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Potlatch Corporation (NASDAQ:PCH)

Q2 2012 Earnings Call

July 24, 2012 12:00 pm ET

Executives

Eric Cremers - EVP and CFO

Michael Covey - Chairman, President and CEO

Analysts

Gail Glazerman - UBS

Mike Roxland - Bank of America

Chip Dillon - Vertical Research Partners

Joe Stivaletti - Goldman Sachs

Joshua Barber - Stifel Nicolaus

Steve Chercover - D. A. Davidson

Joshua Zaret - Longbow Research

Operator

At this time, I would like to welcome everyone to the Potlatch second quarter 2012 earnings conference call featuring Eric Cremers, Executive Vice President and Chief Financial Officer; and Michael Covey, Chairman, President, and Chief Executive Officer for Potlatch Corporation.

(Operator Instructions) I would now like to turn the call over to Mr. Eric Cremers for opening remarks.

Eric Cremers

Well, thank you and good morning. Welcome to Potlatch's investor teleconference covering our second quarter 2012 earnings.

Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also please note that segment information as well as a reconciliation of non-GAAP measures can be found on our website, www.potlatchcorp.com, as part of the webcast for this call.

I would now like to turn the call over to Mike Covey, our Chairman and CEO, who will make some introductory remarks, and then I'll review our second quarter results in more detail. Mike?

Michael Covey

Thanks, Eric. Good morning. We are pleased to report second quarter results that have exceeded our expectations. In our Resource business we experienced modestly higher sawlog prices compared to the first quarter, and we expect prices to continue to increase in Q3.

Our Wood Products segment considerably outperformed our expectations, posting its highest operating income in over five years. Much improved lumber and plywood prices in Q2 justified increased production levels in order to capitalize on pricing and margin opportunities.

Our Real Estate segment continued to be a solid performer in the second quarter of this year with consistent demand for rural recreational and HBU real estate, especially when excluding the impact of two significant land sales in the second quarter of 2011. In total, our quarterly and year-to-date results were stronger than anticipated.

Our outlook for the near term continues to be favorable as we believe we are in the very early phases of our Wood Products recovery evidenced by recent pricing gain. Pricing and demand are improving for a wide variety of reasons, including low levels of inventory found throughout the supply chain, strong industrial and commercial markets, firm repair and remodel markets as well as solid year-over-year improvement in new home construction, though still low by historical measures.

June, U.S. annualized new housing starts increased 7% to 760,000 units, the highest level since October of 2008. Over the long term, we believe continuing Chinese demand, higher U.S. lumber manufacturing capacity utilization and diminished Canadian harvest will result in improved market conditions and profitability for Potlatch.

Though optimistic, we remain patient and we'll wait for sustainable sawlog market improvements before increasing our harvest level. As discussed on previous calls, we are currently managing harvest levels considerably below sustainable rates.

In the current sawlog pricing environment, it is our advantage to protect our greatest financial asset, our timber, by continuing to grow our forest and defer harvesting in order to capture the upside for better pricing in the future. We believe sawlog prices will continue to advance over the coming 18 to 24 months as the U.S. housing market continues to recover.

A continuation of the recent improvement in the wood products industry is critical as it is a prerequisite to the return of stronger sawlog pricing and thus resource profitability. Our very mature forest profile will eventually result in higher harvest levels, which is completely within our control. When coupled with what we believe will be higher sawlog prices over the next couple of years, the company's cash flow should significantly improve.

Finally, the recent Forest Capital sale to Hancock and the Molpus Woodlands Group confirms investor interest in the long-term outlook for the timber asset class.

I'll now turn the call over to Eric to discuss the quarter, and then we'll take questions.

Eric Cremers

Well, thanks Mike. As shown on Page 3 of the slides accompanying this presentation, we reported second quarter 2012 net income of $5.1 million or $0.13 per diluted share. This compares to net income of $8.4 million or $0.21 per diluted share for the second quarter of 2011 and net income of $5.1 million grew $0.13 per diluted share for the first quarter of this year.

I'd now like to review our second quarter results broken down by segments. Slide 4 exhibits operating income and margin trends in our Resource segment. Operating income was $6.7 million for the quarter, which compares to $7.5 million in last year's second quarter and $8.7 million from the prior quarter.

The second quarter is typically our weakest quarter due to seasonality. The variance from Q2 of 2011 is caused by decreased harvest volume consistent with our previously announced harvest deferral, primarily in Arkansas, where sawlog and pulpwood pricing remains unfavorable.

Page 5 reviews volume and pricing trends for the Northern region of our Resource business. Comparing Q2 of this year to Q2 of last year, sawlog volume increased 9%, which is attributed to unusually wet weather experienced in Q2 of last year that delayed logging activity. Sawlog prices declined 2% year-over-year driven by a modest product mix shift with less feet are being harvested in this year's Q2.

Comparing to Q1 of this year, sawlog harvest volume fell 26% due to normal seasonality, while pricing is up 6% driven by strong customer demand. And in fact, the roughly 65% of our sawlog prices in the Northern region are tied to lumber prices, which have been strong.

Turning to pulpwood. Comparing the current quarter to last year's second quarter, harvest volume and pricing are up 37% and 15% respectively. The increased harvest volume is again due to improved logging conditions experienced during Q2 of 2012, whereas pricing was bolstered by increased demand, particularly in Idaho. Comparing Q2 and Q1 of 2012, pulpwood harvest volume declined 49% due to normal seasonality, while prices held steady.

Page 6 displays volume and pricing trends in the Southern region of our resource business. Comparing Q2 of 2012 to the prior year's second quarter, sawlog harvest volume and pricing declined 23% and 4% respectively. The lower harvest volume is directly related to our planned harvest deferral and the reduced pricing is due to depressed demand.

Comparing Q2 to Q1 of this year, sawlog harvest volume declined 6%, but we realized a 5% price increase. The lower harvest volume is again a result of the ongoing execution of our harvest deferral plan. The increase in pricing was created by a shift in product mix in order to capture better hardwood sawlog pricing as Southern pine sawlog markets remained under pressure.

In regard to pulpwood in the Southern region, our harvest volume declined 15% compared to Q2 of last year due to the harvest deferral. Comparing Q2 of this year to Q1, pulpwood harvest volume increased 19%, caused by adverse weather conditions that shifted planned first quarter harvesting activities into the second quarter. Southern region pulpwood pricing in Q2 increased 6% over Q2 of 2011 and 4% over the prior quarter driven by strong customer demand.

Considering our Resource segment overall, Q2 harvest volumes were consistent with expectations and we were on track with our plan to harvest 3.5 million tons for the year. We experienced slight pricing gains for the quarter and expect continued improvements into the third quarter as strong wood products prices eventually translate into higher sawlog prices.

Next, I'd like to review our Real Estate business. As shown on Page 7, our Real Estate segment produced $8.7 million of revenue in the second quarter, which compares to revenue of $19 million in last year's second quarter and $8.2 million in the first quarter of 2012.

Notably, included in last year's second quarter results are two significant transactions in Idaho. The first being the second phase of a non-strategic real estate sale as well as another non-strategic timberland sale. Together the transactions accounted for over $14.3 million of revenues in that quarter.

Slide 8 displays operating income trends in our Real Estate segment, which generated operating income of $6.7 million during the quarter, which compares to $11 million in last year's second quarter and $6.3 million in the first quarter.

Page 9 highlights our real estate acres sold by product type. We continue to see steady interest in our rural recreational and HBU properties. For the quarter, we closed 55 real estate transactions, which is above our average quarterly transaction count, but is also consistent with trends indicating the second quarter to be a particularly active quarter. We attribute this above average level of activity to seasonal weather conditions.

Page 10 highlights price trends for our Real Estate business summarized by product type. Prices continued to be stable, particularly in regard to rural recreational and HBU real estate as well as consistent with prior results. Finally, we continue to see firm demand for non-strategic timberland from the TIMOs.

Page 11 highlights our Wood Products segment's operating income and margin trends, which exceeded expectations and posting operating income of $11.7 million for the quarter compared to $2.8 million in last year's second quarter and $5 million for the first quarter of 2012.

Page 12 highlights lumber price and volume trends in our Wood Products segment. We experienced strong Wood Products pricing driven by higher demand during the quarter that ultimately resulted in our lumber prices improving 15% over Q1 and 17% over last year's second quarter.

Shipments increased 1% over Q1, but are up 13% over 2Q of 2011, when we began to push our mills harder for additional volume. We ran additional sawmill hours in Q2 compared to both prior periods in order to take advantage of strong lumber and plywood margins. And we continue to look for opportunities for additional production, whether through modest capital expenditures, incremental overtime hours at the mills or operating efficiency improvements.

Returning to Page 3 of our supplemental materials, corporate administration costs were $9.2 million for the quarter compared to $8.3 million last quarter and $5.9 million in last year's second quarter. The year-over-year increase was caused by $1.5 million increased pension expense as well as a non-cash mark-to-market adjustment associated with our deferred compensation plan, which accounted for $1.5 million of the increase between periods, because the deferred compensation plan liability is tied to our stock price.

During the second quarter of 2011, we recognized a $1.2 million benefit whereas in the current quarter we recognized a charge of $300,000. The increase in our book tax provision over both prior periods is attributed to higher earnings in our taxable REIT subsidiary generated by increased Wood Products earnings.

Our balance sheet is strong, coming out of our seasonally weakest quarter with $50 million in cash and short-term investments and an undrawn $150 million revolver, accompanied by a $100 million accordion.

Furthermore, our debt-to-capital ratio stands at 56% as calculated per our credit agreement, and toady we have a net debt-to-enterprise value of just 17%. We paid off $5 million of debt maturities during the quarter and paid off $22 million year-to-date with cash on hand. And our next debt maturity is not until August of next year and even then it is only $8 million.

As covered during Mike's opening comments, we are well situated for a continued recovery of U.S. housing starts, which is now underway, yet still far from its potential.

Our strategic course remains the same from our last two calls. As previously mentioned, we expect to harvest approximately 3.5 million tons for the year as we await better pricing and stronger demand, before increasing harvest levels.

The positive indicators displayed by the Wood Products market during the quarter are extremely encouraging. And is essential that Wood Products see improved pricing and become more profitable, before we can expect to see meaningful increases in sawlog prices. Higher prices will of course prompt us to increase our harvest levels, which has the potential to dramatically improve the company's cash flows and is a key part to our plan.

We consider pricing improvement to come in time, as most demand indicators continue to be positive for the industry. Based on these factors, we expect sawlog pricing gains realized during the quarter to continue into the third quarter as the incremental profitability achieved in Wood Products manufacturing steadily finds its way back to the stump.

In regards to our Wood Products segment, we anticipate third quarter results would be strong, but not quiet as strong as in Q2. Compared to Q2, lumber and plywood prices are expected to be modestly lower and sawlog cost modestly higher, which together will pressure Wood Products margins somewhat. Though it's early to say, we expect seasonal weakness in Q4 for Wood Products, but we still expect the segment to be profitable.

Finally, in Real State, consistent with our previously announced plan, we expect to sell towards the high-end of our 20,000 acre to 25,000 acre range for the year, with perhaps 3,000 acres to 4,000 acres sold in Q3 and about 9,000 acres sold in Q4. In addition, we expect land basis to be a little higher than year-to-date, averaging around 15% in Q3, and perhaps 25% in Q4.

I would now like to open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Gail Glazerman from UBS Securities

Gail Glazerman - UBS

I guess just starting you're talking about trying to find ways to ramp up your lumber production. I'm just wondering if you look at your customer base are you seeing signs that they are doing the same. Just kind of what you're seeing in terms of volume outlook relative to the survey attractive pricing that's currently out there?

Eric Cremers

What I can tell you, Gail, this is Eric. In our own mills we're pushing them pretty hard right now. I don't know that there is a lot more room for us to increase production levels from where we're at without taking extraordinary step like putting on incremental shifts, which we have taken in some of our mills. We have taken that step, but not in all of our mills. So I don't expect higher production levels from where we're at today.

Gail Glazerman - UBS

And any other signs that your log customers are starting to ramp up as well?

Michael Covey

I think that there is some evidence of that, but I wouldn't say that it's widespread. I think generally speaking most mills continue to operate at levels where they have been with few exceptions. So now we're starting to see a little bit stronger log pricing, but not a lot of pull-through cost and a higher customer demand in terms of log customers. If you can certainly point to the south and see that log prices to the south remain pretty stagnant, which I think reflects fairly weak overall demand still.

Eric Cremers

And I think, Gail, just to that question, inventory levels remained at relatively low levels. But supply and demand seemed to be fairly well and balanced at this stage. So it doesn't seem like customers are anxiously putting on additional volume.

Gail Glazerman - UBS Securities

And switching gears a little bit, Mike, you referenced the Forest Capital deal, I was wondering if you could give a little bit more color? Press reports is kind of estimated value of somewhere in the neighborhood of $2.5 billion, which strikes me as a little bit low, given how much of the acreage was in the Northwest. And I'm just wondering if you could give a little bit of color? And also if it has an implication for kind of the part of cash that TIMOs have had to deploy moving forward, if you think this takes away a fair chunk of that or if there's still a fair amount out there?

Michael Covey

Well, there's something in the order of 25 TIMOs operating in the U.S. today, and this transaction may involve two of those. So I think that there's still a lot of TIMOs and we have dialogue with many of them on a regular basis and still have money to invest in kind of broadly $50 million to $200 million range.

This is the largest transaction that's been announced in several years on the Forest Capital sale. We have no idea about the details regarding price other than the public information about acreage. But I think the broader takeaway is I think it still show that timber has been an attractive asset class and I assume Forest Capital sold, because they did well with the investment and the investors were happy. And I think it's been redeployed into the same asset and that's encouraging for I think for those of us that are in this space.

Gail Glazerman - UBS Securities

And then, just one last question. Eric, can you give a little bit more specific color on what you're looking for in terms of harvest activity in the third quarter?

Eric Cremers

In terms of volume or in terms of pricing?

Gail Glazerman - UBS Securities

Volume, and if you can be a little bit more specific on pricing that would be great as well?

Eric Cremers

As I mentioned, we've got about 2.1 million tons left to go in the year. We'll get about 1.2 million of that in the third quarter and the remainder in the fourth quarter. And the skew will be about 900,000 tons in the Northern region and about 300,000 to 400,000 in the Southern region.

With regard to sawlog pricing, we expect to see improvements. As I mentioned in the call script in Q3, and both in north and the south, probably in the range of I guess 6% to 8% is the best way to characterize it. We're seeing it in the south, really not because southern alpine log prices have improved really, because it's more of a mix shift to hardwood sawlog volume. So that's kind of our outlook for the third quarter.

Operator

Your next question comes from the line of Mike Roxland from Bank of America.

Mike Roxland - Bank of America

You mentioned on the last call that harvesting cost in Idaho would be higher in 3Q and 4Q, as you're going to steeper terrains. And just on order of magnitude, what would be the impact and harvesting cost between 3Q and 2Q based on your plan to harvest or even on a year-over-year basis, given that you were harvesting at the steep terrain in 3Q 2011?

Michael Covey

At the start of the year, we indicated that we expected logging cost in Idaho to increase about $2 a ton over the prior year, largely due to steeper terrain. We have done some competitive bidding. We've seen fuel cost moderate. We haven't seen quite as much of line harvesting as opposed to ground or skid-based harvesting.

So we actually think it's not going to be a $2 per ton increase for the year, but really about $1 a ton is what we're looking at. And again, that's just in Idaho, that's not overall.

Mike Roxland - Bank of America

Then it's $1 a ton 2012 versus 2011 full year basis?

Michael Covey

Correct. For back half of the year.

Mike Roxland - Bank of America

And then just quickly, can you just provide a little more color on conditions in the South. We've been hearing that recent weather has impacted logging conditions to some degree and the log prices can move higher as a result. Just bring in some additional color there.

Eric Cremers

To be more specific our ownership is in the South Arkansas, North Louisiana area. The drought conditions persists other than the occasional thunderstorm throughout the central U.S. south and conditions really haven't change. The weather that may have been experienced in the Gulf or in other places hasn't made its way to the central U.S. south. So conditions still remain favorable to logging, that's why we've shifted our mix to more hardwood, where we can capture better pricing.

Operator

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

Chip Dillon - Vertical Research Partners

Question is on the tax rate. It looks like and, Eric, maybe give us some color that you might have had a little catch up, because it seems to be unusually high even factoring in the enormous improvement in the Wood Products non-REIT business. Could you give us a little color on that?

Eric Cremers

The tax provision, I don't think it was a catch up, Chip. The tax provision comes out of earnings in the TRS. There is a lot of different items that make up the TRS. It's not just Wood Products. We also have real estate sales that come out of the TRS. And I don't know the exact split off top of my head, but if we had $6.7 million of operating income in the Real Estate segment for the quarter, some of that was in the TRS.

So you have to add that to Wood Products earnings to get you your operating earnings. Then you got to subtract out interest expense. So it wasn't a catch up. It was due to two earnings in the TRS.

Chip Dillon - Vertical Research Partners

And then as we look at the land sale program, I know it's a little bit early, but should we still be looking for like around 20,000 to 25,000 acres again in 2013 or how should we see 2013, 2014? What would be kind of a range that we should use?

Eric Cremers

We haven't given any guidance yet on 2013 land sales, Chip. But I would expect it to be maybe at the lower end of that or maybe even a little bit less than 20,000 acres. But it's early to say. We normally announce our plans for the year when we release fourth quarter results in February.

Chip Dillon - Vertical Research Partners

And then the last thing is, when I look at the returns you got in the Wood Products business, if you annualize it's about $50 million almost on an EBIT basis. Just going back in time, it seems like these prices you would not have expected it to be that strong. And this is obviously a very good performance. And I didn't know if there was anything, either from lumber futures or maybe it's just the fact that you have a lower breakeven point than you did back before the company split up in '08, '09. Could you give us some color on that?

Michael Covey

I think the cost curve has shifted down certainly for us. We have closed or sold three facilities in the last three years. And I think what remains is a really strong group of operating facilities both in lumber and in plywood.

We're still a significant lumber producer, a top-10 lumber producer in the U.S. with good cost. I think everybody has seen across the country. Log cost with exceptions of those really in the west and remain quite lower around the country. And I think that reflects the fact and the reason that we haven't yet decided to increase harvest levels.

Log cost remain low and we expect that the Wood Products business to capture these kinds of outsized margins for a period of time. But as Eric mentioned in the call script that that economic performance in the wood product sector will eventually be lost to the people that own the timber and timber prices will go up.

Eric Cremers

Before we lose you, just on your tax question earlier, just as a reminder, we're still carrying NOLs in our TRS. So even though we're showing a book tax provision, we're not actually cash paying taxes at this stage.

Chip Dillon - Vertical Research Partners

If I think about simplistically real estate and wood earning $17 million and I take away interest, I guess it's under $12 million. $5.7 million even if you give no allocation of corporate expense, but still seemed to be above the corporate tax rate. So maybe I don't know if there's more going on beside that? Maybe some of the resource income could be non-REIT for all I know?

Eric Cremers

No. It's really that not all the interest expense is in the TRS. The high-yield bonds that we issued a couple of years ago that's at the REIT level.

Operator

Your next question comes from the line of Joe Stivaletti from Goldman Sachs.

Joe Stivaletti - Goldman Sachs

I know you touched on this a little bit earlier, just trying to see what kind of supply response you're seeing on the Wood Products side with these higher prices. I think you addressed that in your case you haven't been really adding shifts or doing anything major. But I'm just wondering, your outlook sounds pretty positive, are you comfortable that producers are going to act rationally. Do you have much in a way of a concern that some of your competitors will start bringing facilities back on line or do you think it takes a much higher price level for that to start happening? I just wanted to get your perspective on that?

Michael Covey

We're not going to comment on either pricing or operating levels for competitors and other people. I think we're comfortable in the areas where we operate. And so we've mentioned we're running overtime in mills where it makes sense. And we have attractive margins and we'll continue to do that as long as our customers continue to want product.

And we feel we're really well positioned with a good customer base, it's very diverse both in construction lumber, dimensional lumber and industrial plywood. And I think we feel pretty strong that regardless of what the industry response is to more attractive markets that we're going to do pretty well with our customer base.

Operator

Your next question comes from the line of Joshua Barber from Stifel Nicolaus.

Joshua Barber - Stifel Nicolaus

Most of my questions have been asked and answered already. I'm just wondering if you could expand a little bit more on the direct relationship that you mentioned between lumber prices and log prices. How much of the total harvest I guess does that cover and how much of the total harvest that you expect for the third quarter would that be covering?

Eric Cremers

Josh, I think we've indicated on previous calls, roughly 50% of our sawlog harvest volume across the company is indexed to the price of lumber. But if you break it out between the north and the south, really the indexing is in the Northern segment. And that's roughly 65% of our harvest volume is indexed to the price of lumber in Northern segment. So if you take a look at, say, in the third quarter where we expect to harvest around 800,000 tons of sawlogs, roughly 65% of that 800,000 is going to be indexed to the price of lumber.

I think one thing that's interesting to note is that, we have been experiencing pricing gains similar to our index customers outside of the index customers that we have. The pricing gains that we're seeing is not just with our index customers, it's with other customers as well.

Joshua Barber - Stifel Nicolaus

And the lumber prices that uses that like a one month trailing, is that an average of local regional prices? And what sort of prices are going to be used for that?

Eric Cremers

We won't get into all the details, because these are proprietary customer contracts. But what I'd tell you is that, one contract has got a one quarter lag, a regional pricing and the other contract has got a one month lag in its regional and national pricing.

Joshua Barber - Stifel Nicolaus

One last question, going back to the Hancock deal. I know you may not have specifics on what the Idaho acres specifically went for. But could that affect your bank line at all based on the appraisal on those particular things or could it help you on the bank line if there are some comps that are coming above where your appraisal is for those particular acres in Idaho?

Eric Cremers

Josh, it won't have any impact on our bank line, whatsoever. The seller that does the appraisal for us, we do it once a year. He did it earlier this year and prices were up 2.5% over the prior year. Have appraising again next spring and it's all based upon harvest volumes and anticipated pricing. And things have moved up from where they were earlier this year. So I don't expect it to have any impact whatsoever.

Operator

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

Steve Chercover - D. A. Davidson

I also had a question with respect to the Forest Capital deal. Are you aware of any changes in fiber flows that might have happened by virtue of the change of ownership?

Michael Covey

We have no idea about what Forest Capital may have structured with the purchasers.

Steve Chercover - D. A. Davidson

And it sounds like sawmill residual prices are falling particularly in the Pacific Northwest. Can you quantify for us how much they might benefit you on a quarterly or annual basis?

Michael Covey

To clarify that, how would falling prices benefit us?

Steve Chercover - D. A. Davidson

Well, no, I don't think they'd benefit you. I mean, I'm saying over the course of the year are you getting $10 million a year in chip sales, that's what I meant by benefit?

Michael Covey

We only have the two facilities in Idaho that manufacture wood chips and that's the plywood plant and a sawmill, plus we also do chipping of logs that we sell through third parties to other paper customers. But the movement in chip prices that we've experienced over the last quarter is not a meaningful change to our bottomline in any way.

Eric Cremers

Now, if you look at it, Steve, on the pulpwood side, coming out of the forest prices has basically been flat for the last three quarters and they're expected to dip a little bit in the third quarter, but not meaningfully. And we don't make a whole lot of money out of pulpwood in the Northern region anyway. So it's not a big impact to us.

Steve Chercover - D. A. Davidson

And one last question. I know that you were unsuccessful in a couple of land acquisitions, are you still trying to buy land in size?

Michael Covey

Yes, we continue to have an active due diligence process to look at transactions that are parceled, that come to the market. And as we've said before, the ones that are in our operating area that we can kind of append to our current operations. But we've been out there in a couple of transactions this year by TIMOs. And I think that reflects their aggressive nature in terms of putting funds at work.

In fact, that I think in most cases they look through this cycle that we've been in and look to stronger pricing in the future. So we'll continue to compete and hopefully we can grow the acreage base for the company.

Operator

(Operator Instructions) Your next question comes from the line Joshua Zaret from Longbow Research.

Joshua Zaret - Longbow Research

First, I want a clarification and I wanted answers from Eric. You mentioned that you thought, you projected that sawlog prices in the north and the south would be up 6% to 8% quarter-over-quarter. I mean, the question is that quarter-over-quarter or year-over-year?

Eric Cremers

It's quarter-over-quarter.

Joshua Zaret - Longbow Research

And then, a question of mix. You're cutting more hardwood, when I look at your prices quarter-to-quarter, in the second quarter clearly it was higher than all the averages. So I assume, mix was an issue in the second quarter and will be an issue in the third quarter, is that correct?

Eric Cremers

That's correct.

Joshua Zaret - Longbow Research

When does the mix turn around, is it just going to be a six month kind of thing, because of weather conditions? And then it will see you revert back to sort of a normal mix, is that what's happening now?

Michael Covey

Well, I mean we can't predict the weather and I don't know how long it will last. But certainly the shift of hardwoods has been because the opportunities presented itself, because of the weather, as long as we can capture that we'll do that. And of course, over time in the south, where we begin to raise our harvest levels, most of that harvest approval that we've executed is that several hundred thousand tons of pine sawlogs, so that in itself will dramatically shift the mix back to pine.

Joshua Zaret - Longbow Research

I know I think we're talking sawlogs here for the furniture trade or whatever. What percent of your mix right now is hardwood on the log side?

Eric Cremers

The second quarter was around 5%.

Joshua Zaret - Longbow Research

So let me shift some questions that answers that. CapEx, I believe you projected $20 million for the year, is that still a good number or you're running below that at this is point?

Eric Cremers

Josh, it's in the $15 million to $20 million range. And if I had to pick a number, I'd probably say $18 million.

Joshua Zaret - Longbow Research

And then, let me ask you this question. Have you seen any effect from the fact that the North American softwood lumber agreement has hit its trigger point? Are you seeing any increase in Canadian lumber in any of your markets?

Michael Covey

Not to any meaningful degree. And we compete all along the Canadian border, especially in the lake states. I think that's a reflection that Canada has been successful of developing markets and trying at other places and in fact that the (tariff 13-1.40) went off for a month or two. It just not had a meaningful effect on supply.

Joshua Zaret - Longbow Research

And last question, you said there is firm demand for your non-strategic timberland. Now, I guess my understanding is you're down to 10,000 maybe 15,000 acres left of non-strategic. Is there any chance you're going to revalue, if we look at your land, we appraise it and come up with more in your bucket for non-strategic?

Michael Covey

Well, that's a constant process of looking at every acres that we own and trying to decide what its highest and best use is. And for most of our acreage, we think that timber, but that can change as demand changes overtime.

As we've said, we were down to around 15,000 acres of non-strategic land at the start of the year and we continue to try to sell that. And we may develop and identified different parcels over time, but that's the bulk of what we have left.

Operator

At this time, there are no further questions. I will now turn the call back over to Mike and Eric for closing remarks.

Michael Covey

There's no closing remark. Thank you all for your attention. We'll talk to you next quarter.

Operator

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

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