Potlatchdeltic Corp (PCH) 2015 Q2 法說會逐字稿

Good morning. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch second quarter 2015 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, Karen, and good morning. Welcome to Potlatch's investor call and webcast covering our second quarter 2015 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 at www.potlatchcorp.com. I'll now turn the call over to Mike for some comments, and then I'll cover our second-quarter results and outlook.

Thanks, Jerry, and good morning. Between January and the middle of May of this year, the random length lumber composite index lost $75, the steepest slide in almost 20 years. That, coupled with seasonally low harvest volumes in our northern region, resulted in a very weak operating results in April and May. In June, Western lumber prices began to improve, and the earnings in our wood products business improved by $3 million in June compared to May. We also completed two significant capital projects at each of our Great Lakes stud mills, resulting in nearly a month of nearly total downtime. Both projects went well, and we are already seeing the benefits of higher volumes and improved recovery. Our recently acquired timberlands in Alabama and Mississippi continue to perform as expected, and we are on track for the acquisition to be accretive to FAD per share this year. Given seasonality, earnings contributed by these properties will be higher in the second half of the year. We are in the peak production period for Idaho timberlands, and expect a very strong third quarter, with log prices increasing sequentially, due to the improvement in lumber prices late in Q2. While we are experiencing unusual dry forest conditions in Idaho, we expect to harvest and deliver all of our planned volume in the quarter. We are already operating under restricted harvesting hours, and don't expect that change until September. Having said that, the risk of widespread fires and logging-related curtailments remains a higher risk this year.

We are pleased that the real estate segment exceeded our forecast this quarter. This was due to the sale of two commercial sites, and a strong Minnesota rural recreational real estate market, which led to a record number of transactions for us in a quarter. Looking ahead to the balance of the year, we expect very strong results in the third quarter, on the strength in northern log prices, peak production activity and better lumber pricing sequentially. Although the fundamentals in the housing market are steadily improving, both the exploration of the softwood lumber agreement in October, and the weaker Canadian dollar, pose risks to further improvement in lumber prices later this year. Our shares continue to trade at a deep discount to NAV, with an attractive dividend yield of almost 4.5%. We allocated capital late last year to purchase high-quality timberland in the South, and continue to invest aggressively in our wood products business. Later this year, Management and the Board will make a decision to refinance or retire about $30 million in debt that is maturing, and we continue to evaluate the possibility of a share repurchase authorization. Such a program would require the sale of assets, which would be more attractive after 2016, when the built-in gains tax associated with the re-conversion in 2006 phases out. I'll now turn it back over to Jerry to discuss the results in detail, and then the three of us will take questions.

Thank you, Mike. Beginning with page 3 of the slides accompanying this call, our net income was $711,000, or $0.02 per diluted share, in the second quarter. This is down from first-quarter earnings of $5.7 million, or $0.14 per diluted share, primarily due to seasonally lower harvest volumes and lower average lumber prices realized in the second quarter. I'll now review the results of our operating segments. The results of our resource segment are displayed on pages 4 through 6. Operating income for the segment was $8.8 million, compared to $15 million last quarter. The sequential decline was driven by normal seasonal factors, including lower harvest volumes and higher silviculture and road related expenses. As presented on page 5, northern sawlog prices increased $6 per ton, or 7%, in the second quarter. This was due primarily to significantly higher prices for cedar sawlogs. Cedar comprises less than 10% of our northern sawlog sales volume. Prices for non-cedar sawlogs were flat quarter over quarter, on a per ton basis.

Our Idaho sawlogs are priced on a dimensional or board foot basis, which declined as a result of indexing to lower lumber prices on a one- to three-month lag. The effect of lower dimensional prices was offset by the fact that logs are seasonally drier and lighter starting in the second quarter, and we report prices on a per ton basis. The decline in northern pulpwood prices in the second quarter is largely due to less hardwood pulpwood in the sales mix in the Lake states. Log and haul costs in Idaho have declined on a per ton basis this year, largely due to lower diesel costs. Contracts representing approximately 75% of this year's planned harvest volume in Idaho have been negotiated with loggers. As a result, we have locked in a significant portion of the benefit of lower diesel prices that we mentioned on last quarter's call. The significant decline in our northern harvest volumes in the second quarter is typical, as spring breakup limits operating days in Idaho.

Moving to the South on page 6, sawlog prices increased 2%, primarily due to more hardwood volume in the second quarter sales mix compared to the first quarter. Pulpwood prices increased 4% compared to the first quarter, largely due to unusually wet weather, constraining supply in the second quarter. Sawlog and pulpwood harvest volumes in the region were behind plan, due to the wet weather. We expect to make up the shortfall this year, with the majority of the catch-up occurring in the fourth quarter. The results of our wood products segment are displayed on pages 7 and 8. The segment lost $2 million in the quarter, compared to earnings of $3.5 million in the first quarter. The decrease in earnings is primarily due to lower lumber prices, which continued their slide well into May. Even though Western lumber prices snapped back sharply in June, the average lumber price that our wood products segment realized in the second quarter was 9% lower than the first quarter. The decrease is in line with the drop in lumber prices, implied by calculating the simple average of monthly random links framing lumber composite prices. As Mike mentioned, we completed two of our four large planned wood products capital projects in the second quarter. We replaced the primary saw line and in-feed system at our Gwinn, Michigan and Bemidji, Minnesota lumber mills. Outages associated with these projects had a negative effect on wood products earnings between $1 million and $2 million for the quarter. Both project have IRRs above 20%, and collectively are expected to result in an increase in production of about 25 million feet annually, higher grade recovery and lower costs.

The results of our real estate segment are covered on page 9. Operating income for the quarter was $8.5 million, compared to $1.6 million in the first quarter. As Mike mentioned, the Minnesota rural recreational real estate market was strong, which led to a record number of quarterly closings. In addition, we sold two commercial sites during the quarter, including one that had been under option for some time, for significantly higher prices than our typical HBU properties. Moving to page 10, we had cash and short-term investments of $11 million at the end of the quarter. We made a small draw on our $250 million revolver in the second quarter to fund working capital, and plan to repay the amount in the third quarter. Capital expenditures were $11 million in the quarter, and we are on track to spend the $36 million that we budgeted for the year.

Now, I'd like to comment on our outlook. We plan to harvest between 1.5 million and 1.6 million tons in the third quarter, with slightly more than half of the volume in the North. The third quarter is traditionally the highest volume quarter in the North, because favorable weather increases the number of operating days. Approximately 90% of the harvest in the North, and approximately 50% of the harvest in the South, including stumpage, are expected to be sawlogs in the third quarter. We expect northern sawlog prices to be up almost 5% in the third quarter. The sharp increase in Western lumber prices in June is already favorably affecting the portion of Idaho sawlog prices that are indexed to lumber on a one-month lag. We expect the average price that we realize for southern sawlogs in the third quarter to increase, due primarily to a seasonally higher volume of hardwood sawlogs in the sales mix. We continue to believe that our southern pine sawlog prices will remain flat this year. We expect southern pulpwood prices to be flat sequentially. A higher mix of hardwood pulpwood is expected to offset the absence of the weather-related premium that we realized on pine pulpwood last quarter. We estimate that resource earnings in the third quarter will be slightly higher than the segment's third-quarter 2014 earnings. The increase in EBITDA is expected to exceed the increase in earnings in the third quarter, on a year-over-year basis.

Turning to wood products, we expect lumber shipments to increase 5% to 10% in the third quarter. Our forecast assumes that lumber prices will increase further, and that our average lumber prices for the third quarter will also be 5% to 10% higher than the second quarter. The segment's final two significant capital projects are scheduled to be completed in the third quarter, and we expect to incur the equivalent of two weeks of downtime. We estimate these outages will have a negative effect between $1 million and $2 million on the segment's earnings in the third quarter. Shifting to real estate, we continue to expect that we will sell approximately 20,000 acres this year. Land basis is estimated to be approximately 30% of land sales revenue for the year. The lower land basis percentage reflects the commercial site sales in the second quarter, and the strength of the Minnesota rural recreational real estate market, where we have low-basis properties. We expect that corporate and interest expense will each be slightly higher than second-quarter amounts. We estimate the consolidated tax rate to be in the range of 5% to 10% in third quarter, and for the full year. The downward revision, compared to guidance provided on last quarter's call, is a result of lower wood products earnings in the first half than previously expected. To summarize, we expect earnings to increase significantly in the third quarter, due to seasonally higher harvest volumes and higher log and lumber prices. We continue to believe that housing starts will hit the 1.1 million mark for the year, but lumber prices will continue to recover in the third quarter, and that the second half of the year will be much better than the first half.

That concludes our prepared remarks. Karen, I would now like to open the call up to Q&A.

(Operator Instructions)

Gail Glazerman, UBS.

Can you give a little bit more color? I know I should really get this by now, but the contract indexing off of lumber for your northern log, like what percentage of it roughly would be one month, versus three months or longer?

Gail, this is Eric.

Almost half of our northern volume sawlog production is indexed monthly. And I would say probably another 25% is indexed quarterly.

Okay. That's helpful.

And just in general, your lumber prices did rally sharply in June, but they seem to have faded and come off a little bit. Can you talk about a little -- about what you're seeing or feeling in the market? And what caused the delay and the sharp rally? And your level of confidence that prices will hold or get better, moving forward?

Yes, we did see a sharp drop in the second quarter, and I think it was a drop that nobody anticipated in the marketplace. And we talked about that last quarter. About adverse weather impacts that we had early in the year, and how that caused buyers to stay on the sidelines. But we did see a nice recovery in June, and into July. So we have seen a nice bounce.

At this point, prices have stalled a little bit, I think is the best way to describe where lumber prices are at. We think that stalling is largely due to the fact that duties are expected to increase, or will increase, from Canada to 15%. And so buyers are on the sidelines, waiting for that duty to drop to 5% in August, and that's what's caused prices to stall here. We still think there's more upside in Q3, however, once we start getting into August.

Okay. And can you give a little bit of perspective on customer inventories? Both on the lumber side, but especially on the log side?

Yes. On the lumber side, it's really hard to predict. There's very scant data that's out there on where lumber inventories are across North America. But in general, they have been coming down over the past few months. And so they have been brought down. They've been brought down, and that's coincident with this stall in lumber prices that we just talked about.

When you talk about mill inventories on the log side, it varies a little bit by region. In general, in Idaho, they're in pretty good balance. If you go down to the South, mills are -- generally speaking, they have more than adequate inventories. And some mills are even on quota. They're taking limited deliveries of logs. So it varies by region.

Okay. And I guess in the -- maybe you can talk -- I guess you referenced one -- another factor impacting wood products is still the high log costs in the Lake states, but still something you think that persists for a while?

The Lake State log costs have begun to moderate, as pulp mills have finally restored their supplies from another difficult winter in the Great Lakes. So they've replenished those inventories, and so we've seen pressure come off of log prices in the Lake states, especially in Michigan, more so than in Minnesota. And hopefully, those log costs stay down for us, as we begin to build inventories for the wintertime period. So that, again, should not only help our cost structure in the third quarter, but add to profitability for those Great Lakes stud mills with lower log costs.

Okay. And can you give some broader perspective on the timberland markets? There's been a lot of large deals out there. And what your thought is on the land that's available in the market? And whether you think it's an unusual amount? And if so, what you think is driving that?

There are, I think, about four deals publicly announced for sale. I don't think that's a particularly large amount. But I think what's unusual is, they haven't cleared as quickly as usual, which I think is indicative of some of the underlying challenges of the property. Whether it's supply agreements, underlying quality of the land, a heavy HBU component in the Foley tract --

Large lease components is another.

A large lease component in the Campbell tract. The Claw Forestry announcement here, in the last couple weeks, of property for sale in Georgia and Alabama, is a legacy US Steel property that is unique, and has some challenges. Molpus just announced a very small package on the market, as well.

And I think it wouldn't surprise us that these haven't sold quickly, and I think it will take some time to clear in the market. And it wouldn't surprise us that they traded a significant discount from where we've seen the higher-quality property. For example, the property that we purchased last year in Alabama and Mississippi for about $1,900 an acre. I would expect many of these will clear for less than that.

That's very helpful. Thank you.

George Staphos, Bank of America.

Piggybacking on Gail's last question, so to conclude, though, given the fact that you think these properties might take some time to clear, in your view that doesn't mean that you're seeing a diminished level of interest in higher-quality industrial timberlands? Or for that matter, HBU properties? Or does it? And why or why not?

I don't think there's any diminished interest, George. There still is a fair amount of money on the sidelines with the TIMOs that are looking for high-quality properties. We continue to get inbound calls from TIMOs and others, looking to invest in high-quality timberlands. So I don't think that this is -- I think it happens to be that several of these properties that are on the market have components that make them more challenging.

It doesn't mean they're poor quality, but they're more challenging, and have taken longer to, I think, find a clearing price. But I don't think, in any way, shape or form, that the timberland or HBU properties have diminished in value at all here. And I think demand remains strong.

Mike, recognizing this is an advanced science, do you have a view on what the money on the sidelines might look to be? Typically, the numbers thrown around are $2 billion to $3 billion. Has that number come down significantly recently, or is it even higher?

I have no idea. I really don't. Like you said, it's not a science. I don't know.

Okay. Appreciate your candor on it. You mentioned something about hardwood pulp trends in the North. And if you could give us a bit more clarity on what is trending there? And then back -- and then I'll turn it over after this.

In terms of the SLA, to conclude, you're saying there will be more supply from Canada in August. However, you would expect that lumber prices can continue to head higher in August. What kind of supply factor are you building into the model in that region? Thanks. And I'll turn it over there.

Well, George this is Eric. Let me start with your first question, around hardwood inventories out in the Lake states. So I think what Mike was saying is, at the start of the year, the pulp mills brought their inventories down to very, very low levels. And we compete for small sawlogs out in the Lake states. Our two mills out there produce studs, and they use small sawlogs. When the pulp mills run low on inventories, they can bid very aggressively for those small bolts, and that drives up the price of those small sawlogs to our two mills.

And that was the case this past winter. The pulp mills had very low inventories, and competed very aggressively, and put premiums on prices for all manners of fiber. And so what's happened now is that, over the past six months, those higher prices have stimulated supply, those pulp mills now have their inventories back in line, and those prices for our sawlogs, our small sawlogs, are now -- they're now coming down to more normal levels. So that's what's happening out in the Lake states.

Yes, thanks for the refresher on that. I have forgotten. I'm sorry. Keep going, Eric.

Yes, so that was the first question. Sorry, remind me of your second question?

Just on the SLA, on the one hand you're expecting, I thought I heard you say, lumber price to continue moving higher in August. Yet you're also saying there is some supply coming in, and you thought it would limit price increases. So if you could help us maybe put a finer point on that, that would be helpful, especially as regards the supply factor. Thanks.

Yes, there really isn't a hard computer model that we run with here. The duty is coming off, or coming down, in August, the 5% level, whereas it had been up at 15% in July. So supply is off the market. Now, what's going to happen is, you get out into August, the duty is going to drop, and all of a sudden, orders are going to start to come in. And the question is, is there more demand than what that incremental supply is going to be? And our view is that there -- yes, demand is going to outweigh supply, and that should push prices a little bit higher.

Okay. Thanks. Go ahead, Mike.

There's a fair amount of uncertainty right now. We've seen the futures market roll over a bit. The cash market still held up, and one of two things has to happen. The futures market has got to come back up to meet it, or cash prices are going to drop. And our view is, inventories are thin enough in the field, with dealers and others that are being cautious, not wanting to buy if the market is uncertain. And we think reasonable housing demand, strong multifamily starts, better single-family starts. All those things, even with the change in duties, dealers will be back in the market in August, and we'll see pricing continue to move up.

Mike, with what's been written about the pine beetle, have you been surprised at all with Canada's ability to supply into the US market at all?

No, not really. That pine beetle story is, we always knew it would take a long time to play out. It was never just going to be a light switch, and everything would stop. And I think that they found more and more green timber intermixed amongst the pine beetle stands, and they've been able to still comply -- or supply a quality product into the US. So it's a long-term story. It's not one that's going to quickly end.

Thank you.

Chip Dillon, Vertical Research PA.

Yes. You mentioned that you -- a couple times in your opening comments, Eric, that you expected a very strong quarter in the third quarter. And I know, in the last two years, you had strong quarters. I would think the third quarter, where your sold more than your prorated 5,000 per quarter average timber, and you had very strong wood earnings, it would be tough to match. But I just want to make sure I heard that right. But do you think a year -- and that's when you made $0.81.

Of course, two years ago in the third quarter, you made $0.56 from operations. And it seems like you sold 3,700 acres, and the wood products business made about $10 million. Is that the kind of quarter you're looking for? Or do you think even that might be strong? Basically, what I'm asking, is it between the mid $0.50's and maybe $0.80?

Chip, this is Jerry Richards.

So I think you're hearing the factors right. But just to provide a little bit more help, in terms of what we mean by a strong Q3 in 2015, we think year over year, I think the result -- overall Company result will be down. So it certainly -- I think you book-ended it, when you look at Q3 of two years ago versus last year, I think you have book-ended the range. It's probably down around lower in that range than higher in that range.

That's what I would have expected.

But certainly a big bounce-back from the $0.02 that we earned in the second quarter.

Okay, I've got you. And then as you think about the lumber market -- and I know you were asked this before. Is there anything from the last couple weeks drop off, and we'll get another number tonight, midweek, in lumber, that might have explained that, on the demand side? I know you mentioned that -- demand in use, I mean, as opposed to users of lumber -- holding back to wait for the duty to drop in August?

Have you seen more of a -- any change at all in the housing market? Because it seems like we had a very slow start, then we had some catch-up with activity. And probably that's what you felt May and June, when the lumber price turned around. And does it seem like we've hit a lull? Or do you think that it's -- that might be concerning? Or do you think it's -- the end-use demand is continuing to improve?

I think end-use demand is improving slowly. I think everything you look at, all the factors point to stronger builder confidence, stronger housing starts, permits are up at a level of 1.3. I don't think it's a demand issue. I think it's really a factor of the issues with the tariff.

And you can't forget, the Canadian dollar is very weak, and that has had a profound impact on pricing, especially when they sell into this market. So I think the demand thing's coming along, not as quick as we'd hoped, but I think it's fundamentally solid. We just have a bit of a supply issue here, and hopefully that's going to come back in balance.

And lastly, could you give us a little perspective, to the extent you can, on maybe the political side of the SLA process? We know that the duties, everything goes to zero starting in October. And while there are arguments that there isn't a lot of lumber that comes in, I just know if I was in a position in Canada, I would -- and I was getting close to the end of my either mill's life or the amount of what I could pull off the -- off my license was limited, I'd go for it, with the currency, as you mentioned, being where it was.

And I just wondered where that process is? One could argue those that are against extending the current provisions are almost hoping that there is a severe supply response from up there. So then they can turn around and really get an even tougher regime, from a US perspective. I wonder if that's their motives. But could you just enlighten us on that?

The Softwood Lumber Coalition, and the members of it, are from all over the country, and they have diverse points of view. Some would advocate that we need a quota, rather than a price mechanism, attached to tariffs. Others suggest that we just continue the agreement that we have. The unfortunate part is, time is running out to get something renewed between the two governments, and it is a government-to-government negotiation.

I think it would be foolish to try to let there be a train wreck for a year, and then come back in a year and say, gosh we have a great case for a lawsuit. And meanwhile, we've had 12 or 18 months of brutal performance in the wood products business because of it. I think that's very shortsighted, and we've advocated strongly that the agreement be renewed.

I think it's worked fairly well. Setting aside currency issues, which we can't do anything about, I think the agreement's been fair. So hopefully, there will be a way to continue it in some form, rather than a train wreck that you described.

And is there any chance, based on what you hear, that even though it may not be renewed by October 1, that you could get something done. Let's say before -- do we have to wait this full year? Or do you think there's a chance we could get something done in the next six to nine months, government to government?

Well, I think there's a chance, Chip, but I don't know the political parts of that, and all of those things. I'm hoping that both countries, and both sides, will continue to work on a -- on something that's fair. We both need each other. And it's an important trade agreement between the countries, and it's important to the housing construction industry, as well. So hopefully, we'll sort it out.

Great. Thank you.

Collin Mings, Raymond James.

Couple of questions.

First, just going back really quickly to 2Q harvest volumes relative to your original guidance of, I think, 900,000 to 950,000 tons. I know you -- in the prepared remarks, you mentioned weather. But was there anything else, as far as delaying some of those harvest volumes, or other issues?

Yes, the quick answer, Collin, is no. But the big factor as to why we were short on harvest volumes in the second quarter was wet weather in the South.

Okay. And then going back onto the real estate front, really strong 2Q activity. A couple of the commercial sites you referenced. Are there any other commercial sites, or anything else, as you think about your HBU portfolio, that we should expect in the next year, year and a half, that would have these type of per-acre values?

Yes, Collin, I'll take that one, as well. In terms of real estate, obviously, there's -- when we think about the transactions that we completed this second quarter, they weren't necessarily planned. So it's really hard to predict which particular parcels will sell in which periods.

As part of the overall portfolio, we do have other commercial-related. It's a small percentage of our overall HBU that we have identified and that we expect to sell over time. But it's really hard to predict, like I said, which period that might happen.

Okay. Any way to think about -- I know you provide the -- roughly still maintain that 20,000 acres, as far as full-year guidance. Any way to translate that into what the total revenue from real estate might be this year?

When I think about total revenue, year to date, we're about $14 million. And I think for the full year, we'll probably be a bit higher. We're probably less than half, certainly on acres, but also on revenue. I think if you trend that out, you would get a number that's slightly more than double what we've done year to date.

Okay. No, that's helpful. Another one on my list here, just housekeeping, in the sense of, looks like you recognized a tax benefit during the quarter. Was that just driven by the loss on the wood products business? Or was there something else driving that?

So you are correct, Colin. That tax benefit in the second quarter was really directly attributable to the loss in wood products.

Okay. And then really just one last one, specific, but then also a broader, in the sense of the mill capacity in the US South, and in particular your region. We saw Interfor announce an acquisition of a mill in your Arkansas wood basket. Can you just maybe talk about any momentum tied to that? And then one of your peers yesterday suggested that some more capacity would be coming online towards the latter half of this year, that really -- the fourth-quarter. Can you maybe just comment on what you're seeing on that front?

Yes, so Collin, this is Eric, and I'll take that one. At any given time in the South, you're -- right now, we're seeing lots of mills expand capacity. And we look at this every quarter. And what we see, out over the next few years, is demand is going to increase roughly 8 million tons per year, sawlog and pulpwood combined, across all three of our states of operations. Now, some of these are pellet mills, some of these are plywood mills, some of these are sawmills. Just a wide variety of mills that are going to increase the demand for fiber in our wood baskets.

Now very specific to Interfor, they did acquire that mill in Monticello, Arkansas, and they have announced that they're going to increase the capacity of that mill. They're going to increase it roughly 25%, or 25 million board feet, which is roughly 100,000 tons per year. So it's going to take them a little bit of time to get that capacity expansion complete. But certainly, we'll benefit from that increased demand in our wood basket.

Okay. Great. Thanks.

Paul Quinn, RBC Capital Markets.

Just following up on real estate, and thanks for the extra color there, but any idea on the split between Q3 and Q4? Are we expecting it to be even? Or is one going to be heavier than the other?

I'll take that. So Paul, this is Jerry Richards. In terms of the split between the second half, I think -- the best way I can think to give you some help is, Q3 will be more acres than Q2. And then it will be even heavier in Q4, in terms of how it's split. So think of maybe like a 20% increase in Q3, with the remainder in Q4.

Okay. That's great.

And then just back on the timberline side, you referenced the number of large transactions out there. But it seems the volume of timberland put up for sale this year has been very light. What do you attribute that to? And what are your expectations, going forward here?

Yes, so Paul, I think, at this point in time in the recovery, we really haven't seen sawlog prices move much in the South. And so it's going to take time for that recovery to play itself out. My guess is, if you're a holder of Timberland right now, you might be better served waiting until you see some of that price recovery. That's the first thing.

Then the second thing is, it's all just a matter of timing of when investors bought this timberland. And generally, there's a 10-year holding period, more or less. And people can extend out that holding period if they want to in their arrangements with the TIMOs that are managing the property for them. So I think there are better times ahead for timber markets in the South. And in general, people may just be waiting for those better times.

Okay. And then the reference to fire restrictions, I think in Idaho, that you mentioned, just if you could describe what those are? And what gives you the confidence that you'll be able to get the volume in Q3?

So we're under hoot owl restrictions right now, which means all of our harvesting activity has to stop at 1:00 in the afternoon. And what that means, basically, to the folks that have to do the work, is that instead of starting at, say, 4:00 AM, they now start at, say, 2:00 AM. So they are still getting the production that they need to get; they're just having to do it when it's darker outside. And what gives us the confidence that we're going to get the volume that we're after is, at our current run rate, we're now a month, more or less, into the quarter, we are spot on with what our production goal is for the quarter. So I think we're keeping up with what our needs are.

We're not immune from a wide-scale fire disaster, if there was one. Certainly, we're not unique there, but we've had three small fires start on our land. We caught them all before they were even less than an acre in size. And hopefully, we can continue to be aggressive in that, and continue to work through the quarter. But it certainly is a larger risk this quarter than it's been at any time I can remember.

Great. That's all I had. Best of luck.

Mark Weintraub, Buckingham Research.

Two questions. First, you had mentioned 8 million tons of incremental takeaway in your southern wood baskets, over the next couple years. Can you -- what's the current takeaway order magnitude?

Gosh, Mark, it's probably on the order of, I don't know, 80 million tons, just to pick a number out of the air. (multiple speakers) I think about three regions.

Great, so roughly a 10% type increase is what you're thinking?

Yes.

Okay. And then second, you mentioned that your stock is trading at what seems to be a pretty wide, very wide discount to net asset value. You talked about, perhaps it makes more sense next year, for tax reasons, to think about contemplating potentially selling assets to help fund share repurchase. At the same time, you did also mention that you were of the view that timberland sellers, perhaps right now, are a little bit slow to come to market, because they're waiting for log prices to get better, possibly, and hence maybe timberland values to go up.

So different things, pointing in different directions. And the question I have is, how easy or difficult do you think it would be for you right now to sell land at values that are comparable to the type of numbers you have embedded in your view of net asset value? And to then turn around and potentially use that for share repurchase, if you were to decide to go down that path? And what type of size of properties might be contemplated, if you were to go that path?

There's lots of hypotheticals there. But our experience in the past, in Idaho, we've sold some 20,000 to 33,000 acre tracts for around $1,500 to $1,700 an acre.

We've sold property in the South for similar numbers of $1,600 to $1,800 an acre. This is some years ago. Certainly, I think pricing is stronger in the West than it is in the South, where we have -- we are at very strong log prices in the West, pricing has recovered nicely. So I think, while you make a point that perhaps there's a reason to wait in the South to put timberland on the market, I don't think that same logic exists in the Northwest. I think pricing is still quite strong. And we've seen some very high value transactions, particularly in Oregon and Washington, where, of course, we don't own timberland there, but they've gone well.

So I think in terms of size, I think anything in this 50,000 to 100,000, 200,000 acre range certainly is in the strike zone for many of the TIMOs, and the kind of money that they want to allocate to Timberland investments. And if we were to contemplate something, it would probably be in that size category, which probably would match up nicely. If we did decide -- if the Board did decide to pursue a repurchase program, and our stock continues to trade at a deeper discount, then that would leave a nice basket of proceeds to execute such a program.

Just to add to what Mike is saying, Mark, I can -- what gives us confidence in these values. We have competed, over the past couple quarters, for various smaller tracts of Timberland that were being auctioned, and we actually lost those auctions, using what I would consider to be relatively aggressive discount rates. So what that implies is that others are out there willing to pay more than us, so it's a very healthy market.

Thank you. Very helpful.

(Operator Instructions)

Steve Chercover, D.A. Davidson.

I recognize I'm late in the Q&A, so I'll just -- a couple brief ones. You've given us views on lumber, and I think they're interesting. Can you give us any perspective on what you think is going on in panels? And directionally, for pricing, as well?

Yes, the panel market, we make a relatively unique product, Steve. We're serving the industrial market; it's not the commodity sheathing markets. And so the industrial markets for our plywood are holding up very nicely right now, and we're seeing strength in demand. So panel markets are good. We don't break that out separately from our financials, because it's really just -- it's a one mill, one product line for us. But those markets are good.

And the plywood business for us, for the first six months of the year, has been a bright spot, very steady. So we're very optimistic about that.

That's good. Because the performance in your wood products business has really tapered off. For a while, it was tracking quite consistently with another Washington-based company that has a pretty similar ticker. So do you attribute that just to commodity lumber, then?

Yes, our manufacturing business is dramatically different than the peer company you're referring to.

Got it.

And then finally, it's amazing that your loggers are starting their day at 2:00 in the morning. It's almost as bad as being an analyst on the West Coast. But does that have any impact on the merchandising, since they're working for three, four hours without light?

They're working under lights, on ground skid-based operation, when they do start that early. And the cable logging operations obviously can't start until daylight, so no, merchandising or safety, neither one are compromised.

Okay. Thank you very much.

Collin Mings, Raymond James.

Just a couple of quick follow-ups here. I think going back to the comments about the debt you have coming due later this year, I think that's around a 7% interest rate on that. Jerry, maybe you can just provide us, if you were to refinance that today, what type of rate you'd be able to get on that? And then maybe, as you think about capital allocation priorities, how you think about paying off that debt from cash, or cash from operations, versus going ahead and refinancing it?

So you're remembering the stated rate on the debt that comes due in December is roughly 7%, Collin, so you remember that correctly. We do have a swap, an interest rate swap on that, that effectively brings it down to about 5%. And I believe that we could refinance that for something less than the 5%, given current interest rates.

In terms of capital allocation, as Mike mentioned, we're exploring options. Whether we pay that debt off, or like I said, we could refinance it, as well. And that's a decision we've not reached at this point.

Okay. And then still on this theme, from the capital allocation standpoint. I think last couple of years, the Board has paid particular close attention to the dividend in December. You have announced a couple dividend bumps. But as we sit here today, just curious, your thoughts. Is it more reasonable to think, at this point, given how the wood products -- the profitability of the wood products business this year that probably going to be the next dividend bump into a 2016 time horizon?

I'm not going to get in front of the Board on that. But given the weakness in our wood products business this year, and I think more importantly, that we sit here with a lot of uncertainty around what the price behavior's going to be in the lumber markets over the next period of time. I think we'd have to have a lot more confidence in the wood products business to support the dividend increase in December of this year. But we'll leave that for the Board to decide.

Okay. No, thanks. Really appreciate the color.

George Staphos, Bank of America.

Colin got my last question, but maybe taking it from a different tact. So are we to understand, then, Mike, that really, it's the wood products stability and trajectory that would give you more confidence in -- or the Board, potentially -- more confidence in raising the dividend? Partly because of what it would also mean for your log price on the West? Or would we need to see, in your view, a greater slope in the line, in the South, on timber, before you started thinking about a dividend increase from here? Thanks, and good luck in the quarter.

All those factors are related. Certainly, the lumber commentary, as it spills over into our northern log prices, is a very important driving factor for us. So I feel more strongly about its impact on the northern log business than I do on the standalone wood products, per se. We increased the dividend last year, and the year before, under stagnant southern log prices. So I don't think that's had as much of an impact for us as it has in the North.

But having said that, we also have more southern timberland now, and more at stake in the South. So I'm sure the board saw southern log prices begin to move up, southern stumpage I would give them more confidence in the dividend. So they're all related, but I'd say lumber prices is the start of it, because it has such an impact on northern log prices for us.

Thanks, Mike. Appreciate the emphasis. Have a good quarter.

There are no further questions at this time. I would now like to turn the call back over to Mr. Jerry Richards for any closing remarks.

Thank you, Karen, and thank you to all of you for your interest in Potlatch. That concludes our call today.

Thank you.

This concludes today's conference call. All participants may now disconnect.