.

Okay, and your expectation is prices will move up. The Pacific Northwest prices have been under at least a little bit of pressure the last few months. Are you seeing customers that might pull from the Northwest reaching out to you a little bit more to save money, or what do you think is driving that?

Well, for the last several quarters, at least 2 or 3, we've seen West Coast mill owners that are looking for log supplies for their mills to look for alternatives that are less expensive than the US West Coast log -- the logs driven by the US West Coast export log market. So they have reached inland Idaho, and there have been a handful of small deals made with log shipments headed to the West Coast. And that just serves to keep pressure under this market. It is not a meaningful part of the volume that we ship.

So I think generally speaking, most of our volume for the third quarter is already sold and committed. We really don't expect any material change in log prices for Q3 as we sit here today.

And the new Idaho landfill that you had in the quarter, was that to the same buyer as the prior land, or can you give a sense of what type of buyer that was?

It was in the same general area, but it was a different buyer. But like the first transaction, it was another mill owner and small land owner in Northern Idaho that wanted to purchase the property.

Okay, and still no sense that TMOs might be interested builts during the build positions in Idaho?

Not yet.

Okay, and Mike, can you talk a little bit about what your outlook is for housing, both for 2011 and maybe an early peek into how you see things playing out in 2012 at this point?

Well I think it's a better -- it's probably highly likely this year is no better than last year in terms of the housing starts. Potentially, I think it has the chance of being a little bit lower, but we're at the bottom. I don't see what's going to fundamentally change that in the first half of 2012. I think our outlook continues to get pushed out a bit, Gail. And I think we'll see what happens with the efforts that Congress has underway to stabilize the economy and the country and an election cycle and what that has to do with next year. Hopefully, the second half of 2012 is better than where we've been this year, but I think we're still several quarters away from meaningful improvement.

Okay, thank you.

You're welcome.

Chip DIllon with Vertical Research.

Good morning. First question is on the harvest for the second half of the year. Tell me if I'm wrong about this, Mike. I think it was going to be about 2.7 million tons and now that's 2.5 million tons. Is that the order of magnitude of the reduction?

It's going to be around 2.5 million tons, Chip. About 1.5 million tons in the third quarter and about 1 million tons in the fourth quarter.

Right, and before like last quarter I think you were planning on something closer to like 2.7 million tons over that second half. Is that fair, or was that -- has it been 2.5 million tons all along?

No, I think it's been around 2.5 million tons all along.

Okay, got you. And then if you could talk a little bit about the log price situation? I know you are not way over on the coast really, but we obviously saw some very strong pricing for logs late last year, earlier this year. And I've heard it's backed off some. But do you have a closer read as to if that's true and how far it's backed off? And do you think it's a near-term thing, or do your sources tell you it's just a correction, or could it be something more structural?

Chip, we don't have direct participation in that market, so I think it would be inappropriate for us to comment about the behavior of those markets. Or all of our information is really second hand. I think that as we've pointed, is this a seasonal thing or fundamental change? Typically, the Chinese demand in this building season wanes this time of year with hot weather and other activities in China. The incredible step up we've seen in Chinese log demand, even if it falters a little bit, it's still way higher than its been in the past. And I think we may have a temporary blip here, but longer term, we're still optimistic that the Chinese demand is here to stay.

Got you, and then last thing, and you might have addressed this. I was on a couple minutes late. On the wood products segment, I know that there was some discussion last quarter about futures contracts and hedging, either helping or hurting, and what was the net effect of that this quarter on the $2.8 million you made there?

On the $2.8 million, $2.4 million came from the lumber hedge. Prices were treated in the quarter, and consequently, we get made an accrual in the last quarter of 2010, a $2.9 million expense ran through the P&L. And we got $2.4 million of that back in the second quarter.

Got you. And is there still a hedge out there for the second half of not?

There's a hedge in place that will -- it will run out at the end of the third quarter. And so, there's actually an asset now on our balance sheet, that's I don't know, $100,000, $200,000, something like that. And as we sit here today, that hedge is in the money about $10 an MBF, so we expect to collect $100,000 or $200,000 at the end of the quarter.

Got you. Okay, thank you.

Thank you.

Dan Cooney with KBW.

Hi, guys, how's it going?

Good morning, Dan.

I think you mentioned the increased operational flexibility from unencumbering the 290,000 acres. Were you just talking about the ability to opportunistically sell land, or are there actually harvest restrictions in place on that acreage?

No, that was purely, if we wanted to sell those acres now, we would have no issues with the bank group. Before when it was in the collateral pool, it would have been more challenging for us to sell those acres.

Okay, so on what's remaining there's no harvest restrictions on that land?

Yes. We now have the ability to sell those acres. Before if we wanted to sell them, we would have to replace those acres with something else.

He's asking about the harvesting restrictions on the land that is in the pool today.

Oh, yes, nothing changes from that.

Okay, great. And then I think you mentioned last quarter that you expected to harvest about 750,000 acres this quarter and came in at about 680,000. So is that 70,000 acre or ton gap basically represent the lost volume from that 3 to 4 week delay in the spring breakup in the North?

Well, you mixed -- so we're clear, you mixed up acres and tons there. So maybe you should repeat the question, so we're clear about what you asked.

Yes, sure, you're right. Just the tonnage, the harvest outlook for the second quarter. I think you guys came in about 70,000 tons light; is that correct?

Yes, we were definitely on the light side about 100,000.

And because you had already planned to defer the harvest in the South, I'm assuming the bulk of that was from the spring breakup in the Northern harvest?

Yes. That's correct.

Okay, great. That's all I have.

We'll catch up most of that in Q3.

Okay, fantastic.

Thanks.

Joshua Barber with Stifel Nicolaus.

Hi, good morning.

Good morning.

You guys had some sales as part of the 3 phase Idaho sale, and then you had some other non-strategic Idaho sales. But there was about a $400 per acre difference between those 2. Can you just comment on where the regions were, and if there's any difference with some overmature forests, or what would account for that difference?

Well the metric you're referring to, the first non-strategic timberland sale in Idaho was approximately $1,500 an acre. This last one was more like $1,100 or $1,200 an acre. The primary driver behind that difference, in this particular case even though both are in Northern Idaho, was stocking levels, the number of board feet per acre. Logging costs were higher on one than the other, so the margins were net different, and due to steeper terrain, just general operability conditions. There was really nothing else that drove it, other than those 2 things.

Okay. You had also commented before on there's been relatively strong log prices in the Pacific Northwest. Have you seen any mills starting to cut back there now as lumber prices have bounced around the bottom, and log prices continue to be fairly stable?

Yes, there's been a number of announced curtailments. I don't think there's been closures, per se, but curtailments both related to probably holiday down time around the Fourth of July. But just beyond that, some companies have announced publicly that they are taking market-related down time, and that has primarily been on the West Coast. We've not seen it in Idaho.

Okay, and last question is the basis the real estate sales that you expect in the third and fourth quarters, I know that's a vague number. But would you expect that to be comparable to the first half basis, or would it be much higher basis land like we saw the back half of last year?

What you'll see, Josh, is probably a little bit higher basis in the third quarter, probably comparable to what we had in the first and second quarter. But then you'll see that basis come down a little bit in the fourth quarter to the more typical 15% range, 15% of sales.

Great. Thanks very much, guys.

Thanks.

Joshua Zaret with Longbow Research.

Great. Thank you very much. I want to address my greatest concern. Your non-strategic lands, you really upped that program back in 2008, and you're going into 2009 with a plurality of segment sales, and a majority in 2010, a majority in 2011. I think you said you have 10,000 acres to 15,000-acres left in that bucket. So going forward, how do you replace the revenue and earnings? How do you envision replacing your revenue and earnings that you're now generating from that bucket?

Well, the Company's land base was about 1.5 million acres in 2006. We made a couple of strategic acquisitions, have since divested the non-strategic piece of those. We have about 1.5 million acres left today, which we think is higher quality, better land than what we had 4, 4.5 years ago.

The revenue replacement is really going to come from what we view will be the pick up in our core business of harvesting activity, as the US housing market increases, as we raise harvest levels, the cash flows that we have used to plug the gap if you will, bridge the gap, from non-strategic land sales will be replaced by earnings from our core business. That's been our plan all along. We plan to sell this property over a 10-year period. We accelerated it because we found attractive prices, and we're nearly done with that process.

Josh, just to add to what Mike is saying, I think we talked about this earlier in the year. Sawlog prices in 2010 were up $7 a ton over where they were at in 2009. That $7 translated into about -- over $20 million of incremental cash flow to the Company. That's purely on price per sawlogs, so as we get into a better housing market, we expect to see higher prices for sawlogs.

The second thing is, as you know, we have the ability to harvest at a higher level. We have been holding back our harvest level until we get to a better price environment, and that potential is a good 400,000 tons to 500,000 tons a year. And most of that is sawlogs, so there's a lot of incremental cash flow that can come from both pricing and from incremental volume going forward.

Understood, which could be longer term when markets recover, but it almost sounds like you may have to cut into some muscle here on creating cash from what may not be non-strategic land sales if markets don't recover in a year or 2. Am I missing something?

No, I don't think -- we have said from the outset that we wouldn't sell land at prices that we didn't think were attractive and provided good value to shareholders, and we certainly won't do that in the future. We'll have to face the capital allocation that we have between the dividend and the use of money if that comes to -- we'll have to make choices about that with the Board. Were' not there yet.

Okay, then let me change to one other question. And this is for you, Mike. It's a longer term Southern pine timber question. If you look at stumpage prices or delivered log prices going back 10 years or so, and you use Timber Mart-South data, you see a continuous decline from a $50 --$40 or $50 level, and I'm talking during the housing downturn of the early part of last decade to where you are now at basically $23 on stumpage, where you might have been at the beginning of $40.

What's really going on here? It's not about housing, as you look at this, at least in my opinion. Could it be that -- and I guess my theory would be there's just a lot of planning in the 70s, 80s, etc. is all coming to fruition. What is causing this really, and I'm sure you've seen this really long-term decline in stumpage and delivered log prices?

Well, we haven't studied extensively the cause for it. I concur that the trend line has been down. Part of that is probably related to log size, Southern stumpage prices are quite sensitive to diameter. And I think largely the older, larger, more mature forest have mostly been harvested. So you have today, what is more of a plantation forest with smaller diameters, which probably has some impact there.

Rationalization in capacity in the South has probably taken place over time. Maybe mills have more pricing strength than they've had in the past to drive prices down. I don't know all of the reasons for it.

Actually, those are very good answers, and I thank you for that. And then the last thing, other than the spring thaw, has weather in either region, it's been crazy weather this year, has that affected your business either positively or negative in any way?

Only to the extent that we had a difficult logging conditions, and we're going to have to make up for that in the second half of the year here. But I don't attribute that to a benefit of a detriment to the business, per se. It's just a shift in timing.

Okay, great. Thank you very much.

You're welcome.

Mark Weintraub with Buckingham Research.

Thank you. Just two quick clarifications and then a question. One, I thought I heard in terms of the amount of timber being removed from the pool 350,000 number, and then also a 290,000 number.

Yes, it's more around 290,000 Mark.

Okay.

We have 352,000 acres now in the collateral pool.

Okay, got it.

I switched the 2 numbers, Mark. I should have let Eric answer the question.

Okay, thank you. Second was when you're talking about the harvest, if you cut about 100,000 tons less in the second quarter but you expect the full year to be the same, aren't you actually going to be cutting about 100,000 tons more in the second half of the year as opposed to less, as was postured at one point?

Yes, year over year, the harvest volume is going remain around 4.2 million tons. It's simply a little bit of a shift. We harvested around 1 million tons in the first quarter of this year, same as in 2010. The second quarter this year, it was just under 700,000 tons, where it was 900,000 tons last year. So now the difference of the 200,000 shortfall, the second quarter of this year versus second quarter prior year is going to come in the third quarter.

Right, and relative, though, to your prior expectations is you're actually going to end up harvesting about 100,000 tons more in the second half of this year than you had previously anticipated because you harvested about 100,000 tons less in the second quarter.

That's correct.

And then one more strategic or maybe tactical question. This year, there is a holiday on the built-in gain sacks, correct?

Right.

So given that you've indicated there still seems to be pretty good demand interest on the timberland side, and at the same time, stumpage and what you're receiving for your harvest is quite depressed. Does it actually potentially make sense for you to continue to be more conservative on your harvesting, and perhaps a little bit more aggressive in selling land?

Well, I think you raise a good tactical question. At the end of the day, we have other ways to defer those taxes through 10/31 exchanges. In some cases, the property is either sold out of the TRS or the REIT. Those have implications for the tax situation. I don't think, in our thinking so far that the holiday on built-in gains tax treatment has not triggered our thinking about how to manage the business. I think fundamentally we look at prices. Are they strong, what is the future outlook, and we go from there.

Fair enough. Thank you.

You're welcome.

Steven Chercover with D.A. Davidson.

Good morning. What we're seeing here in Oregon, some of the coastal mills are basically stopping the purchase of third party logs, and they're strictly using their own logs. Down the road, could you see the market developing so that coastal mills are dedicated to China, and production that's geared for the US market will move inland to Idaho and elsewhere?

I hope so. I think that will be an extreme case, Steve. I doubt that it will take that shape long term. One of the states of Washington and Oregon are very large timber sellers. They don't participate in the export market to a great degree. They certainly have a concern about that. But I think fundamentally, the demand from China will have a long-term, lasting impact on inland log prices, and I don't think we're going to see a wholesale shift, but I think it's a fundamental change that will be very helpful.

Well to the extent that your mills are in Idaho, would you prefer to ratchet up your own production? Or if there was some form of such a shift, just selling logs to others in that fiber basket?

I'm not sure I understand that part of the question.

Well I guess the question is, are your mills capable of adding value so that you would be best off transferring logs at market value to your sawmills and ratcheting up production, or would you be agnostic and say we'll just sell them to the highest bidder in the Idaho Basin?

Our mills generally operate at, more or less, full capacity today. And while I do think we have add value, we don't have a lot of capability to add more production capacity. So we participate in the market where we have some terrific operators in the inland Northwest that have the ability to pay a lot of money for logs and still make a margin.

Great. Many thanks.

Thank you. (Operator Instructions). Joshua Barber with Stifel Nicolaus.

Just one quick follow-up. On your comments before about the potential harvest levels in a recovery, given the sales pipeline for the rest of the year, what would you expect that to be going forward if we have 4.2 million this year, how much do you think you could increase that by in a great market?

Well we've said that we have the ability to raise our harvest levels up to around 4.6 million tons for an extended period of time, several years. We could take it considerably above that in a really attractive market for a year or 2. In the upper limit I'd say today as we sit here today is I don't think we could do more than 5 million tons at the very upper end; 4.6 million tons would be a more typical upper end range.

That's very helpful, thank you.

Chip Dillon with Vertical Research.

Yes, and I might have missed this, but in addition to the potential in a better market, what would the mix -- how could the mix shift, because obviously one thing that's holding you back a little bit right now is the obviously sawlog versus pulpwood shift. And if you've addressed this, I apologize. But if you were to get to that 4.6 million tons level, which is, in a sense, only about 10% higher than now, how would the relative mix shift in that environment between sawlogs and pulpwood?

What you'll see Chip is a little bit of a skew more towards sawlog. The real volume increase opportunity for us is in Idaho. Our forest year in particular is relatively more overmature than it is in the South. So that extra 400,000 tons, if I'm not mistaken, roughly 300,000 tons is going to be sawlogs. So it will be skewed more to sawlogs than pulpwood.

Now, that being said though, would you not do any shifting in the South?

No. I think our harvest there is really, it's more split. It's still a little bit skewed to sawlogs versus pulpwood, but the forest isn't as overmature there as it is in Idaho.

Got you. Okay, thank you.

Thank you. There are no further questions at this time.

Thank you, Chastity, and we'll talk to everyone again on the next quarter. Thank you.

Thank you.

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