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Potlatch Corporation (NASDAQ:PCH)

UBS Global Industrials Conference

September 17, 2012 03:30 PM ET

Executives

Mike Covey - Chairman, President and CEO

Eric Cremers - EVP and CFO

Analyst

Gail Glazerman - UBS Securities

Gail Glazerman - UBS Securities

All right. So we’re going to continue and finish the theme of the conference on the housing side of the industry and as I cut Paul off before he could get into the fiber supply dynamics, I think, I’ll let Potlatch management, Mike Covey and Eric Cremers address 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 that might have missed the press release a couple months ago, Eric has recently assumed a few operating responsibilities as well, I believe in-charge of Idaho.

So, with that, and I apologize for anyone on the webcast for the delay. I'll turn it over to Mike and Eric.

Mike Covey

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 I already covered it very well, painted a pretty accurate picture.

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

Potlatch is one of four timber REITS as you probably know. Enterprise value of about $1.8 billion today, we are the smallest of the four timber REITs. Painted a very attractive dividend of $1.24 per share with the yield of just under 3.5% today. And 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 the largest land owner in the State of Idaho, one of the largest owners in Arkansas, a 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 in five 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 in species 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. Timberland has been on the books for a long time at a very low basis, so 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 turn in this graph and I think one of the things that is 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.

I will cover housing starts, Paul just did that a minute ago very well. We certainly feel like the recovery is underway and we’ll benefit from that.

Interestingly though and I think it is really important distinction for Potlatch. These are two trend lines on one page. Slide seven, two really important things here, the trend line in green represents our long-term trend from the mid-70s for Pacific Northwest log prices and in the red line a Southern saw log prices. The very bottom of the graph are pulpwood prices. You can see pulpwood's 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 US, South just the opposite has happened. Log prices weakened. They continue to be weak and in fact, finally we think we have kind of reached 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 stronger market to cut those trees and bring them to market in the US, 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 in these next couple of slides cover that, you can see we harvest about around 4.5 million tons of logs in a kind of a sustainable log market, log period. We've reduced that from the mid 4 million ton range all the way down to 3.5 this year.

And on the saw log component, now I’m striping out the pulpwood piece which is the lower margin least valuable piece, just thinking about saw logs 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 saw log harvest of 800,000 tons will contributed an additional $25 million in EBITDA and we think overall pricing in the industry, not just the volume increment, but the pricing increment, could add potentially another $40 million in EBITDA over the next few years. So a combined $65 million in cash flow improvement just from our resource business alone or about $1.50 a share.

Paul talked extensively about the mountain pine beetle and its impacting Canada where that combined with this harvest supply reductions in Quebec and 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 good North American exports to China and although they wobble 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.

We get asked often about biomass and what our outlook is for biomass. If we had timberland that was on the Atlantic sea border in the Gulf South, we would probably have more optimistic outlook for biomass because we could manufacture biomass or pulpwood in the pellets and export them to Europe where there is robust market. But we don’t, our land ownership is inland. Arkansas, Idaho places where we don’t have an excess to sea port and we don’t think that near-term there is going to be a 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 is so low right now, kind of hard to see a future for biomass unless Congress subsidies it.

And we’ll spend time on historical lumber prices. As you know, lumber prices have been strong for the last several months. It is reflected in our wood products business and we think they are going to continue to improve over time and probably share 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, 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 margins and our customers tend 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. We're especially in Idaho and Minnesota we have a lot of priced land for recreation and development that people want to use as their second home or weekend getaway. 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're 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 use or recreation.

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

Idaho has similar potential although prices breaker will be much higher but that market is currently quite saturated and weak 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 sold over the last few years. Non-strategic timberland that we identified, that we wanted to dispose them, 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 rust color on this slide, on prices that are somewhere between $1,000 and $2,000 in acre and we'll 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 and 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 2008 and have since sold a number of acres in red here, the non-strategic timberlands. So although the acres we own today, the 1.4 million are different than the ones that we owned in 2006. In many ways, they are much more valuable. We think these have real estate potential or better stocking than what we used to have and hopefully, we can begin to turn around 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 your questions for you.

Eric Cremers

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. End of the second quarter we had about $50 million of cash and short-term investments on the asset side of the balance sheet offset with 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 it would be. But we don’t think of leverage that way because we're 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're at relatively healthy 19%.

Today we maintain a completely undrawn $150 million revolver with another $100 million accordion on top of that. All told, our cost of debt is around 6.8%. We're 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. And 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 low 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 them.

This next page is an interesting one. Its part of our revolver, which we put in place back in December of 2008, we had to securitize revolver and we did it by posting 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 appraised. 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're 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. Now 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'll 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're starting to see is our Wood Products business generate 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 per year back when it was $2.04 per share.

However, we did lower 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're 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 an attractive debt maturity profile and the slide says industry turns are beginning to turn positive. I think we're 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 for next several years.

So, with that, we finished the presentation and we'll open it up to Q&A.

Question-and-Answer Session

Gail Glazerman - UBS Securities

So I guess, we’re entering the fourth quarter and you are starting the budget planning process for 2013 and we think about what your harvest plans might turn out to be. What should we be looking at? 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 for what you’re going to factor into that harvest decision and whether or not you start to raise it back up?

Mike Covey

Well, 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, 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 US south where we saw very weak saw log 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 lumber and plywood market and how much our customers can pay for logs. So that will be the first thing we'd look to.

Gail Glazerman - UBS Securities

And how much when you think about lead time, we’re going back to Paul's presentation one of his key swing factors as we get, how optimistic do our customers are going into the New Year? And I guess, looking back to the end of 2011, the harvest deferral division, gathering your customers were incrementally cautious on how they were building the log decks 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 2012 and may adjust and compensate in 2013?

Mike Covey

Well disagree a little bit with Paul about the notion that you have to plan log decks to increase production. In US South, most of our customers, log customers only have log decks 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 it through the winter period.

But in US South, outside of seasonal hurricane type weather events, most customers run somewhere 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 us to further to think about the harvest deferral. I think most of our customers I’d say were a little more cautious last year but feeling better.

And I think almost to a customer this year, every one of our lumber customers and plywood customers are making margins that are as 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. And 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 US South. So I think going forward, people will feel a little better about their business, 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 is going to take longer in the south this time than it has before. But it will happen. I don't know if I got your question or not Gail but that's kind of our sense of the business.

Gail Glazerman - UBS Securities

No. Obviously, it helps. You're not a direct player and you weren't a direct player in the export market last year. It did have an indirect impact on your Idaho business. I mean, you have been hearing all year from (inaudible) log exporters, China is going to come back. We’re entering the fourth quarter. I haven’t really heard it starting to kind of pick up. (Inaudible) and 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, yes, we are not a direct participant. We do not export either logs or lumber to China. And as such it's anecdotal as only I can share with you. Our view is that whether China is growing at 7% or growing at 9%, there is still a lot of fiber that they need to grow their economy.

And as long as they have that 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 I guess, during the year today with harvest, just only one thing I can think they are actually skilled back harvest this year but we haven’t see the export support. Do you have any sense this, what's been log prices have been under a little bit of pressure lately? Any sense that there is a bit of an oversupply growing with domestic demand not able to absorb what we've been going to 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 saw log production to the price of lumber for the type of species that are developed in our regions. So our businesses are incrementally driven by Chinese demand from specific Northwest, are influenced by that so much as it is what’s going on with lumber prices in the domestic market with the species in our region that's what drives pricing for us?

Gail Glazerman - UBS Securities

And leading it to my next question which was your indexing and hedging strategy. Can you talk a little bit more about the indexing strategy like how long are those agreements for us? It’s something to get renegotiated every year and generally speaking now that you've got back to the indexing, do you find that's what hedging on the lumber side attractive or are you still doing both?

Mike Covey

Yes, so 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 and 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 is 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

You'd might ask why did we index our log prices to lumber prices. While I believe long-term lumber and plywood prices always lead recovery of log prices, sometimes that 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're 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, by structuring of that we built in a margin for our customer. So they are able to pay us a price that 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 that impact in our log prices when others may not because they are indexed. We haven’t it done anything in US South. We've only done it in the Northwest to a significant degree.

Gail Glazerman - UBS Securities

And 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 up drift in log prices in Idaho at contract.

Eric Cremers

I think, frankly I think both parties are quite happy with the contract, because what of Mike said, they locked 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 to 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, ex our log contract; log prices in Idaho have been pretty stable for most of the year, not much volatile.

Gail Glazerman - UBS Securities

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

Mike Covey

I'll do the recreational part and Erick can speak on the institutional piece. Recreational timberland demand and pricing seems remarkably stable for us, but primarily that’s the story of a Minnesota market. We don’t do 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 buyer, it's not credit sensitive. It’s been a steady business for us. And we don’t see that changing.

Eric Cremers

I just see on the institutional timberland M&A market; the TIMOs continue to have ample amounts of capital. They continue to purchase on a regular basis. Interested in buying any non-strategic timberland that we'd been willing 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 timber industry is going to face is, is one of supply, it’s going to be the seller of those acres.

Mike Covey

We would say that for the transactions that we do witness and compete for, discount rates the TIMOs are using the cap rates have drifted back down maybe not as low as they 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 you have 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 benefit that you especially forward or do you think moving forward, any transactions to be of somewhat more traditional nature?

Eric Cremers - EVP and CFO

No. We are seeing it pouring small transactions both with the timber deed or with just a simple deed purchase. I think our unique angle is 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 the bidding competition won’t be quite as intense.

Mike Covey

And I think that an opportunity to buy timber deed would be very attractive.

Eric Cremers

Yes. Especially with financing costs. Banks are, they are going to state money.

Gail Glazerman - UBS Securities

Some of the ultimate housing customers will like to be hearing that as well but we are not there. Kind of looking at uses of cash and market recovery, you cut the dividend concurrent with the harvest increase. Would the board be comfortable doing the same that if your comfortable enough to harvest, you might be comfortable to raise the dividend or do you think you want to have some experience with, kind of juggling the cash from a higher harvest support you reinvestigate the story mix?

Mike Covey

Long-term we hope to raise the dividend and we store hopefully back to its current level or above that. And as I illustrated, there is one slide, I covered with potentially another $65 million in incremental cash flow 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 under the REIT structure. We really need to distribute the cash to shareholders or we are going to pay a tax to REIT. And that doesn’t make sense. So we look to restore the dividend. We’d like to see longer term in our ability to sustain it for a 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’ve looked at and have been out bid. How big a deal would you be comfortable doing in that stage in this market, would you be comfortable seeking events with that same office view in?

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 where they are at. I think it's going to be really a question of one of supply, is they willing to sell on the other side, number one. And then number two, is the price for the transaction is going to be so high that all the excess returns are going to get competed away that’s wonderment (ph) we find ourselves in.

Gail Glazerman - UBS Securities

Yes for that, and another context throughout the day in terms of getting deals done, obviously if that's at the right price. I guess looking at the recovery and getting a little bit more actually going back to my first question, you talked about the cost and now closing last year, are you starting to hear talk of maybe things moving the other way where some of the facilities that Paul was talking that have been idle, could customers starting to restart some that you haven’t even sold during a year or two, kind of starting to talk about why you build that log (inaudible)?

Mike Covey

Not very much. I can’t remember these numbers exactly, but of the facilities you talked about that were closed versus those that are idle. 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 of 80 as a full two shift capacity.

And I don’t think he would capture those and his idle numbers and I think his idle numbers would meet a mill that's still ready to operate, it’s been maintained, but it's just not running at all. We see the first incremental demand if there are demand for logs coming from customers that are running 60 hours that want to move to 80 rather than 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 a mill is getting ready to start, has been shut. They could be started I can’t think of one. We do have some interest in customers who want to run more hours.

Gail Glazerman - UBS Securities

And within your manufacturing business, where are 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 and 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 our coverage anything else that you could do further on to increase that or is basically any improvement in manufacturing from here just going to be place driven?

Mike Covey

It's going to be mostly price driven with marginal contributions for more volume. 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. So from 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

None. Well unfortunately we didn’t get enough right. People in Louisiana would shoot me for saying that but 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 (inaudible) deliver two to five inches of rain which in Southern Arkansas is just a wet weekend.

Eric Cremers

I heard we needed 12 inches of rain we got is like two to five, so we are still kind of in semi-drought conditions down there.

Gail Glazerman - UBS Securities

Okay. And seems that there is not a huge…

Mike Covey

No. Very small numbers.

Gail Glazerman - UBS Securities

And I guess one last question which I know you addressed in last earning calls, but I'll ask anyway. With lumber prices where they are, the export taxes on Canadian lumber have come down. I guess partially offset by the recent run off in the Canadian currency but any response out of Canada, China slows, US looks little a bit more attractive?

Mike Covey

No and there was a period here for just a few weeks' worth of tariff, I think we are all the way to zero. Okay in Canadian softwood lumber under the structure of the agreement, talk to our lumber sales group, by the impact we’ve seen in early. I think Canada has built longstanding relationships with many of these China customers. In many cases they've committed the mill capacity to its customer in China in much of the Pine beetle kill material is not suitable in the US market at least at this level of demand. And we’ve really seen no change in Canadian supply to US. In fact I think the numbers I just read are North American, the US portion of exports in Canada is around 25% to 26% and has been 34%, 35% historically. So it’s way down. I think it's going to stay that away for a while.

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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