Potlatch's CEO Presents at UBS Global Industrials Conference (Transcript)

Sep.12.12 | About: Potlatch Corporation (PCH)

Potlatch Corporation (NASDAQ:PCH)

UBS Global Industrials Conference Transcript

September 12, 2012 3:30 PM ET


Mike Covey - Chairman, President and CEO

Eric Cremers - EVP and CFO


Gail Glazerman - UBS Securities

Gail Glazerman - UBS Securities

All right. So we’re going to continue and finish theme of the conference on housing side of the industry and as Mike Covey, before he could get into the fiber supply dynamics, I think, I’ll let Potlatch management make up our comers.

Just that, so with us today, we’ve got Mike Covey, Chairman and President and CEO of Potlatch; and Eric Cremers, EVP and CFO, for those of you might have missed the press release a couple months go, Eric has recently assumed a few operating responsibilities as well, I believe in-charge of Idaho.

Eric Cremers


Gail Glazerman - UBS Securities

So, with that, and I apologize anyone on the webcast for the delay. We will turn it over Mike and Eric.

Mike Covey

Yeah. Thanks Gail. I know many of you sat through Paul’s presentation few minutes ago. I did and I won’t spend much time on the housing part, since he already covered it very well, painted a pretty active picture.

For those on the webcast there are forward-looking statements in our presentation which you can refer to on the website, as well as our printed material.

Potlatch is actually one of four timber REITs as you probably know. Our enterprise value of about $1.8 billion today, we are the smallest of the four timber REITs, in a very attractive dividend of $1.24 per share with the yield just under 3.5% today. We’re the fourth largest, as I mentioned with ownership in three geographic regions, which I’ll cover in just a minute.

Those are depicted here. We are largest land owner in the State of Idaho, one of the largest owners in Arkansas, significant land owner in Minnesota. We have manufacturing operations in each of those states, as well as in Gwinn, Michigan, the upper peninsula of Michigan.

We make lumber and plywood, ply manufacturing facilities around the country and with the timberland ownership here of 1.4 million acres gives us, we think excellent exposure to different markets both geographically and especially the first diversity mix in each of those areas.

Three business segments of Potlatch the largest and most important component of that is our resource business, our timber business, the growing and harvesting of trees, our small Real Estate business where we sold raw wood, undeveloped recreational land, a very high margin business because Potlatch is a 110 years old. Timber’s been on the -- Timberland has been on the books for the long time at a very low basis, when you sell an acre of land, it’s got an extremely high margin.

And then our wood products business which I mentioned and the cash flows from each those businesses in the last few years are depicted in the lower churn in this graph. And I think, the things that most unique about this is despite the economic downturn through a combination of land sales and timber harvesting, we’ve been able to hold our EBITDA fairly constant through the downturn.

We’ll cover housing starts, Paul just did that a minute ago very well, we certainly feel like recovery is underway and we’ll benefit from that. Interestingly though and I think this is really important distinction for Potlatch.

These are two trend lines on one page, and even true, I can’t see the slide number, is that seven. Slide seven, true really important things here, the trend line in green represents our long-term trend from the early, mid 70s for Pacific Northwest log prices and in the red line is Southern sawlog prices.

The very bottom of the graph are pulpwood prices, you can see pulpwood has been relatively flat, it doesn’t matter, doesn’t change much nor does it matter much, when it does, we don’t saw, we don’t produce much pulpwood.

The log prices in the Pacific Northwest begin to bounce back a couple of years ago as the dynamics started to play out in Canada and with China, and log pricing has come up closer to this long-term trend line in the Northwest.

But in the U.S. South just the opposite it happen, log prices weaken, they continue to be weak and in fact, finally, we think kind of reach the floor but it’s been a sequential period of three or four years here downturn in Southern log pricing.

And for this reason Potlatch decided to reduce our level of harvesting activity in the South, let the trees grow biologically and wait for a strong market to cut those threes and bring them to market in the U.S. South. And that was one of the large drivers behind our decision to reduce the dividend in October of last year.

And this is really what I’m referring to and these next couple of slides cover that, you can see we harvest about around 4.5 million tons of logs and kind of sustainable log market, log period, we reduce that from in mid $4 million ton range all the way down to 3.5 this year.

And on the sawlog component, now I’m striping out the pulpwood piece which is the lower margin least valuable piece, just think about sawlog only. We’re only going to be at about 2.5 million tons this year with a longer term potential to raise that up to about $3.3 million tons.

That incremental uplift and additional sawlog harvest 8,000 tons will contributed an additional $25 million in EBITDA and we think overall pricing in industry not just the volume increment but the pricing increment could add potentially another $40 million in EBITDA over the next few years, so combined $65 million in cash flow improvement just from our Resource business alone or about $1.50 a shares.

Paul talked extensively about the Pine beetle and its impacting Canada where that combined with this harvest supply reduction into back in Ontario. We think that’s a 10% to 15% supply shock in North America that’s underway currently.

Coupled with strong demand in China we saw the big run up in the North American export to China and although, they while go around right now, between 5 and 6 billion work feet, they are still really strong and that’s what’s important I think for the big picture.

Without talking about biomass and what our outlook is for biomass, if we had timberland that was on the Atlantic sea border and the Gulf South, we would probably have more optimistic outlook for biomass because we could manufacture biomass or pulpwood in the pallets and export them to Europe for this robust market. But we don’t, our land ownership is -- its inland, Arkansas, Idaho places we don’t have an access to sea port and we don’t think that near-term there is going to be lot of price impact or force from biomass.

Although, over the very long term, and they will have an impact but that largely depends on natural gas pricing, natural gas so low right now, kind of hard to see a future for biomass unless Congress subsidies it.

And we’ll spent time on historical lumber prices, as you know lumber prices have been strong for the last several months, its reflected in our wood products business and we think they are going to continue to improve overtime and publish Paul’s conviction that we’ll see increases next year and beyond.

We do have a wood products manufacturing business where we operate five sawmills and plywood plants on an LTM basis through the end of the second quarter that’s the last public day that we have. EBITDA was about $25 million, I think, it was $25 on an LTM basis.

That business continues to be very good with strong margins largely because the slide that I showed you on log costs, log costs especially in the South remained very flat and low, allowing us to have very attractive margin and our customers to have good margins as well.

I mentioned our Real Estate business, I’ll touch on this quickly and then Eric will talk about our financial statements a little bit. Just a couple of comments, especially in Idaho and Minnesota we have a lot of price land for recreation and development that people want to use as their second home where we can get away. And in the last couple of years that’s primarily been our focus for us in Minnesota, within a couple of hours of the twin cities we are the largest land owner.

And we sell rural undeveloped recreational land where we’ve harvested a component of the valuable timberland, but still left at looking attractive for a record second home user recreation.

Last quarter, we closed 55 transactions, almost all of those in Minnesota and we kind of do 30 to 50 transactions at quarter, prices that are roughly $1,000 to $2,000 in acre, which is several times what the lands were of this timberland value in the State of Minnesota.

Idaho has similar potential all the prices break will be much higher but that market is currently quite saturated and week in terms of recreational Real Estate property. But we think it will come back well within a couple of hours of Boise, the largest population center in Idaho.

And then a transformational change in our Real Estate business is depicted on this slide on page 17. The yellow bars indicate acres and values that we’ve sold over the last few years.

Non-strategic timberland that we identified that we wanted to dispose off, when we accelerated that process and so we got good prices for it and attractive returns even during the downturn, but that process is largely complete.

So going forward our land sales will be largely focused on rural recreational real estate which is in the green and the red color on this slide, on prices that are somewhere between $1,000 and $2,000 in acre and will do around 20,000 acres a year. We have about 2,000 acres, a little bit more than that left of land that we plan to sell, we will probably do that over the next decade at roughly 20,000 acres a year pace.

So today, our company has about 1.4 million acres, very similar to what it had in 2006 at the time of the reconversion. We made a couple of acquisitions in 2007 and ‘08 and have since sold a number of acres and red here are the non-strategic timberlands.

So although the acres we own today, the 1.4 million are the difference in the ones that we owned in 2006. In many ways, they are much more valuable. We think this have real estate potential or better stocking than what we used to have. And hopefully, we can begin to turnaround now and grow that acreage base going forward.

With that, I’ll turn it over to Eric, who is going to make some comments on our balance sheet and our financial and we’ll answer questions for you.

Eric Cremers

Well, thanks, and good afternoon. This page highlights our second quarter ending balance sheet. We do maintain a relatively conservative capital structure in the company and what you see is that.

In the second quarter, we had about $50 million of cash and short-term investments on the assets side of the balance sheet. Offset was about $350 million of long-term debt on the other side of the balance sheet.

If you take a look at some of our credits statistics, our debt-to-capital, we finished the second quarter at 56% and you might think for an industrial company that’s relatively high which would be.

But we don’t think of leverage that way because we are a 100 year old company. A lot of the assets on our books are way understated relative to fair market values. So we think the right way to think about leverage is to look at the next line down, which is net debt to enterprise value and if you look at it from that perspective, we are at relatively healthy 19%.

Today, we maintain a completely undrawn $150 million revolver with another $100 million accordion on top of that. Also our cost of debt is around 6.8%.

We are not investment grade rated by either the rating agencies. However, we are in constant discussions with them about what it would take for us to get to investment grade. So hopeful that will happen over the next year or so.

If you take a look at our debt split, it’s roughly 86% fixed rate and 14% floating rate, which has proved to be beneficial in this slow interest rate environment.

Take a look at the next page, our debt maturity profile is pretty attractive with just $57 million in maturities over the next five years. Relatively small, relatively well-placed spread out over the next five years, and we anticipate just using cash on hand to pay those off or to refinancing.

This next page is an interesting one. As part of our revolver, which we put in place back in December of 2008, we had to securitize revolver and we did it by closing 352,000 acres of core Idaho timberland as part of that collateral pool, and we have to go out and get an appraisal on those acres from a certified third-party timber appraiser every year.

And if you look at it, it represent roughly 24% of our acres that we get appraise. The most recent appraisal on those acres came out to $724 million and if you compare that to our enterprise value, which today is around $1.7 billion, $1.8 billion, it’s 24% of the acres yet it’s 48% of our enterprise value.

So, I think it highlights the fact that we are a very strong net asset value oriented company. Today, cash flows are on the weak side because housing is still in the early stages of its recovery. But yet the NAV is still there and that’s evidenced by this appraisal on this slide.

Take a look at the company’s cash flows, breaking it down by business segment where it’s come from over the past several years. On the left-hand side of the page, you see corporate consolidated EBITDA and it’s been in this $100 million to $150 million range.

So that has corporate overhead included in it. So if you add up the three bars, the three segments on the right-hand side of the page, it’s not going to equal the bar on the left-hand side. But we’ve seen a mix shift in terms of our cash flow generation, which segments have contributed which percent.

So Resource has been under a little bit of pressure as we have taken on this, what I will call self inflicted wound by bringing down our harvest levels, basically waiting for a better day, a better pricing environment. So Resource EBITDA has come down a little bit.

Our Real Estate EBITDA peaked as you can see, back in 2010 with the sale of some non-strategic timberland. But if you look at the bottom of the page, what we are starting to see is our Wood Products business generates significant cash flow and we expect that trend in Wood Products to continue.

If you take a look at funds available for distribution or how much cash the company generates after all cost and expenses. That’s shown in the yellow bar here. The green bar illustrates what our dividend payment has been. Typically it’s been about $80, $182 million peer back when it was $2.04 per share.

However, we did well in the dividend in the fourth quarter, down to a $24. So new required FAD is $50 million to pay the dividend, and we think we are well ahead of that $50 million in terms of FAD generation for the company.

So in conclusion, we maintain a very attractive timberland base of nearly 1.5 million acres. Our Wood Products business is now generating solid cash flow after couple of rough years at the bottom of the housing market.

Our Real Estate business, it’s not vertical development, it’s not high risk. It’s relatively low risk and it involves the sale of raw land. We continue to maintain an attractive dividend at $1.24, again yielding nearly 3.5%.

Our balance sheet is strong. We’ve got attractive debt maturity profile and the slide says industry turns beginning to turn positive. I think we are beyond that. I think housing has found its footing. Housing starts this year up roughly 20% over prior year and as you heard, they are going to be higher again next year. China continues to import a lot of the logs and lumber from North America and we think that trend is going to continue.

And then finally this Pine beetle in British Columbia is going to have a big impact on the industry. It’s going to play itself out over the next, for next several years.

So, with that, we will finish the presentation and we will open it up to Q&A.

Question-and-Answer Session

Gail Glazerman - UBS Securities

Okay. I’ll kick of the Q&A.

Mike Covey

What happened to this microphone?

Gail Glazerman - UBS Securities

We haven’t tested it. That’s been put in Mike and my table as well.

Mike Covey

Okay. Just take questions from the table.

Gail Glazerman - UBS Securities

We can try. So I guess, we’re entering the fourth quarter and you’re starting the budget planning process for 2013 and we think about what your harvest plan might turn out to be. What should we be looking at it? Should there be southern log prices, or should it be housing starts for Potlatch, should it be the lumber price? What guide should we be thinking about -- what you’re going to factor into that harvest decision and whether or not you start to raise it back up?

Mike Covey

All those play a factor and we will not guidance today on what we’re going to do next year. But as I mentioned in my remarks, that we reduced our harvest level from about 4.4 million tons down to 3.5 million tons over the last year or so. The bulk of that deferral was in the U.S. south where we saw very weak sell-off prices.

So the first benchmark that we’ll look for in terms of increasing our harvest level really is triggered by what southern log prices have done. And of course, that’s dependent at the end of day on strength of the lumber and plywood market and how much our customers can pay for logs. So that will be foreseeable to.

Gail Glazerman - UBS Securities

How much when you think about lead time, we’re going back to Potlatch presentation, one of his key swing factors as they get. How optimistic do our customers are going into the new year and I guess, looking back to the end of 2011, the harvest to follow decision, I’m gathering your customers. We’re incrementally cautious on how they were building log desk going into 2012. Is that a fair comment and then if so as you kind of get early indications going into 2013. Is there a sense that your customers were overly cautious in ‘12 and may adjust and compensate in 2013?

Mike Covey

Well, I disagree a little bit with Paul about the notion that you have to plan log desk to increase production. And you at South, most of our customers, log customers only have log desk that have about five days of inventory. That’s far different than it would be in the interior of British Columbia or even in the west where you have to plan on several months of inventory to make through the winter period.

But in U.S., outside of seasonal hurricane type weather events, most customers run some where between a week and two weeks of log inventory which is pretty easy to flex with market conditions. So I think to characterize it last fall, when we reduced our harvest levels that was largely driven by one of our large customers, Georgia-Pacific close to large plywood plant in our operating areas.

We lost a very large and important customer which caused to further to think about the harvest deferral. I think most of our customers I’d say we’re a little more cautious last year but feeling better. And I think almost to a customer this year, everyone of our lumber customers and plywood customers are making margins that are terrific in the business.

Our own business in the second quarter of this year, our business was as good as it’s been in five years. I don’t think we are the most exceptional lumber and plywood manufacturer but we are not the worst in the industry either. And I think that gives you the idea of lumber and plywood business is good.

The OSP business is terrific. We have a number of OSP customers particularly in the U.S. South. So I think going forward, people will feel a little better about their business and I think we’re going to -- it always happens the lumber and log prices, the lumber and plywood prices have to lead first. And eventually that gets bit back to the timberland or in the form of log pricing.

It just takes, going to take longer in the south this team than it has before. But it will happen. I got your question about the outlet, that kind of our assess.

Gail Glazerman - UBS Securities

No. Obviously, it helps. You noticed that’s clearly you wanted that clear in the export last year. It did have an indirect impact on Idaho business. I mean, you have been hearing all year from what -- while the exporters, China is going to come back. We’re entering the fourth quarter. I haven’t really heard a stunning kind of pick up. Paul has been -- white paper but I haven’t really heard any sign of log export to China picking up.

Do you kind of get any sense that the dynamics are changing and we could start to see that pick up again. I realize you are not a direct participant but….

Mike Covey

Well, yeah, we are not a direct participant. We do not export either logs or lumber to China. And as such we’re -- it's anecdotal was only I can share with you. Our view is that while China is growing at 7%, growing at 9%, there is still a lot of fiber that they need to grow their economy.

And as long as they have fiber depths sitting or buying a lot of logs and lumber from North America, it continues to support prices here in this continent. So that’s about all the comment, I could provide on that.

Gail Glazerman - UBS Securities

Okay. And then I guess, during the year today at least, harvest not -- just only one, I can take a -- they got harvest this year but we haven’t see the export support. Do you have any sense of this being -- that’s because log prices have been under a little bit of pressure lately. Any sense that there is a bit of an over supply growing with domestic demand not able to kind of -- that's where we were able to enter China last year in the near term?

Mike Covey

What I can tell you is that for Potlatch, particularly we have indexed roughly two-thirds of our Northern region sawlog production to the price of lumber for the type of species that are developed in our regions. So our businesses are really incrementally driven by Chinese demand from specific Northwest or influenced by that So much at it what’s going with lumber prices in the domestic market with the species in our region that will drive for us?

Gail Glazerman - UBS Securities

And leading it to my next question, which was your indexing has any strategy. Can you talk a little bit more about the indexing strategy like how long are those agreement for us. It’s something to get renegotiated every year and generally speaking now that you’re getting -- you've got act of indexing, do you find hedge in -- (inaudible) hedging on the lumber side. Is that attractive or are you still doing both?

Mike Covey

Yeah. We currently do not have any lumber hedges in place in effect. The prices that we’ve been offered are below where we think prices are going to be. So we’ve not found the hedges to be attractive. So no lumber hedges today.

I think the second part of your question is the detailed nature of our log supply agreements. I think the simplest way to answer that it varies. The log prices lag lumber index by anywhere from one to three months, number one. And number two, it varies from the contract term. One, in particular, is multi year and one is more short term in nature.

Eric Cremers

Very good thought but I’d ask why did we index our log prices to lumber prices. While I believe long-term lumber and plywood prices always lead the recovery of log prices. Sometimes they can take several quarters and we felt with the period that we were entering over the next several years really kind of back to what Paul talked about in his presentation. We think we are going to see rise in lumber prices for some time and the strength in lumber market. We wanted to closely couple our log prices to those lumber prices as much as we could.

At the same time, we kind of by structuring of that, we built in a margin for our customer. So they are able to pay us the price. It allows them to still produce lumber at a margin and we don’t have the lag period waiting. So our expectation would be that during the second half of this year as lumber prices have gone up and stayed up, we’re going to see impact our log prices while others may not because they are indexed.

We haven’t done anything in U.S. south. We have only done in the Northwest to a significant degree.

Gail Glazerman - UBS Securities

And again, I guess, where I’m coming from, given where lumber prices have gone. Well, that’s log prices in the western part of the country. It feels like a better deal for you than your customers that are in this agreement or have you seen some after spend month basis in Idaho last contract.

Eric Cremers

I think, frankly I think both parties are quite happy with the contract, because what Mike said, they walk in their margins whether the lumber prices are high or low, they virtually locked in the margin for their business. They’ve also got a guaranteed source of supply or committed to supply then the volume under the contract.

So, I think they benefit in that way. We benefit because of the immediate or virtually immediate impact the log pricing when lumber pricing runs up. And if you are bullish on the outlook for lumber prices, which we are -- we want to be tied index to that rising price to lumber.

Mike Covey

And I think one part of your question, Gail external long contract, what prices in Idaho have been pretty stable the most of the year that much volatile.

Gail Glazerman - UBS Securities

Okay. And obviously won’t let you go without touching on actual underlying Timberlan markets. Can you give a little bit color on what you are seeing into the kind of more retail recreational areas as well as kind of more institutional side of timber transaction?

Mike Covey

Also the recreational part, American speak on the institutional piece, recreational timberland demand and pricing seems remarkably stable for us, but primarily that’s the story of Minnesota market. We’re not -- we don’t do hardly any transactions in Idaho in the last couple of years, because there is just not much demand there.

So our evidence is really primarily in Minnesota where we do 30 to 50 transactions a quarter. Pricing has been stable and demand has been solid. It’s a cash buyers not credit sensitive. It’s been a steady business for us. So I have -- we don’t see that changing.

Eric Cremers

I just see on the institutional timberland M&A market. The TIMOs continue to have ample amount of capital. They continue to purchase on a regular basis. Interesting buying any non-strategic timberland and we have been rolling to sell. And frankly, we don’t have a lot of acres in that bucket. So, I think demand is still high. The real issue, I think the timberland is going to face is this one of supply, it’s going to be the seller of those acres.

Mike Covey

We would say for the transactions that we do witnessed and compete for, discount rate the TIMOs are using cap rates have drifted back down maybe not as lowest there were at one point but they are in the 5% range. So that’s a discount rate without inflation. It’s very hard to compete at that level as a public company with our cost to capital is significantly above that.

Gail Glazerman - UBS Securities

And we’ve seen you do transactions kind of creatively structure with the timber deed, we have seen one of your competitors actually instead of selling the timber deed buying their timber deed. Is that an opportunity that you would see given some of the taxation that you may get -- that you just do forward or do you think moving forward, any transactions to be somewhat more especial mention?

Eric Cremers

No. I think we are going to -- we are seeing referring small transactions both with the timber deed or we’re just timber deed purchase. I think our unique angles going to be not chasing the big transaction, because the big transactions are going to attract the lot of TIMO interest and the excess returns are going to get competed away in the upfront cost. Our opportunities are going be in those smaller transactions, where a bidding competition won’t be quite as intense.

Mike Covey

And I think that the -- an opportunity buying timber deed looks would be very attractive.

Eric Cremers

Yeah. Especially with financing cost.

Mike Covey

Well, yeah.

Eric Cremers

Banks are, they are going to take money.

Gail Glazerman - UBS Securities

Housing customer, well they can hearing that as well. But we are not there kind of looking at uses of cash and end market recovery. You cut the dividend concurrent with harvest increase with the board be comfortable doing the same that is your comfortable operates harvest, you might be comfortable operating the dividend or do you think it want to have some experience with, kind of getting into cash from hire harvest support you reinvestigate the story mix?

Mike Covey

A long-term we hope to raise the dividend and we store hopefully back to its current level or above that. They illustrated -- one slide, I covered with potentially and other $65 million an incremental cash will coming with rising harvest levels and potentially stronger industry wide pricing.

We certainly have to think about raising the dividend or buying back shares or doing something else with the capital into the REIT structure. We really need to distribute the cash to shareholder so we are going to pay a tax to REIT. So one most and that they can make sense. So we look to restore the dividend. We’d like to see longer term in our ability to sustain for longer period of time and raise it cautiously, but certainly we hope to do that.

Gail Glazerman - UBS Securities

And in the current environment where you are -- you have talked about potentially looking acquisitions and deals that you looked that have been out there. How big a deal would you be comfortable doing in the stage in this market, would you be comfortable seeking events with that just being offered here on?

Eric Cremers

I think absolutely, I think we’re quite bullish. Our confidence is very high in the industry going forward. And I think our willingness to do a transaction is there, the financing markets being we were at. I think its going to be really question one is supply is there rolling sell on the other side number one.

Then number two is the price for the transaction at least so high they’re all the excess returns are going to get compete away that’s kind of measure we find ourselves in.

Gail Glazerman - UBS Securities

I know there are contacts throughout the day in terms of getting deals done on the sale, it’s obviously at the right price. I guess looking at the recovery and getting little bit more traction going back to my first question, you talked about the cross and now closing last year, you starting to hear maybe things moving the other way where some of the facilities that Paul was talking that have been ideal. Customer starting to restart, you haven’t sold during year to kind of starting to talk about why you build that log that can run or not really?

Mike Covey

Not very much, I can’t remember these numbers exactly, but of the facilities you talked about that we are closed versus those that are ideal. I think the place we see incremental interest in demand for logs comes from mills that are running 60 hours a week instead of 80 hours a week, we think 80 is a full two shift capacity.

And I don’t think you would capture those and these ideal numbers and I think these ideal numbers would meet a mill. It’s still ready to operate and it’s been maintained, but it just not running at all. We see the first increment of demand. There are demand for logs coming from customers that are running 60 hours that want to move to 80 rather from the mill that has never run in the last two years starting up anew.

I can’t think of an example in the country where we were mills getting ready to starts has been shut. That they could be started I can’t think of one. We do have some interest in customer who were doing more hours.

Gail Glazerman - UBS Securities

And within your manufacturing business, where you kind of within that 60 to 80 type range and you have been adding shifts and hours, are you -- tapped out now?

Mike Covey

We have been at two shifts 80 hour capacity for over two years that are running incremental overtime where it make sense but we’re kind of tapped out and have no plans to run three shifts.

Gail Glazerman - UBS Securities

So, if we look into recovery is everything else that you could do further on to increase that or it’s basically any improving manufacturing from here just going to be place driven?

Mike Covey

That’s going to be mostly price driven with marginal contributions for more volumes. But it’s fractional. It’s largely price driven. The mills are running with excellent cost, good productivity we’ve had zero downtime to speak of and no large capital investment project. But here its price driven.

Gail Glazerman - UBS Securities

I guess any impact in any of your southern operations from the regroup from activity?

Mike Covey

No. Unfortunately we didn’t get enough right. People in Louisiana would shoot me for saying that. We’ve had a very severe drought in Southern Arkansas which is affecting our seed links survival rate for the trees that we just planted and they could really use a substantially soaking size deliver two to five inches of brand which in Southern Arkansas just that what we can.

Eric Cremers

I heard we needed 12 inches of rain. Mike said two to five, so we are still kind of semi drop ambition down there.

Gail Glazerman - UBS Securities

Okay. And seem that many keeping, it’s not huge…

Mike Covey

No. Small -- very small numbers.

Gail Glazerman - UBS Securities

And I guess one last question which I asked in last earning calls. I will ask anyway with lumber prices where they are the export taxes on Canadian lumber have comedown, I guess partially offset by the recent amount Canadian currency but any response out of Canada, China slow, U.S. looks little bit more attractive?

Mike Covey

No. There was period here for just few weeks for the tariff, I think we are all the way to zero. Canadian softer lumber under the structure of the agreement, talk to our lumber sales group, that impact we’ve seen in early. I think Canada has built longstanding relationships with many of these China customer and many cases that committed the mill capacity to it customer in China and much of the beetle -- Pine beetle killed material not suitable in the U.S. market at least at this level of demand.

And we’ve really seen no change Canadian supply to U.S. In fact I think the numbers just read are North American, the U.S. portion of exports in Canada is around 25%, 26% there has been 34%, 35% historically. So it’s way down. I think its going to stay that away for long.

Gail Glazerman - UBS Securities

Well, that enough. Anyone else have questions?

Mike Covey


Gail Glazerman - UBS Securities

All right, Mike. Thank you so much for coming.

Mike Covey

Thank you.

Eric Cremers

Thank you.

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