Potlatch (PCH) CEO Mike Covey on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Potlatch Corporation (PCH)

Potlatch Corporation (NASDAQ:PCH)

Q2 2014 Results Earnings Conference Call

July 23, 2014 12:00 PM ET

Executives

Jerry Richards - Vice President and CFO

Mike Covey - Chairman and CEO

Eric Cremers - President and COO

Analysts

Gail Glazerman - UBS

Chip Dillon - Vertical Research

Steve Chercover - Davidson

Paul Quinn - RBC Capital Markets

John Tumazos - Independent Research

Mark Weintraub - Buckingham Research

Michael Roxland - Bank of America Merrill Lynch

Joshua Zaret - Longbow Research

Collin Mings - Raymond James

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Second Quarter 2014 Earnings Conference Call. 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 call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Jerry Richards

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.

Mike Covey

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 downward.

We believe the recovery will continue to be a slow arduous climb marked by plateaus with job markets and household formations 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 remained strong in our northern region and will move up with the lumber prices in the third quarter. Southern yellow pine sawlog prices remained flat and we expect that will continue to be the case for the balance of the year. Harvest volumes will be at a seasonal peak in both regions in the third quarter.

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

We're 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.

Jerry Richards

Thanks, Mike. Beginning with page three of the slides accompanying this call, our second quarter net income was $16.3 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 of our resource segment are displayed on pages four through six. 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 breakup. This limits access to timberlands in the northern region when snow is melting and 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 and logs. Customers pay based on dimensional volume in Idaho not weight. The sequential improvement in prices amplified by the fact that logs dry out later 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 six. 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 remained 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 to increase harvest volumes in the third quarter to make up the shortfall. Southern region pulpwood prices improved slightly from the prior quarter because the wet weather limited supply and pressured prices.

Results of our Wood Products segment are displayed on pages seven and eight. 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.

Results of our Real Estate segment are covered on page nine. Operating income for the quarter was $12.4 million, compared to $8.3 million in the first quarter. We close 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 were previously harvested. The segments 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 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 Products earnings in our taxable REIT subsidiary and lower harvest volumes in the REIT due to spring breakup. Our consolidated effective tax rate for the 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 seasonally low point in the second quarter.

Our $250 million revolver remains undrawn and we have no debt maturing during 2014. We're working on extending 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 are 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 tights supplier 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 to 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 expected 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 gave at the start of year. We plan to harvest 1.4 million tons in the third quarter, which is more than 20% higher than the volume that we harvest in the third quarter of 2013.

We expect the volume of lumber that we shipped 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 started of the third quarter. We anticipate modestly higher lumber prices will more than offset lower volumes, resulting in sequentially higher Wood Products earnings.

While 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 of 2014 and all three of our businesses are on force 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.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gail Glazerman with UBS.

Gail Glazerman - UBS

Hi. Good morning.

Mike Covey

Good morning.

Gail Glazerman - UBS

I guess, 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. Just wondering what we should book to?

Eric Cremers

Yeah, Gail. This is Eric. So yeah lumber prices in Q2 were relatively subdued in Random Lengths versus Q1. It went down about $19 basically because having 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 starts than the composite. I think our product mix is roughly 30% and we don’t know for certain but the composite we think maybe around 20% starts. And we also have economy grade in our product mix whereas the composite does not include the economy grade.

And economy prices were relatively strong in Q2 versus Q1 as were starts. So our mix is not exactly the same as the composite. So you will see dislocations over particular quarters but generally speaking, over time we will -- we will track the composite up and down.

Gail Glazerman - UBS

….particularly in Arkansas around your plan?

Mike Covey

Sorry Gail. We didn’t hear…

Gail Glazerman - UBS

On just any sort of about data activity, lumber activity and potential startups and ramp ups in Southern Lumber activity particularly in your land in Arkansas, anything happening?

Eric Cremers

Yeah. 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 are handful of either idled mills and some rumored to be in discussions and hopefully will restart.

We have seen some activity in Idaho, one of our largest customers, our largest customer on the resource side. I just added a new line to the Lewiston facility which will increase demand, 600,000, 700,000 tons a year in Idaho. And then we also saw another mill in the Clarkston right next to Lewiston restart after being idle for five years and that will improve demand a couple hundred thousand tons per year. So we’re definitely seeing signs of life out there.

Gail Glazerman - UBS

Okay. And can you give some color on I guess, cash allocation in terms of the opportunities to make acquisition that you’re 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?

Mike Covey

Gail, this is Mike. There are 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 and what we can do so on an accretive basis. And while there is a handful of properties, I think the time is uncertain as to when those auctions and processes will come to conclusion.

So 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 and share buybacks, they certainly remain a possibility but they are the lowest priority on the scheme of capital allocation that we think.

Gail Glazerman - UBS

Okay. And just a couple of quick question about the third quarter, can you spot us based on what you know about lumber pricing, what that would -- more details what that would mean for your Northern follow-up prices, little more detail?

Eric Cremers

Yeah. I think what jury indicated in the call was that Northern Sawlog were going to be modestly higher in the third quarter. That’s our current outlook.

Gail Glazerman - UBS

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?

Jerry Richards

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

Gail Glazerman - UBS

Okay. Thank you very much.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research.

Chip Dillon - Vertical Research

Yes and good day there. First question is on, you mentioned the increased activity on 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 that all yours or some of it yours? Can you tell us?

Jerry Richards

Certainly, if we decided to ramp up our harvest levels, Chip, we would expect to get some of that. It could -- 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’s going to come from. But certainly there is a potential there for us to supply additional logs that we so choose.

Chip Dillon - Vertical Research

And 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 that one way or the other, you all should benefit?

Jerry Richards

Yeah. Absolutely, I think it’s a positive for the market.

Chip Dillon - Vertical Research

I see, okay. And then as you look at the -- you mentioned that your saw log prices are elevated and you are going to take advantage of that in the, I guess, 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, I mean, -- feedback that you think that prices have, kind of, recovery in the northern region to sort of a reasonably high level. But the fact that you’re not tapping it up more in the south as the fact that prices, you see them, I guess, since they are still flat in pine are just still well below normal levels?

Jerry Richards

Yeah. This is Jerry. I’ll take that one. In terms of sawlog volumes in the north, I guess, one thing I want to remind the group is last year we actually pulled harvest forward to take advantage of higher prices. When we talk about the sequential increase in sawlogs Q3 this year versus Q2 -- I’m sorry -- year-over-year this Q3 this year versus last year. That’s really reflection. We’re kind of going back to more than 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 pricings. 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.

Chip Dillon - Vertical Research

Okay. Thank you.

Operator

Your next question comes from the line of Steve Chercover with Davidson.

Steve Chercover - Davidson

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

Eric Cremers

Yeah, Steve, it’s Eric. You’re 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 added up, it probably caused us 75,000 tons of missed volumes 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 costs us $2 million or so of operating earnings in the quarter. We’re not going to leave that volume out of the plan. We’ll get it in the third and the fourth quarter. But we had anticipated getting in the second quarter.

Steve Chercover - Davidson

Okay. That was my gut. And -- but 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?

Jerry Richards

This is Jerry, Steve. I would say correct on both fronts. I mean 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.

Steve Chercover - Davidson

That’s what I understood. Just wanted to make sure and then you feel free to take this one offline if you wish but I just want 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 the view of the ongoing land sales?

Mike Covey

Well, 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. So really the Idaho and Arkansas, timber inventory were driver of future harvest profile. And as you know, the flat saw log pricing in the south for the last several years, we have deferred harvest and continue to defer harvest there.

Even though opportunistically we have shifted that to hardwoods here this third quarter but softwood, pines, sawlog harvest continues to be deferred in the south still on a sustainable basis going forward. The ramp up potential is the biggest opportunity we have is in the U.S.

Steve Chercover - Davidson

Okay. But few years ago, you used to 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 be 4.6 as we achieved through kind of the deferred harvest for lack of better words. But it’s not really a long run sustainable level?

Mike Covey

Yeah. 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 at Idaho which do impact our long-term sustained harvest level. There is no question that we could ramp up to 4.5 million tons on a short-term basis but that is not a long-term sustain level that we can support long term.

So I think overall the long-term sustained level has come down. Opportunistically, we can do as much as 4.5 million tons for short period of time but over time the harvest level have to come down from there.

Steve Chercover - Davidson

And it would be therefore more call it -- 10% lower, $3.8 million to $4 million?

Eric Cremers

Yes, we haven’t given public guidance on that, but I think the general tenor of it is, yes. It’s going to be less than the 4.5 million peak opportunity that we might find in really attractive markets.

Steve Chercover - Davidson

Got it. Okay. Thanks very much.

Operator

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Yes, thanks. I just had additional question on this lumber mix issue. What percent you have is economy versus zero for the benchmark?

Eric Cremers

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 reason economy was really strong in Q2 versus Q1, it was up sequentially.

Paul Quinn - RBC Capital Markets

What about the difference on the upper end between the Random Length Composite Benchmark and your mix? Is that in proportion to the composite, i.e., it’s a big difference really starts in economy I guess is a question?

Mike Covey

I think starts in economy drive the majority of the difference at least in the looking back what’s happened especially with economy prices in the last quarter. But I think to Eric’s point earlier, over longer periods of time our prices in Random Lengths Lumber Composite track pretty closely. These aberrations happen quarter to quarter but over time it tracks.

Paul Quinn - RBC Capital Markets

Okay. We will try to do a couple tweaks to get that closer. You mentioned a new pulp contract in the north, who is that within is significant volume?

Eric Cremers

Yes, it’s incremental volume that the particular pulpwood user consumer is looking for. I don’t know but it’s a new contract per se. It’s just their inventories are 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’ve reached an agreement. And 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 the longer haul.

Paul Quinn - RBC Capital Markets

Okay. So margin has basically helped a lot.

Eric Cremers

Yes, I think maybe up a little bit.

Paul Quinn - RBC Capital Markets

Okay. And then Mike you mentioned a number of timber sales that you’re 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 pressures?

Mike Covey

I think that especially the southern timberland 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 are seeing higher prices and more competitors than we’ve ever seen both from the suite of weak competitors as well as (indiscernible). And there are only a handful of properties for sale. There is -- I don’t know by handful there is probably half a million acres on the market and half a dozen transactions. So they are small, there is not many of them and they are extremely competitive.

Paul Quinn - RBC Capital Markets

I think that increased competition has pushed up transactions values. I mean we really haven’t seen that many transactions. I mean there was one closed I guess the Catchmark sale in Q1 that was over 2000. Is 2000 an acre now sort of the new norm in the US now?

Eric Cremers

Well, the price per acre heavily depends on stocking and quality of the timber and proximity to markets. So it’s hard to just pick one number, but certainly the large Plum Creek transaction with (indiscernible) 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. But 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 new norm.

Mike Covey

Paul, I think part of what’s driving those higher prices that we are seeing is there is more conviction that there is going to be a housing recovery in the U.S. If you look at forward demand for lumber going up 4, 5, 6 billion board feet a year. Almost everybody agrees that’s got to come from the U.S. south. So price curves for saw logs in southern yield pine continue to strengthen. And with more conviction of there being a housing recovery, it’s pushing discount rates down. Those two combined factors and what’s driving those higher values.

Paul Quinn - RBC Capital Markets

Okay. And we are seeing some price appreciation in different parts of the U.S. south on the pine saw log side, but you are not seeing any in Arkansas. Is it more to do with just the growth versus drain ratio in that -- in your jurisdiction?

Eric Cremers

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. Ad I think as you go to coastal and central Georgia, the Carolinas, North Florida, parts of Texas there is just a more robust market for lumber and plywood producers than is south central Arkansas where we’ve seen a fair amount of idle capacity.

Paul Quinn - RBC Capital Markets

Got you. Okay. Thanks so much. Best of luck.

Operator

Your next question comes from the line of John Tumazos with Independent Research.

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 2014 and 2015, whether it’s a 1 million starts or 1 million miner, 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 explanation to various amounts due to weather, but the permits were also falling which is less related to one month’s weather?

Eric Cremers

Yes, the housing market in terms of our outlook, we haven’t spent a lot of time looking at 2015, but just to give -- but at a high level we rely on the American Panel Association of Port which utilizes eight different forecasting firms for housing starts. And I think for 2014, the average consensus is 1.44 million housing starts as we sit here today which is up roughly 13% over 2013. And then 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. And virtually every forecast has got higher housing starts next year versus this year and the mix is skewed a little bit towards multifamily versus single family.

But with regard to your -- and there is a lot of reasons behind why we shouldn’t foresee higher housing starts whether it’s affordability, household formation, employment gains, existing fore-sale inventories are very low, it’s home price appreciation, demographic trends, etcetera, etcetera. There is a lot of reasons why the housing market should continue to gain traction and that’s our conviction as well.

The 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 are looking and more focused on the long-term trends. So I can’t respond, we can’t respond to your question as it relates to what happened in June.

John Tumazos - Independent Research

Thank you very much.

Operator

Your next question comes from the line of Mark Weintraub with Buckingham Research.

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 you thought it’s going to be 1.1, would you be operating differently?

Eric Cremers

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

Mark Weintraub - Buckingham Research

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

Eric Cremers

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

Mark Weintraub - Buckingham Research

Okay. And then, so the railroad tie that certainly would seem to be kind of extraneous to housing, the other two you would have thought would largely tend to move hand and glover with what would be going on in the softwood business? Or is there some nuisance and some help you can given understanding why that might be a little different right now?

Eric Cremers

I think it’s not just a new housing market for these appearance grade products, it’s also the repair on modern market who are increasing doing well. So I think they are all moving up in tandem with one another. I think thing that makes the hardwood unique is that it tends to be in low lying ground. And so 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 are seeing right now and that’s what we are going to get after.

Mark Weintraub - Buckingham Research

I see. And so there is weather or something like that that has impeded access. Is that what…

Eric Cremers

We had a very wet spring in the south.

Mark Weintraub - Buckingham Research

Got it, okay. And then lastly you had indicated that as you look at acquisitions, one of the criteria not pricing, it’s got to be accretive. When you are 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?

Mike Covey

Well, 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. I mean, ideally, we can find the acquisition using our own cost of capital we think add value. That’s currently a very high hurdle with the competitive nature of timber markets or the minimum accretive definition that we think about it is cash flow generated after financing costs with harvesting profile that makes sense for the property.

I think that’s the challenge of any timberland property. You can make almost any deal accretive, if you cut the trees fast enough. Certainly, that’s not a sustainable way to manage timberland asset and certainly something that. When we look at an acquisition, we look at a sustainable harvest profile over time and financing cost for us are in the 4% range today and that’s really a benchmark for how we think about something being accretive.

Mark Weintraub - Buckingham Research

Okay. Thank you.

Mike Covey

Welcome.

Operator

Your next question comes from the line of Michael Roxland with Bank of America Merrill Lynch.

Michael Roxland - Bank of America Merrill Lynch

Thanks very much. Realizing, just a question on the North realizing that you have the spring breakup and you pulled some forward some volume last year. Northern solid volumes have now declined for two consecutives quarters. So just wondering what’s driving that decline? I mean, is it 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?

Mike Covey

Yeah. Well, the harvest decline in second and third quarters is I think something that -- excuse me in first and second quarter that happened this year and last year, I think it’s 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 because the operating days are long and that’s really the most productive time of the year and we’ve got very strong prices.

So I wouldn't read too much into anything plan for that we did between first and second quarter, and it was really more if you kind of take the opportunities of weather conditions give you in the north and that’s what happened.

Michael Roxland - Bank of America Merrill Lynch

So you’re not seeing anything from your customers indicating that they don't -- they just don’t need to target at this point. Would it be housing market or anything like that?

Mike Covey

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’d hope to.

Eric Cremers

Mike, just add a little color to that. So we harvested 280,000 tons of sawlogs in north in the second quarter. And I think I had mentioned roughly 20,000 tons is what we missed from our plan because of weather very late in the quarter. Literally it was a last week or two we didn’t get 20,000 tons to market. So, we had that 20,000 to 280,000, we would have been at 300.

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 have we not pull for that volume? We probably would've been right around 300,000 tons, which is very comfortable to what we would've done this year have we not have that wet weather. So it’s very comfortable year-over-year.

Michael Roxland - Bank of America Merrill Lynch

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 yet either was actually low. Was there anything from an operation at this point that negatively impacted performance during the quarter?

Mike Covey

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 or logs particularly in Wisconsin -- excuse me Michigan, but that’s the only real operation issue that we faced in the second quarter.

Michael Roxland - Bank of America Merrill Lynch

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

Operator

Your next question comes from the line of Joshua Zaret with Longbow research.

Joshua Zaret - Longbow Research

Hey, 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?

Mike Covey

So, normal mix Josh in the second quarter might be just in the low-single digits 3%, 4% and that's about where we were at in 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.

Joshua Zaret - Longbow Research

Great. I’ve got it all, right I guess the second quarter is weather impacted getting that out. Let me the second question. What is the trend in the cut in Holocaust and has that had an impact on your margins this year?

Mike Covey

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 in holocaust. Our prices are roughly flat year-over-year.

In the south, we are seeing a little bit of price inflation, up roughly 3%. Some of that's driven by the fact that we’re going after hardwood stands as opposed to softwood stands. So they’re less productive in the hardwood versus softwood but net-net overall log in haul was up roughly 2% for the company year-over-year so not a significant impact.

Joshua Zaret - Longbow Research

Okay. That’s useful. And then last question. A lumber production this quarter was at $176 million board fee. Your steady capacity is 625, which means that you’re either running more shifts, more working weekends. So I guess, my question then is what is you're effective capacity this year? In other words, what are you going to produce because you’re running well over your stated capacity?

Mike Covey

Yeah. 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, excuse me, million board feet this year, which is up roughly 4% over the last year. And as you can imagine Josh in this environment, we’re always looking away to tweak our mills, to run them a little bit harder. So, we hope year after year to push them a little bit more.

Joshua Zaret - Longbow Research

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

Operator

(Operator Instructions) Your next question comes from the line of Collin Mings with Raymond James.

Collin Mings - Raymond James

Hey, good morning. Most of my questions have been answered, but just a quick couple of follow-ups here. Just as it relates to the lumber price outlook, which obviously, I got a lot of attention, can you just provide a little more color on the supply chain in some of the logistics issues that were really pronounce to start the year and maybe where we are today? I know you guys were able to work through the access inventory. You guys have build up your mills, but can you talk on what you’re seeing a little bit broader on that front?

Mike Covey

Hey, Collin, it’s Mike. I think the industry has a whole phases of trucking shortage, not only in competition for trucks to hold other agricultural product seasonally. But just generally I think, nationwide there is a shortage. I think I’ve seen a couple of 100,000 truck drivers. So we certainly face a 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 in all of our mills. Not only as a more economic, but it’s more reliable, even though it takes longer to transport through customers destination.

So, I think we’ve largely work 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. I don’t see that abating anytime soon but it certainly doesn’t. It isn’t something that’s heavily impacting our business.

Collin Mings - Raymond James

Okay. Are you hearing from any other on the producer side, any other situation where you still have a lot of excess inventory at middle level or what your sense is as far as kind of field inventory from that perspective?

Mike Covey

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

Collin Mings - Raymond James

Okay. All right. And then just one other follow-up, just on the share repurchase. I’m just curious, I mean, some of your peers have gone as far as offered a specific trigger point on the share price that they see where they might get more aggressive. And I know that’s probably not something you guys would love to do but just can you talk a little bit more about maybe the dynamics where as you alluded to where that’s kind of the bottom of your capital allocation priorities. What might happen or what way you might see the move that up the stack a little bit?

Particularly just give me some of the challenges as Mike you alluded to with how competitive it remains for Timberland acquisition. And again as I look your stock trading at discount to NAV, it seems like there is some value there and repurchasing your own timber, if you will this type of discount?

Mike Covey

Well, we don’t dispute. We certainly believe, we traded at a discount to 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 the landscape related with people who do share buybacks that have not got that right in hindsight.

And our board has been very conscious about that. And I think it’s just as a matter of priority, kind of work through and said capital allocation to our wood products business, dividend increases and acquisitions are higher priorities in share back. That’s not that we’re going to rule them out but they are just at the bottom of the stack. Well, when moving to the top of the stack, obviously is a major retraction. I think in our share price for whatever reason -- for the below NAV than it is today and then certainly we do revisit with board.

Collin Mings - Raymond James

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

Mike Covey

Thank you.

Operator

(Operator Instructions) At this time, there are no additional questions in the queue.

Mike Covey

All right. Thank you, Stephanie and thanks to the rest of you for joining our call today as well as for your interest in Potlatch. We’re heading back to my desk shortly and look forward to discussing your detailed question. Thanks and have a great day.

Operator

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

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