Potlatchdeltic Corp (PCH) 2014 Q2 法說會逐字稿

Good morning my name is Stephanie and I'll be your conference operator today. At this time I would like to welcome everyone to the Potlatch second-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Thank you, Stephanie, and good morning. Welcome to Potlatch's investor call and webcast covering our second-quarter 2014 earnings.

With me in the room are Mike Covey, Chairman and Chief Executive Officer and Eric Cremers, President and Chief Operating Officer. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements.

Also, please note that 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. I will now turn the call over to Mike to make some introductory remarks and then I will review our second quarter results in detail.

Thank you, and good morning.

We are encouraged by the recent reports on single-family permits, homebuilder sentiment, and home sales. We believe that housing continues to be on a long-term path to recovery in spite of the fact that the number of housing starts estimated for this year has been revised downwards. We believe the recovery will continue to be a slow, arduous climb marked by plateaus, with job markets and household formation serving as two key pacing factors.

The longer-term housing recovery bodes well for Potlatch given our heavy leverage to lumber production. Our wood products segment reported another solid earnings quarter on the back of an increase in lumber shipments. Demand increased as winter conditions eased and the pace of home construction picked up. Lumber prices have been increasing at a modest pace throughout the quarter.

Sawlog prices remain strong in our northern region and will move up with lumber prices in the third quarter. Southern yellow pine sawlog prices remain flat and we expect that will continue to be the case for the balance of the year. Harvest volumes will be at seasonal peak in both regions in the third quarter.

Our real estate segment closed the second of two large sales that we planned this year in the second quarter. As a result, real estate earnings in the first half of 2014 are higher than the segment's earnings for the full year in 2013. No more large transactions are planned in 2014.

We are pleased with the overall performance of our businesses. We expect strengthening demand and prices for logs, lumber, and plywood, coupled with seasonally higher harvest volumes to drive strong performance in the second half. We are on track to report higher annual earnings for the third consecutive year.

I will now turn it back to Jerry to discuss the results in detail and then we will take questions.

Thanks, Mike.

Beginning with page 3 of the slides accompanying this call, our second quarter net income was $16.2 million or $0.40 per diluted share. This compared to net income of $20.3 million or $0.50 per diluted share last quarter. I will now review the results of our operating segments for the quarter. Results for resource segment are displayed on 4 through 6.

Operating income for the segment was $10.8 million, compared to $16.2 million last quarter. As depicted on the graphs, the second quarter is consistently the lowest earnings quarter for resource because of spring break-up. This limits access to timberlines in the northern region where snow is melting the ground is wet. Fewer operating days in the region result in lower harvest volumes.

Northern region sawlog prices improved 10% quarter-over-quarter due to higher lumber prices in the first quarter, as well as lower moisture content in logs. Customers pay based on dimensional volume in Idaho, not weight. The sequential improvement in price is amplified by the fact that logs dry out and are lighter in the spring months.

Pulpwood prices in the Northern region improved 5% quarter-over-quarter based on stronger demand. Sawlog and pulpwood harvest volumes in the northern region declined considerably from the first quarter, due to the seasonal factors already discussed.

Moving to the South on page 6, sawlog prices improved 5% from the first quarter due to a greater component of higher priced hardwood sawlogs in the sales mix during the second quarter. Prices for our primary product in the region, pine sawlogs remain flat.

Sawlog and pulpwood harvest volumes in the region declined 5% and 13% respectively, compared to the prior quarter, due in large part to an unusually wet spring. We expect an increased harvest volumes in the third quarter to make up the shortfall. Southern region pulpwood improved slightly from the prior quarter because the wet weather limited supply and pressured prices.

The results of our wood products segment are displayed on pages 7 and 8. Operating income for the quarter was $14.9 million compared to $12.7 million last quarter. The increase was driven by 13% higher lumber shipments. We successfully worked off the excess inventory that we held at the end of the first quarter as a result of weather related transportation challenges.

Excluding amounts billed for shipping costs, average sales prices realized for lumber were flat sequentially on a mill net basis. Spot prices were approximately 15% higher at the end of the second quarter on a year-over-year basis.

The results of our real estate segment are covered on page 9. Operating income for the quarter was $12.4 million compared to a $8.3 million in the first quarter. We closed the planned sale of 9,400 acres of rural recreational land in Minnesota to a conservation concern for $10 million in the second quarter.

The first quarter included the bulk sale of 11,000 acres of scattered rural recreation parcels in Idaho that were previously harvested. The segment's margin increased from 57% in the first quarter, to 79% in the second quarter, primarily because the Minnesota property had a lower per acre basis than the Idaho property.

Corporate administrative costs were $9.2 million for the quarter, compared to $6.7 million in the first quarter. The increase was primarily due to mark to market adjustments in our deferred compensation plans, which are driven by changes in our stock price, and higher incentive compensation expense. Our Board approved changes in the second quarter whereby deferred director awards will be settled in shares not cash. As a result, the total number of awards that are mark to market each quarter, and the related earnings volatility will decline significantly going forward.

Our income tax provision increased $2.4 million sequentially to $7.9 million for the second quarter. This is due to higher real estate and wood product earnings in our taxable REIT subsidiary, and lower harvest volumes in the REIT due to spring break up. Our consolidated effective tax rate for the first quarter was 33%. We still expect that the full-year consolidated effective tax rate will be slightly above 20%.

Moving to page 10, our balance sheet remains solid. Cash and short term investments increased to $83 million as of the end of the quarter, in spite of the fact that our harvest volumes were at a seasonal low point in the second quarter. Our $250 million revolver remains undrawn and we have no debt maturing during 2014. We are working on extending the maturity of our revolver to the first quarter of 2020 and expect to close the transaction next month.

Capital spending was $9 million in the quarter. We're still planning to spend approximately $28 million on capital projects this year.

Now I'd like to comment on our outlook for the second half of 2014. We expect Northern sawlog prices to increase modestly in the third quarter due to higher lumber prices. We also expect a small increase in Northern pulpwood prices due to tight supply relative to demand.

In the Southern region demand for hardwood sawlogs remains very robust and we expect prices will remain elevated for the duration of the year. We are planning to increase our harvest hardwood sawlogs above typical levels in the third quarter. As a result of the combination of higher volumes and elevated prices for hardwood sawlogs, we expect the average price that we realize for Southern sawlogs in the third quarter to be meaningfully higher on a sequential basis. We expect pine sawlog and pulpwood prices to remain flat in the second half of this year.

We expect our annual harvest will be in line with the guidance that we give it the start of the year. We plan to harvest 1.4 million tons in the third quarter, which is more than 20% higher than the volume that we harvested in the third quarter of 2013. We expect the volume of lumber that we ship in the third quarter will be slightly lower than the volume we shipped in the second quarter, due largely to the fact that we held lower lumber inventory at the start of the third quarter.

We anticipate modestly higher lumber prices will more than offset lower volumes, resulting in sequentially higher wood products earnings. Though transportation challenges persist industry-wide, conditions in our markets have improved from last quarter and we will continue to proactively manage the delivery of our products.

We are not planning any large sales in real estate in the second half of the year. We sold slightly less than 27,000 acres in the first two quarters and expect that we will come in near the high end of the 30,000 to 35,000 acre range that we guided at the start of the year. We estimate that land basis will fall in the range of 20% to 25% of revenue for the year, as the basis of the Idaho land that we sold in the first quarter becomes a smaller component of the annual mix. This is an improvement over our guidance earlier in the year.

In closing, we are pleased with our performance in the first half of 2014, and all three of our businesses are on course to deliver strong results for the year. That concludes our prepared remarks. Stephanie, I would now like to open the call up to Q&A.

(Operator Instructions)

Gail Glazerman, UBS.

Hi, good morning.

Good morning.

Morning.

Just to start, can you remind us what price series would be most comparable for your lumber, because your performance was significantly better than the overall random lengths composite. So just wondering what we should look to?

Yes, Gail, this is Eric. Lumber prices in Q2 were relatively subdued in random lengths versus Q1, it went down about $19. Basically because housing starts didn't materialize as expected due to all the cold and wet weather. Now, our product mix is not the same as the composite. It does vary quite a bit. If you look at it, we are more heavily skewed towards studs than the composite. I think our product mix is roughly 30%, and we don't know for certain, but the composite, we think, may be around 20% studs. And we also have economy grade in our product mix, whereas the composite does not include economy grade. And economy prices were relatively strong in Q2 versus Q1, as were studs. Our mix is not exactly the same as a composite, so you will see dislocations over particular quarters, but generally speaking over time, we will track the composite up and down.

(Inaudible) particularly in Arkansas around your land?

I'm sorry, we didn't --

Any sort of update on activity -- lumber activity and potential startups and rampups in Southern lumber activity, particularly in your land in Arkansas? Anything happening?

Yes, there's been a number of capacity additions, GP, West Fraser, et cetera, announcing significant investments in Southern lumber in Arkansas. We have not seen any new restarts in Arkansas, per se, but there are a handful of idled mills and some are rumored to be in discussions and hopefully will restart.

We have seen some activity in Idaho. One of our largest customers, or our largest customer on the resource side, just added a new line at their Lewiston facility which will increase demand, who knows, 600,000, 700,000 tons a year, in Idaho. And then we also saw another mill in Clarkston, right next-door to Lewiston, restart after being idled for five years. And that will improve demand a couple hundred tons per year. We're definitely seeing signs of life out there.

Okay. And can you give some color on cash allocation in terms of your opportunities to make acquisitions, what you are seeing in the land market? Or if you're still being shut out of that, when you might decide to do something like a buyback?

This is Mike. There are a handful of properties for sale around the United States currently, which we continue to look at and compete for. Acquisitions remain our highest priority in terms of capital allocation and opportunities to grow the Company where we can do so on an accretive the basis. While there is a handful of properties, I think time is uncertain as to when those auctions and processes will come to a conclusion.

We continue to allocate capital to our wood products business, as you know, with some higher spending this year and likely next year. We grew our dividend 13% last year, and given the strong cash position that we have and the strength of our businesses, I would suspect we'll have another discussion with our Board this year about the dividend. Share buybacks, they certainly remain a possibility but they are the lowest priority on the scheme of capital allocation that we think of.

Okay. And just a couple quick questions about the third quarter. Can you spot us, based on what you know about lumber pricing, what that would -- more detail about what that would mean for your Northern sawlog prices? A little more detail?

I think what Jerry indicated in the call was that Northern sawlogs were going to be modestly higher in the third quarter; that's our current outlook.

Okay. And the 1.4 million tons of harvest, can you give a little bit more color on where you see that falling out regionally? And possibly between pulpwood and sawlogs?

You bet, Gail, this is Jerry. I would say that the harvest is going to track with our historical breakout, between the North and the South with probably 60% of it being the North, 40% in the South. And then the split between sawlog and pulpwood, again will kind of track with our historical patterns, where probably about 90% of that in the North is sawlogs. And then in the South it's slightly more than 50% will be pulpwood.

Okay. Thank you very much.

Chip Dillon, Vertical Research.

Yes. And good day there. First question is on the -- you mentioned the increased activity in the lumber side and the Lewiston line that had restarted. Do you get part of that 600,000 to 700,000 tons a year? Is it all yours? Is some of it yours? Can you tell us?

Certainly if we decide to ramp up our harvest level, Chip, we would expect to get some of that. Some of that volume could come out of other competitors' mills that are vying to buy sawlogs. So the mill hasn't completely started up yet, so it's hard to know exactly where it is going to come from, but certainly there is a potential there for us to supply additional logs if we so choose.

I guess at minimum, you would think, given the structure ownership out there, my guess would be that certainly this is a positive development for the market and that one way or the other you all should benefit.

Yes, absolutely. I think it's a positive for the market.

I see. Okay. And then, as you look at the -- you mentioned that your sawlog prices are elevated and you're going to take advantage of that in the Northern region more than the Southern. If you could just clarify that? And are you -- is this sort of a statement that you think your -- sit back -- you think that prices have recovered in the Northern region to a reasonably high level? But the fact that you're not ramping it up more in the South is the fact that prices -- even though you see them, I guess since they're still flat in pine, or just still well below normal levels?

Chip, this is Jerry, I'll take that one. In terms of sawlog volumes in the North, I guess one thing I would want to remind the group, is last year we actually pulled harvest forward to take advantage of higher prices. So when we talk about the sequential increase in sawlogs, Q3 this year versus -- I'm sorry, year-over-year this Q3 this year versus last year, that's really a reflection that we're kind of going back to more of a normal seasonal pattern.

The other comment about ramping up harvest to sawlogs was down in the South and that was to take advantage of high hardwood sawlog pricing. So we are shifting and taking advantage. In the scheme of volumes, it's not huge volumes but given the relatively higher prices, again, that will meaningfully move our average sawlog price realizations in third quarter.

Okay. Thank you.

Steve Chercover, DA Davidson.

Good morning, everyone. Forgive me if some of these -- I might have missed something earlier. First of all, with respect to the quarter two resource results, prices were up a bit. It looks like volumes were down a bit. I am just wondering, is that a function of sluggish demand? Or was access to the woods, and I guess costs elevated due to some residual winter conditions?

Yes, Steve, it's Eric. Yes. You are spot on with that question. We were impacted a little bit more than typical in the second quarter this year due to the wet weather. If you add it up, it probably cost us 75,000 tons of missed volume, so to speak, that was in our plans. And roughly 60,000 tons were in the South and roughly 20,000 tons were in Idaho. And it probably cost us $2 million or so of operating earnings in the quarter. We're not going to leave that volume out of the plan though. We'll get it in the third and the fourth quarter. But we had anticipated getting it in the second quarter.

Okay. That was my gut. And from both your comments on resource and for the year in general, we should be looking at resource pretty comparable to the last couple of years in terms of contribution, in the mid $20 million range and then full-year EPS for the Company ahead of last year's full-year total, right?

This is Jerry, Steve. I would say correct on both fronts. We do expect fairly strong contribution by resource for the year. But also certainly in the second half. And then year-over-year we think earnings will be up fairly significantly as well.

That is what I understood, just wanted to make sure. And then, feel free to take this one off-line if you wish, but I wanted to get some additional clarity on what you think your sustainable harvest volume is, going forward? After you run through some of the low hanging fruit that accumulated during the downturn and also in view of the ongoing land sales.

This is Mike. Land sales have had a pretty de minimis impact on our overall long-term harvest outlook because the majority of our land sales have taken place in the lake states, Minnesota, which has a fairly small component of timber harvest to it. Really the Idaho and Arkansas timber inventories are what drive our future harvest profile, and as you know, with flat sawlog pricing in the South for the last several years we have deferred harvest and continue to defer harvest there, even though opportunistically we've shifted it to hardwoods here this third quarter. Softwood pine sawlog harvest continues to be deferred in the South so on a sustainable basis going forward, the rampup potential is the biggest opportunity we've had is in the US South.

Okay. But a few years ago you talk, I believe, Mike, about 4.6 million tons of sustainable level. And I think you've subsequently backed away from that and I think some of it was we could do 4.6 million as we chew through the deferred harvest, for lack of better words, but it's not really a long-run sustainable level.

I think, certainly, if you go back to five or six years ago before the downturn, we have sold a number of properties during that period of time both in the South and in Idaho which do impact our long-term sustainable harvest level. There's no question that we could ramp up to 4.5 million tons on a short-term basis, but that is not a long-term sustained level that we can support long-term. I think overall, the long term sustained level has come down. Opportunistically, we can do as much as 4.5 million tons for a short period of time but over time the harvest level will have to come down from that.

It would be, therefore, more call it 10% lower -- 3.8 million, 4 million?

We haven't given public guidance on that. But I think the general tenure of it is yes, it is going to be less than the 4.5 million peak opportunity that we might find in really attractive markets.

Got it. Okay. Thanks very much.

Paul Quinn, RBC capital markets.

Yes, thanks. Just had an additional question on this lumber mix issue. What percent do you have as economy versus zero for the benchmark?

Yes, Paul, it's Eric. Our mix is roughly 20% economy and it will vary up and down a little bit. But it's more or less 20%. And for some reason the economy was really strong in Q2 versus Q1, it was up by $5.00.

Right. What but about the difference on the upper end between the random lengths composite benchmark and your mix? Is that in proportion to the composites? (multiple speakers) [IE], is the big difference really studs and economy, I guess is the question?

I think studs and economy drive the majority of the difference, at least in looking back at what has happened especially with the economy prices in the last quarter. But I think to Eric's point earlier, over longer periods of time our in random lengths lumber composite track pretty closely. (multiple speakers) These aberrations happen quarter to quarter, but over time it tracks.

Okay. We will try to do a couple of tweaks to get that closer. You mentioned a new pulp contract in the North. Who is that with? And is it significant volume?

It's incremental volume that a particular pulpwood user consumer is looking for. I don't know that it's a new contract, per se, it's just their inventories were running low and so they approached us and said, hey, could you sell us more pulpwood. And we said sure, if the margins are attractive enough to us. Because the haul is further from what we would typically supply to that mill. So we reached an agreement. So you see higher prices. On the one hand, that's great. The downside to it is, some of that incremental pricing will be given back in a longer haul.

So margin is basically held flat?

Yes, it may be up a little bit.

Okay, then, Mike you mentioned a number of timber sales that you are taking a look at right now. Is that -- would you describe the current market as more sales out there? And what's the general flavor in terms of competitive pressure?

I think that especially the Southern timber land market is as competitive as it's ever been. At least in the last five years, or six years that I can remember. Certainly since the downturn, I think we're seeing higher prices and more competitors than we've ever seen both from the suite of REIT competitors as well as [temose] and there are only a handful of properties for sale. By handful there's probably 0.5 million acres on the market, and a half a dozen transactions. So they're small, there's not many of them, and they're extremely competitive.

Do you think that increased competition has pushed up transaction values? We really haven't seen that many transactions. There was one close, I guess a CatchMark sale in Q1 that was over $2000. Is $2000 an acre now the new norm in the US South?

The price per acre heavily depends on stocking and quality of the timber and proximity to market. So it's hard to just pick one number, but certainly the large Plum Creek transaction with Meadwestvaco and the CatchMark transaction that was completed in Q1, those were approximately $2000 an acre which have been higher than what we've seen in the past. You could also see something trade for $1500 an acre, which might be an extraordinary price if it was poorly stocked. So it's hard to say that $2000 is the new normal.

(multiple speakers) Paul, this is Eric. It think part of what is driving those higher prices that we're seeing is that there's more conviction that there's going to be a housing recovery in the US. If you look at forward demand for lumber going up about 4 billion, 5 billion, 6 billion board feet a year, almost everybody agrees, that's got to come from the US South. So price curves for sawlogs in Southern yield pine continue to strengthen and with more conviction of there being a housing recovery its pushing discount rates down. Those two factors combined are what's driving those higher values.

Okay. We're seeing some price appreciation in different parts of the US South on the pine sawlogs. So you're not seeing any in Arkansas. Is it more to do with the growth versus drain ratio in that -- in your jurisdiction?

It's probably that, the growth versus drain, as well as just the dynamics of the sawmill and plywood capacity that's installed in the area. I think as you go to coastal, central Georgia, the Carolinas, North Florida, parts of Texas, there's just a more robust market for lumber and plywood, from lumber and plywood producers than there is in south central Arkansas, where we have seen a fair amount of idle capacity.

Roger. Okay. Thanks very much. Best of luck.

John Tumazos, Independent Research.

John Tumazos. Thank you for taking my call. Could you just review the housing market expectation you plan your business for for 2014 and 2015, whether it's 1 million starts or 1.1 million or which level? And how you interpret the decline in new permits in June to 963,000 units annualized, where the starts were less and there were different explanations for various months due to weather, but the permits are also falling which (inaudible) related to one month's weather.

Yes. The housing market in terms of our outlook, we haven't spent a lot of time looking at 2015, but just to keep it at a high level, we rely on the American Panel Association report, which utilizes eight different forecasting firms for housing starts. I think for 2014 the average consensus is in 1,044,000 housing starts, as we sit here today, which is up roughly 13% over 2013. If you look out to 2015, the current forecast in that APA report is 1.3 million starts, or roughly 23% higher than where we are at in 2014. Virtually every forecaster's got higher housing starts next year versus this year and the mix is skewed a little bit more towards multi-family versus single-family.

With regard to your -- there's a lot of reasons behind why we should foresee higher housing starts, whether it's affordability, household formation, employment gains, existing for-sale inventories are very low, there's home price appreciation, demographic trends, et cetera, et cetera. There's a lot of reasons why the housing market should continue to gain traction. And that's our conviction as well.

Second part of your question, as it relates to what happened in June. Frankly, we don't worry about short-term movements in permits or starts like that. We're looking and we're focused on the long-term trends. I can't respond -- we can't respond to your question as it relates to what happened in June.

Thank you very much.

Mark Weintraub, Buckingham Research.

Thank you. Three quick ones. First, actually following up on, Eric, on your comments on the last question, are you doing anything differently today than you would be if you had -- if you didn't have confidence in a 1.3 number for next year? Let's say that you thought it was going to be 1.1, would you be operating differently?

Yes, Mark, I think given our view that were going to see higher housing starts, higher demand for lumber, further increases in capacity utilization in the industry, which normal economics 101 would suggest higher lumber prices down the road. And virtually every forecasting firm whether it's RISI or Wood Markets or FEA or RBC, virtually everybody is anticipating higher lumber prices next year versus this year. And I think that outlook would make sense.

Certainly expect our wood products business to do very well, not just next year but over the next several years. So we're looking at incremental capital to put into those mills whether it's improving output or improving grade, or lowering costs. I think that's the one thing that we're doing differently than we might otherwise be doing if the outlook wasn't quite as optimistic.

Okay. Fair. Second, a little bit of color maybe on -- you mentioned that hardwood saw timber's doing better currently than softwood. What are the different end markets and any thoughts as to why you're seeing that difference right now in the South?

Yes, I think a lot of that, Mark, is driven by appearance grade products, whether it's cabinetry or flooring. I think there's a wide variety of end-use markets there that's driving that. We're also seeing firming demand for railroad ties. And this is a trend that has been in place with us now for the past year or two. So prices are particularly good for hardwood species.

The railroad tie, that certainly would be extraneous to housing. The other two, you would have thought would largely tend to move hand in glove with what would be going on in the softwood business. Or is there some nuance, some help you can give in understanding why that might be a little different right now?

I think it's not just the new housing market for these appearance grade products. It's also the repair and remodel markets are increasingly doing well. I think they're all moving up in tandem with one another. I think the one thing that makes hardwood unique is that it tends to be in low-lying ground.

The volatility around hardwood pricing is much more severe than it is in softwood. Because there are certain times of the year when you simply cannot access the hardwood stands. So you will tend to get pricing volatility. And that's what we're seeing right now and that's what we're going to get after.

I see, and so there was wet weather or something like that that has impeded access? Is that what --

We had a very wet, wet spring in the South.

Got it, makes total sense now. And then lastly, you had indicated that as you look at acquisitions, one of the criteria, not surprisingly, it's got to be accretive. When you're saying accretive, are you thinking cash flow, are you thinking EPS, are you thinking value accretive relative to buying back stock or other uses of the capital? How are you thinking of the notion accretive?

You touched on at least three definitions of accretive and you can, I guess, pick and choose any of those at any given point in time. Ideally, we can find acquisitions using our own cost of capital, we think add value. That's currently a very high hurdle with the competitive nature of the timber markets. So at a minimum the accretive definition that we think about it, is cash flow generated after financing costs, with a harvesting profile that makes sense for the property. I think that's the challenge of any timber land property where you can make any deal accretive if you cut the trees fast enough. And certainly that is not a sustainable way to manage a timber land asset. And certainly something that when we look at an acquisition, we look at its sustainable harvest profile over time. And financing costs for us are in the 4% range today and that's really a benchmark for how we think about something being accretive.

Okay. Thank you.

Mike Roxland, Bank of America Merrill Lynch.

Thanks very much. Realizing -- just questions on the North -- realizing that you have the spring breakup, that you pulled some -- forward some volume last year. Northern sawlog volumes have now declined for two consecutive quarters. I'm just wondering what is driving that decline? Is it a more of a function of a slowing housing market on the West Coast? Or is it slowing Chinese demand for timber, which maybe tangentially has affected your business as you don't really export?

Yes.

Well, the harvest decline in second and third quarter is I think something -- excuse me, in first and second quarter -- that happened this year and last year, I think is pretty normal for us. First quarter is usually pretty strong, second quarter is always the weakest. I think the important thing is looking forward, we're going to have a really strong third quarter in terms of harvest volume, just because the operating days are long and that's really the most productive time of the year. And we've got very strong prices. I wouldn't read anything plan-ful that we did between first and second quarter, when it was really more -- you take the opportunities that weather conditions give you in the North, and that's what happened.

So you're not seeing anything from your customers indicating that they don't need tonnage at this point? (multiple speakers)

It wouldn't be a slowing housing market or anything like that.

There was nothing related to price or demand that caused us to alter the harvest other than operating conditions just didn't allow us to operate as many days as we had hoped to.

Mike, just to add a little color to that. We harvested 280,000 tons of sawlogs in North in the second quarter. And I think I'd mentioned roughly 20,000 tons is what we missed from our plan because of wet weather very late in the quarter. It literally was the last week or two we didn't get 20,000 tons to market. So if you add that 20,000 to the 280,000, we would have been about 300,000. I think as Jerry had mentioned, last year we pulled forward volume into the first half of the year. So the North last year did 334,000 tons. So had we not pulled forward that volume, we probably would have been around 300,000 tons which is very comparable to what we would have done this year had we not had that wet weather. So it's very comparable year-over-year.

Got it. Thank you for the clarity there, Eric and Mike. Just last question. Lumber pricing -- I know it's been a focus on the call for a little bit, obviously better than we were expecting and yet EBIT was actually lower. Was there anything from operations vantage point that negatively impacted performance during the quarter?

We did see higher log prices out in the lake states region, some of the pulp mills are running with very low inventories and they're bidding up the price of logs. Particularly in Wisconsin -- excuse me, Michigan. But that's the only real operational issue that we faced in the second quarter.

Got you. Good luck in the balance of the year.

Joshua Zaret, Longbow Research.

Thank you. Couple of quick ones. Going back to the hardwood sawlog mix issue. First question is, what is a normal percent mix in the South and what did you have it at the second quarter?

Normal mix, Josh, in second quarter might be just in the low single digits, 3%, 4% and that's about where we were at in the second quarter this year. Looking out into the third quarter, a typical mix might be in the 15% to 20% range. And this year we're expecting it to be in the 20% to 25% kind of range of our mix for sawlogs in the South.

Great. I got it. I guess the second quarter is weather impacted getting that out. Second question, has -- in terms -- what is the trend in the cut and haul cost and has that had an impact on your margins this year?

No. The trend in cut and haul, it's a little bit different North versus South. In the North, prices are relatively flat year-over-year. We have put in place a bidding program, we're aggressively managing our log and haul costs, so prices are essentially flat year-over-year.

In the South we are seeing a little bit of price inflation, up roughly 3%. Some of that is driving by the fact that we're going after hardwood stands as opposed to softwood stands, so they're less productive in the hardwood versus the softwood. But net-net overall, log and haul is up roughly 2% for the Company year-over-year. So not a significant impact.

Okay. That's useful. And then last question. Lumber production this quarter was 176 million board feet, your stated capacity is 625 million, which means that you're other running more shifts or working weekends. I guess my question then is, what is your effective capacity this year? In other words what are you going to produce because you're running well over your stated capacity?

That's a stated capacity; doesn't include things like weekends and overtime and et cetera. We are running the mills very hard to take advantage of this attractive market environment that we're in. We do think we will produce roughly 660,000 to 670,000 thousand -- excuse me -- million board feet this year, which is up roughly 4% over last year. And as you can imagine, Josh, in this environment we're always looking a way to tweak our mills to run them a little bit harder. We hope year after year to push them a little bit more.

Great. That's helpful. Thank you very much.

(Operator Instructions)

Collin Mings, Raymond James.

Hi, good morning. Most of my questions have been answered. But just a quick couple follow-ups here. Just as it relates to the lumber price outlook which obviously has already got a lot of attention, can you just provide a little bit more color on the supply chain and some of the logistics issues that were really pronounced to start the year? And maybe where we are today?

I know that you guys are able to work through the excess inventory you guys had built up at your mills, but could you talk about what you're seeing a little bit broader on that front?

Well, Collin, it's Mike. I think the industry as a whole faces a trucking shortage. Not only in competition for trucks to haul other agricultural products seasonally, but just generally I think, nationwide, there is a shortage of I think I've seen a couple hundred thousand truck drivers. We certainly face the competition from that. And lumber generally does not pay the highest, it's not the most profitable commodity for trucks to haul. So we move as much as we can to rail transportation which has been our focus at all of our mills. Not only is it more economic but it's more reliable even though it takes longer to transport to a customer's destination.

I think we've largely worked through that in the big picture. It's a constant challenge month-to-month, quarter-to-quarter to get enough trucks to meet customer demand. And I don't see that abating anytime soon, but it certainly doesn't -- it isn't something that is heavily impacting our business.

Okay. Are you hearing from any other -- from on the producer side -- any other situations where you still have a lot of excess inventory at the mill level? Or what's your sense as far as field inventories out there from that perspective?

My sense is field inventory is, after a lull from the winter months, and I think things have normalized quite a bit and I would characterize inventories across-the-board from the customers we talked to, in the mills that we speak with, as normal.

Okay. And then just one other follow up on the share repurchase front. I'm just curious, some of your peers have gone as far as offered a specific trigger point on the share price, if they see where they might get more aggressive and I know that is probably not something you guys would look to do. Can you talk a little more about the dynamics where, as you alluded to where that's kind of at the bottom of your capital allocation priorities? What might happen or what you might see to move that up the stack a little bit? Particularly, just given some of the challenges, as, Mike, you alluded to, with how competitive it remains for timber land acquisition. Again, as I look at your stock, trading at a discount to NAV, it just seems like there's some value there in repurchasing your own timber, if you will, at this type of discount.

We don't dispute -- we certainly believe we trade at a discount in NAV, and certainly in this market perhaps buying our own trees through our own stock is one of the more attractive alternatives that we have for the use of capital. But I also think that the landscape is littered with people that do share buybacks that have not gotten it right in hindsight, and our Board's been very cautious about that.

I think, just as a matter of priority, kind of work through and said, capital allocation through our wood products business, dividend increases, and acquisitions are higher priority than sharebacks. It's not that we're going to rule them out, but they are at the bottom of the stack. What would move it to the top of the stack, obviously, is a major retraction, I think, in our share price for whatever reason -- further below NAV than it is today. And then certainly we would revisit it with the Board.

Okay. Great. Good luck during the back half of the year, guys.

Thank you.

(Operator Instructions)

At this time there are no additional questions in the queue.

Thank you, Stephanie. And thanks to the rest of you for joining our call today, as well as for your interest in Potlatch. I'll be heading back to my desk shortly and look forward to discussing your detailed questions. Thanks, and have a great day.

Thank you. This concludes today's conference. You may now disconnect.