Jerry Richards - VP and CFO Mike Covey - Chairman and CEO Eric Cremers - President and COO.

John Babcock - Bank of America Gail Glazerman - Roe Equity Research Collin Mings - Raymond James Ketan Mamtora - BMO Capital Chip Dillon - Vertical Research Paul Quinn - RBC Mark Weintraub - Buckingham Research Steve Chercover - Davidson.

Good morning. My name is Karen and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Second Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer-session.

[Operator Instructions] I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed..

Thank you, Karen, and good morning. Welcome to Potlatch's investor call and webcast covering our second quarter 2017 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer. This call will contain forward-looking statements.

Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com.

I'll now turn the call over to Mike for some comments, and then I will cover our first quarter results and outlook..

Thanks, Jerry. Good morning. We had an outstanding quarter led by lumber prices. The strength in our financial performance is even more notable given that the second quarter is typically our weakest quarter of the year due to seasonally lower harvest volumes.

Touching briefly on our three business units, the Resource segments strong second quarter earnings were driven by a 26% increase in Northern sawlog prices. This price increase was primarily due to the effect of higher lumber prices on indexed volumes. In addition cedar sawlog prices remain very strong.

The Real Estate segment closed 64 transactions in the quarter and traffic was robust, indicating that interest in our rural recreation property remains high. Our mills are operating extremely well on all key performance indicators including improvement and safety.

The Wood Products segment also set new lumber shipment record and generated its highest quarterly profit in over a decade. The quarter also demonstrated our geographic diversity and the benefited participating in a variety of different regional lumber markets. Looking ahead, we remain very bullish on lumber prices for a number of reasons.

In our view, distributors were caught with lower inventories in early July. They need to replenish came at a time when curtailments caused by the forest fires in British Colombia reduced supply. In addition, the Canadian dollars recently strengthened about 6%.

As a result of those factors, Western SPF prices spiked upward and southern yellow pine prices have turned positive. As random lengths reported, the shortage in Western SPF lumber has also pushed lumber prices for certain species in the England region to record highs. This is very positive for both our St.

Maries, Idaho sawmill and our Idaho Resource business, which indexes the prices of sawlogs to inland lumber prices.

We were pleased to see the stronger housing start numbers for June, including higher single-family starts, which are important to us given that a single-family unit uses about three times the lumber, the amount of lumber as a multi-family unit.

Building permits at a seasonally adjusted annual rate of 1.25 million units indicates that the volume of lumber needed to build houses will continue to grow. Demand and repair and remodel segment which uses more lumber, the new residential construction remains robust.

This translates into very strong prices from premium studs manufactured by our Great Lake sawmills. The preliminary antidumping duty levied at the end of June was generally in line with our expectation and it is an important step and the process to allow the U.S. industry to grow to its natural size.

We continue to believe that a market share based quota is the appropriate long-term solution. We expect the lumber prices will remain volatile as the preliminary countervailing duty expires at the end of August, as well as when and if Canada and the U.S. reach a settlement in the trade case.

Our priority for cash that we are accumulating due to strong lumber prices remains bolt-on timberland acquisitions with attractive returns. We have completed a few small transactions and continue to evaluate opportunities adjacent to our timberlands.

We expect our third quarter earnings will exceed the second quarter result we reported today due to seasonally higher harvest volumes in our two operating regions. In addition, we expect we will continue to benefit from solid lumber prices relatively historical norms and strong lumber shipments.

2017 is shaping up to be an excellent year and we are bullish about Potlatch's prospects going forward. I'll now turn the call back to Jerry to discuss the quarter..

Thanks Mike. Beginning with Page 3 of the slides accompanying this call, we reported net income of $24.3 million or $0.59 per diluted share in the second quarter. This compares to net income of $16.9 million or $0.41 per diluted share in the first quarter. EBITDA was $48.1 million in the second quarter, compared to $35 million last year.

I'll now review the results of our operating segments. Information for our Resource segment is displayed on Slides 4 through 6. Operating income for the segment was $19.5 million in the second quarter compared to $14.9 million last quarter.

The increase in earnings is largely due to significantly higher sawlog prices in the North, which more than offset seasonally lighter harvest volumes. I'll provide more color as I cover each region. Turning to Slide 5, Northern sawlog prices increased 26% and averaged to $115 per ton for the quarter.

The effect of higher lumber prices on our index volume was a single largest factor that drove this increase. Demand and prices for cedar sawlogs continue to be very strong. Cedar sawlogs represent a slightly higher percentage of the Northern sawlog mix in the second quarter. We delivered 334,000 tons of sawlogs in the North in the second quarter.

This is a normal seasonal decline in volume due to spring break-up. I will now turn to the South on Slide 6. Logging conditions were challenging due to heavy precipitation. As a result, our harvest volume of 453,000 tons in the second quarter was lower than the first quarter.

We expect to make up the minor shortfall relative to our plan in the reminder of the year. Sawlog prices in the South weakened 2% in spite of reduced supply caused by wet weather limiting logging access. Logs have been sufficiently available to prevent price tension, if in the region.

Results for the Wood Products segment are displayed on Slides 7 and 8. Operating income was $24.7 million in the quarter, which is almost three times higher than the $8.7 million earned in the first quarter. The increase in earnings was driven by higher lumber prices and shipment volumes, which were up 11% and 13% respectively.

The increase in our lumber prices outpaced the Random Lengths Framing Lumber Composite, primarily due to strengthen our Great Lake stud prices, which speaks well for a geographic diversity.

In addition, in April this year, we entered into a lumber price swap and locked in the price on 36 million board feet of southern yellow pine lumber that will be delivered in the second half of 2017 at $425 per thousand board feet.

We recognized the gain of $3.3 million in Wood Products results to reflect the value of the swap as of the end of the first quarter -- for second quarter, excuse me. All the mills are operating well and as Mike said, the segments quarterly shipments -- records for shipment volumes and operating earnings.

I will now shift to our Real Estate segment on Slides 9 and 10. Real Estate’s operating income operating income was $5.8 million in the second quarter, compared to $8.6 million last quarter. The average sales price decreased from $2,200 per acre in the first quarter to a more typical $1,500 per acre in the second quarter.

Last quarter’s average price was elevated primarily due to a large conservation sale in Alabama, for almost $2,600 per acre. Second quarter sales were more heavily weighted to recurring sales of Minnesota rural recreational real estate than the first quarter.

Turning to financial highlights on Slide 11, we ended the quarter with cash of $110.3 million. We also have $249 million available on our revolver. We repaid $5 million a medium-term notes that matured in the quarter. We have $20 million of long-term debt maturing at the end of 2017 and early 2018 that we expect to repay with cash on hand.

This debt has a weighted average interest rate of 6.4%. Capital expenditures were $5.5 million in the second quarter excluding acquisitions. A high return project is planned in our Warren, Arkansas lumber mill in the fourth quarter that will not required any down time. We were on track to spend capital of $27 million this year excluding acquisitions.

Now I’d like to comment on our outlook, which is summarized on Slide 12. We expect to harvest between 1.3 and 1.4 million tons in the third quarter. The increase in volume relative to the second quarter is normal and is due dryer more favorable logging conditions.

We do not currently anticipate any curtailments due to fire risk given the amount of snow, we had in Idaho last winter and summer temperatures have been normal thus far. Slightly more than half of the total harvest volume in the third quarter is planned to occur in the South.

Sawlogs are anticipated to represent approximately 90% of harvest in the North and 45% of the harvest in the South including stumpage. Our outlook assumes that our average Northern sawlog price will decline about 5% per ton in the third quarter. We expect Southern sawlog prices to increase about 15% in the third quarter.

This is primarily due to a higher proportion of hardwood sawlogs in the sales mix. We do not foresee any appreciable change in the price of southern yellow pine sawlogs.

Resource earnings would increase about $20 million in the third quarter compared to the second quarter as a result of seasonally higher harvest volume and based on these price assumptions. Turning to Wood Products, we expect lumber shipments to be 190 million board feet in the third quarter.

Our forecast which we developed early in July anticipated that the countervailing duty would not be collected for the month of September, leading to buying behavior that would cause lumber prices to be up about 5% to 10% in the third quarter compared to the second quarter; however, the recent fire events in British Colombia low field inventory and the stronger Canadian dollar all introduced uncertainty and volatility to outlook, which maybe conservative.

Wood Products earnings would be about $15 million at these volume and prices. This is a strong result and would be the segments second highest quarterly earnings in the last three years.

For Real Estate, we estimate that we will sell about 2,500 acres at an average price of $1,400 per acre and that land basis on the quarter will be 15% to 20% of revenue. We expect that corporate expenses will be about $10 million and net interest expense will be $7 million in the third quarter.

We estimate an annual tax rate of 15% to 20% for the full year of 2017. The consolidated tax rate should be 10% to 15% in third quarter as seasonally strong Resource earnings are not taxed. Overall, we are very optimistic about the third quarter and the year and expect earnings to be higher in the third quarter compared to the second quarter.

Our volumes will hit a seasonal peak in the third quarter. We also expect lumber prices to remain relatively strong which benefits our Wood Products and Northern Resource businesses. That concludes our prepared remarks. Karen, I would now like to open the call up to Q&A..

[Operator Instructions] And your first question comes from the line of George Staphos of Bank of America..

This is actually John Babcock in line for George. First question I just had for you was, with the continued improvement in lumber market and obviously like the peak earnings you had during the quarter.

I was wondering if you could remind us of the various factors that you guys consider when thinking about the dividend?.

John, this is Mike. Well, certainly the reason strength we have had over the last few quarters in the lumber market has helped build our cash balance which continues to grow. We have long said for some time that we would look for improvement in southern yellow pine sawlog prices to be the catalyst for another dividend increase.

The last one we did was almost three years ago. Well, I think as our cash balance grows and time goes by with housing continue to improve another fundamentals improving, I think there is kind of more likelihood that we will step up the dividend in advance above the increase in southern yellow pine sawlog prices.

Because we have the really the financial comfort to bridge if you will to get through a period to support a higher dividend until those log prices to move up in the South. Also our Northern segment Resource business has been significantly stronger than we anticipated.

And fundamentally, we want to underpin the dividend with earnings from our timber business, not our Wood Products business. So that gives us more confidence..

Thank you.

And then with regards to the lumber business again, I was just wondering if you can talk about whether this kind of 190 million board feet level production or shipments whether it's sustainable and ultimately what you are general operating rates are at this point?.

Yes, so this is Eric. Yes, we do think that 190 million feet number is sustainable in fact as we've demonstrated over the past several years we are always looking at ways to increase capacity that increase throughput at our mills.

We have several projects that were contemplating for later this year or next year and beyond that we will continue to drive those production volumes higher. So I wouldn’t expect just to stop at this 190 million foot level that we reached here in Q2 when we expect again in Q3 we expect to drive that number higher longer-term..

And could you talk a little bit about those potential projects that could raise the product heavily?.

Well, there is a variety of projects at a number of different mills I mean one simple one that we are looking as to give you an example is out of our St. Maries sawmill, we are currently constrained. The team has done a fantastic job driving productivity and throughput at the mill and now we find ourselves constrained with our drawing capabilities.

And so we are considering a project at that mill for next year that will drive volume higher there something like who knows $20 or $30 million feet of incremental production. That just gives you a sense for the kind of stuff we are working on..

Okay, and on that note I was wondering if you could talk about generally the industry as a whole, I mean, have you seen more interest in adding capacity in our lumber market with the duty that were in place in the U.S.?.

I don’t think the duty's or a catalyst added capacity in any way I think the fundamentals in lumber business have been good for a while the margins particularly in the South have been really strong for the last few years. The capacity additions that we see largely are in the U.S.

south and there are number of those in our wood baskets and we've seen a couple of new projects of brand new mill just started in Shelton, Washington on the West Coast. But I don’t think the duties have anything to do with the capacity additions.

I think it's more a function of people look we were at in the housing cycle and they think there is going to be reasonable returns in the business and so they had capacity..

And your next question comes from the line of Gail Glazerman of Roe Equity Research..

I guess just to start.

Can you give a little bit more color on the small acquisition you think you did? And then just broadly speaking, what you are seeing on the land markets, for timberland?.

Yes, Gail. So, there are continuous to be ample amounts of capital pursing acquisitions in the timberland sector. We've now got three smaller transactions under contract, one-year contract. And they are all relatively small as Mike said.

I would tell you that we bought them at discount rates in the 5.5% to 10% kind of range, and they add volume to our outlook, and they are bought at attractive prices. So we're happy with those acquisitions and we continue to kick the tires on others as well..

Okay. And can you just talk in a little bit more detail about the price gaps and trends that have developed across various lumber grades? It seems a bit more extreme than normal.

And any sign that that trying to flow to southern yellow pine?.

Yes. Gail. So, historically, southern yellow pine is traded at who knows a $50 premium to SPF lumber. Of course depending upon what is happening in local markets, this premium could be above or below that premium.

The imposition of duties that we saw in Q2 and there is subsequent pass-through to buyers followed by recent fire related curtailments in British Columbia have caused SPF 2/4 to now rise to a premium to southern yellow pine 2/4. We expect this to reverse as we move through the year.

And especially when we get to Q4, when markets are preferred southern yellow pine like the trading market or when Southern U.S. housing really kicks into gear and you see slower construction in the Northern markets, we expect that pricing trend to reverse..

Okay.

And then just broadly speaking, any anecdotal signs on how the markets are adjusting to the duties? And just would you think and I guess we're pushing August, if you think that come September there wouldn't be duties in place or return of fee, producers kind of kind of pullback volume and anticipation being able to sell without duties?.

As we said in our prepared remarks, Gail, we expect it to see some weakness in the lumber market in September when there was a -- when the CV duty fell off for a four-month period of time or so to a commerce makes the final determination.

We expect that to happen, but I think that recent wildfires, supply shortages, strength in the Canadian dollar, I think a lot of distributors got caught [indiscernible]. We have not seen evidence the people are backing off the buying other [indiscernible].

So, as I was saying, we’ve not seen market behavior that would indicate that people have backed off yet. But as we get closer to the end of August and the exploration of the CVD duties with the suspension of them for a few months, we’ll have an update in a few weeks. But so far, [indiscernible]..

Okay. And just in general, what are you seeing inflow of Canadian would in the U.S.

I guess year-to-date, data tends to be a bit lagged, but any insights there?.

Yes, Gail. This is Eric, and I think it has slowed a little bit. We’re hearing things are picking up over in China, so I think there has been a little bit of a slowdown of Canadian would come into U.S. But I don’t know that, that's related to this duty situation coming up in the third quarter..

And your next question comes from the line of Collin Mings of Raymond James..

Just following up on John’s question, should we think about really caused some 160 million board feet to just kind of a minimum annual production run rate going forward.

I think in the past, it obviously to the response to your earlier question, I’d stepped up overtime, I think the most recent number you guys have kind of thrown out they were maybe around 720 million board feet.

But should we think about 760 is kind of the minimum run rate and then potential upside give us the project you’re looking at?.

Yes. So Collin, so production does vary by quarter, there is some seasonality in Wood Products business. When you get into those colder months, in those colder climates, our late stage mill in particular, logs get brittle and productivity does slow down in the mill.

So, you will see Q1 and Q4 levels a little bit lower than the 190 some million feet that we have here in Q2 and we expect to get in Q3. I think the way to think of it is that for the year we will probably finish somewhere between 725 and 730 million feet.

And as I mentioned, we are working on stuff for projects for next year that we will expand capacity further. I'm hopeful that we can get another 20 million seed next year. And so you can think of modeling 725 or 730 for this year and potentially up to 750 for next year..

Going back to the prepared remarks, you touched on a little bit as far as the swap, a gain recognized in the quarter.

But maybe just, can you expand on that a little bit more? And then to what extent might you look at other options so just walk in the favorable pricing environment?.

Yes, so Collin, we've had a relationship with Koch Industries for many years regarding these lumber hedges. And I think the last one we did was probably two to three years ago, and we are net positive with those hedges.

So, back in April when we are always getting proposals from Koch by the way, but most of them we quickly reject because their prices that are typically below where the market is trading at. In April, they gave us the proposal for southern yellow pine 2/6 at a price of 425 bucks a thousand.

And at the time lumber, southern yellow pine 2/6 was trading below that, it was our call was 450 maybe something like that. And I think we looked at it and we said, jeez, this looks like a pretty high price, things are looking pretty toppy here.

And so executing this hedge effectively would amount to us committing roughly 10% of the Company's volume at that price which we considered to be pretty high toward -- obviously making a better all the Company's volume just a 10% one product and one species.

And I wouldn't say we got lucky I think we were right in our analysis that lumber prices were getting toppy and in fact after we executed the trade southern yellow pine rolled over and rolled over all the way down I don’t know 340, 345 something like that.

So, the accounting rule was that you book the gain, and I'll let Jerry speak to that, if you have questions on that. But the accounting rules that you booked the gain, even if you are not into the period where those cash payments going back in force.

So, anyways, so now that we booked to $3.3 million gain, the southern yellow pine does rally, we will have to reverse some of that gain but we are pretty happy with that trade right now obviously..

And I guess your appetite for doing structures like that going forward, you just said that you kind evaluate on one by one basis?.

Absolutely, it's always one by one we have to think about the volume in coming track because there is a lot of paper work involved there is a lot of accounting we have to get board approval. So we won't do it in small volume and we won't do it unless we think obviously the price offered is pretty attractive..

And then maybe just Jerry just along those lines given more pricing is currently.

What would be mark-to-market adjustments here thus far in 3Q?.

Yes, for me the best way to think about that Collin is, Eric talked about the price that we walked in was 425 bucks a thousand. The average forward curve price at the time when we marked that was about $330 per thousand, so as southern yellow pine moves up and again the other key metric is, the volume is about 6 million feet per month.

So in terms of move from that 330 that I just threw out that would be a way to kind of calibrate what the P&L adjustment might be..

Okay, that's helpful. I did want to go back to just upside in the Resource results for the quarter and I know we've discussed this really at length in the past in our prior calls.

But just maybe just remind us a little bit as far as the index thing in the Northern segment in Idaho, just given that the upside there really seems to be more than I know that we were expecting and it sounds like based on your initial forecast, you guys put out there in April for the quarter, there was upside relative to that.

So maybe just, how much that was driven by the specific kind of the specific species in grade that you guys track for index? And how much that was driven by the cedar pricing? Any additional color there just to give us a sense of how to think about that going forward would be helpful?.

Yes, so Collin, it was a great quarter for our Northern Resource business. We saw a strong pricing gain across the spectrum. As you may recall, 70% of our Northern sawlogs are indexed to the price of the WWPA lumber index. So it's not a Random Lengths' index. It's the WWPA's, so it was western species, western dimension.

Into the third quarter, we just did see some pricing gains from cedar, but importantly we saw a 29% increase on those other mix sawlogs driven by those higher lumber prices. So even though cedar was important component to the overall price increase, we saw a price increases on mix sawlogs as well.

So, really, it was driven by a combination of factors, not just cedar..

And that's very helpful. One last one and I'll turn it over. Just curious, given broadly speaking, there have been some concerns to start the year about pulpwood pricing in the U.S. South.

Maybe just kind of what's your take on that? Obviously, some potential on the kind of outskirts or some of your markets, some mill restarts, potential when OSB restart there.

Just kind of what you're seeing in the pulpwood side?.

Yes, so pulpwood pricing has been a challenge in the U.S. South, particular pine pulpwood. There has been a lot of silviculture investments in the U.S. South over the past couple of decades and that's resulted in a force to grow as pretty fast and need spending.

And so pulpwood has been under pressure, and we are encouraged the increase consumption of pulpwood in the U.S. South, its I recall the assumption was about a 110 million tons per year across the U.S. South back in '06 and we're now looking at about 116 million tons per year of consumption across U.S. South.

As you pointed out in your note, Norbord is starting-up new an OSB mill in Alabama, Eastern Alabama, little bit outside of our wood basket, but as you know these wood baskets tend to overlap and what happens in one can work its way over into an adjacent wood basket. So we're encouraged by all the capacity that's going in the U.S.

South, and at some point time, we will see prices reversed both the pulpwood and for sawlogs in the south. But it looks like it's not going to happen this year..

Your next question comes from the line of Ketan Mamtora of BMO Capital..

First, I just want to go back to the lumber dispute. There was a lot of discussion over the past couple of weeks at a settlement that was likely. Any thoughts on that, what you guys are hearing.

And then, if you don't get a settlement over the next few weeks, do you think lumber gets rolled into the broader NAFTA negotiations? And that could mean, it could take a pretty long time to get the settlement?.

Well, there had been rumors that Secretary Ross and his Canadian counterpart had made some kind of a handshake deal on the Canadian lumber settlement, but I don’t think that there is any -- no substantiation to that those rumors that we’re not aware an agreement.

As far as we know, the two governments continue to discuss the lumber trade case separate in the part from NAFTA, although as understanding that the administration would like to get this result before January of 2018 and kind of the commencement of NAFTA discussions.

I have no idea of lumber will get rolled into NAFTA But I guess, we all say as hopeful as we are that we can see a solution, in our quarter based solution over the next few months. I’d also go back to 2006 in the last trade case, I think it took five years from imposition of duties in 2001 until the agreement was signed in ’06.

So, this is not necessarily going to be quick..

All right, that's helpful. And just switching gears to M&A. I know you talked about bolt-ons.

But can you talk at a high level, your appetite for kind of larger acquisitions in timber? And willingness to issue equity for the right kind of a deal?.

Sure. We’re always trying to find significant size acquisitions that are around our geographic footprint in the Central U.S. South or in -- or the England West that complement our timberlands and that we can execute with synergies and make sense. There are limited numbers of those. They’ve been expensive.

And southern yellow pine timberland trade is still at quite lofty prices, so it’s hard to find things that we can execute that add to shareholder value. We have no interesting getting bigger, just for the sake of getting bigger. We have to find acquisitions that can help improve shareholder value.

And I think the same thing would take the financing of the transaction. First thing is finding a deal that makes sense in this price rate and second is how do we financed it and issues of equity to depend where our stock trades at the time or our excess to that markets in the overall size of the transaction..

Got it. That's helpful. And then just one last one. I want to go back to dividend. You mentioned that you might look at increasing dividend before the real in Southern sawlog pricing.

Would you be able to provide any parameters? Or would it be fair to say that maybe there's kind of a full dividend, which is linked more to the Resources income? And then, a variable component which moves with Wood Products income or EBITDA?.

No, I think we continue to look at the cash flow stream from the whole company and all of our business segments and how we think those are going to unfold overtime.

And as long as we can see a sustainable past to cash flow from the Company, I think that would prompt to the Board to increase the dividend and certainly our cash balance, if it continues to hold gives some cushion if you will until we see the improvement in overall market especially in the South, but we will have to wait.

So, we typically review that on the fourth quarter, Ketan, and I don’t think that will be any different this year. So, I think we’ll cover that then..

[Operator Instructions] Your next question comes from the line of Chip Dillon of Vertical Research..

I just want to make sure we handle this lumber swap correctly. It sounds like it’s a smart thing to do from time-to-time. And I guess the first question is you mentioned that, there is about a given amount of deliveries you have to make each month. I think did you say 6 million square board feet.

How many months into the future does this contract do you have to make deliveries against it?.

Yes, so Chip. This is Jerry. In terms of the volume that we have locked in price, it is 36 million feet in total for the second half of the year and it covers 6 million feet per month starting in July. So, every month, we will cash settle 6 million feet and they will solely amortize when we get to the end of the year..

And just to be clear, Chip, we are not actually delivering to them against their contract. We are producing and selling lumber to our customers like we always have. This was purely a wage with Koch..

But you have locked in the 425 as what you are saying in essence?.

Correct..

And so you might deliver another customer to lower price, but they have to make at the difference?.

Exactly..

If it's lower and if it's higher, you have to make at the difference, I see. And so this will -- onlyl last question, I am starting get into the wage -- let's just say three months from now or more importantly in the fourth quarter.

Would the bookkeeping adjustments or the non-cash adjustments be based on what's left to be delivered on the contract? Or would it be based on all 36 million feet, let's say for looking at the fourth quarter?.

So, Chip, this is Jerry again. It would be based on what's remaining to be delivered. So once we cash settled on July for example, July is done, close the books on that. And any remaining adjustments would only be august through the end of the year..

Last point is, are you going to identified what the amounts are that you're marking the market these next two quarters so we can figure that out?.

Absolutely, in fact, Chip, we in -- for test in press release, you can see but there is a row separate in our income statement where we highlighted swaps specifically and we will continue to do that through the remainder of the contract period..

And let's just say the prices stayed exactly where they were on the last day of June, I guess this what you market by, then there would be no more adjustments and the 3.2 million or whatever is kind of yours to keep.

Is that a fair way to look at it?.

You are absolutely correct..

And then as you think about the -- I know a couple years ago -- or excuse me 18 months ago, you might remember those cases when the stock was $25 and you all had a big arbitrage buyback plan.

I don't -- since you guys have buyback stock much and I didn’t check the statement closely this morning, but are -- what is your thought about buying stock here versus buying land?.

So, Chip, This is jerry again. The last time we very purchased stock was about a year ago right after we put that authorization in place when bought 169,000 shares for about 6 million. And we bought no shares since that point and time.

And I think as you alluded to in your comments to your question, our stock prices had a really nice run and quite frankly repurchasing stock has become much less attractive than -- and our priority right now would be to find both-on acquisitions as both Mike and Eric have commented that have attractive returns.

So that’s where we will spend that dollar as opposed to be purchasing our stock at this point..

And this seems like as in the past that even with the great results in with products that’s not really where you are looking or would you actually look to add more lumber making capacity?.

No, we will certainly look at these incremental projects at existing facilities that Eric alluded to that you each of those cost $3 million or $5 million to add some capacity or improve efficiency, but we are not pursuing standalone manufacturing facilities to add to our portfolio.

If they were coupled with timberland and had a timberland component that was integrated with the Wood Products manufacturing facility weather it was lumber or plywood or something else, we'd certainly look at that..

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

If we can spend a couple of minutes on the U.S. South here. Just trying to understand what's going on with log markets, both on the sawlog side as well as the pulpwood side. So it's look it looks like you're describing that sawlog price being down 2%.

Maybe if you could give us a sort of an idea as to how that price realization changed between Arkansas and Alabama and Mississippi? And then also, just with the price being down, it looks like it's a factor of whether mix versus hardware hardwood in there. But generally, when we see wet weather in the U.S.

South, we obviously see a rise in price so just trying to understand that as well..

Yes, so, Paul this is Eric. I'll try to address the first part of your question which is what happened to pine prices in the South. Our prices did decline about 2% from quarter one to quarter two. Pine prices were either flat to modestly up within our three different markets, flat now in Alabama, up 0.3% in Arkansas and up 2% in Mississippi.

What cause that decline in sawlog pricing from Q1 to Q2 was really driven by hardwood mix, it went from 6% in Q1 to just 3% in Q2, that's a seasonally lower quarter for us for hardwood mix. And that's really what drove that decline from Q1 to Q2..

And to your point about what weather typically cause intentional in log markets, I can certainly agree with that. I don’t know if it didn’t last long enough this time or we were too close to the period when it was going to dry out or people just took advantage of markets and supply was plenty full.

But we did not see pretty what quarter end and at least in our operating area in 2Q, we just didn’t see attention in the market due to weather like we do expect..

Okay. And then just flipping over to pulp. We have pretty strong pulp markets here for the last six or nine months. And container more is rocking along as well. Just trying to understand why that pulp price seems to continue to track lower, despite, I would say, the robust demand. Is that a function of increased lumber production in the U.S. South, i.e.

chip production and therefore the pulp logs are having to compete with residual chips?.

Yes. I think, Paul, certainly a component is increased production coming out of lumber mills. But I think it also is a part of dysfunction of the increasing silviculture investments made in U.S. South 10 to 20 years ago. Those trees are now getting to an age where they need thinning and that's a smart silviculture treatment.

And therefore those logs need to find a home. So, certainly, the extra lumber production is driving increased residuals, but I think the silviculture is an important component..

You have some discretion with the plantation is to when you elect to clear cut it for final harvest of age 25 or 30 or whatever, but you don’t have flexibility on the time that it needs to be thin. You have to do it and so the wood comes to the market..

And then, just overall, we're seeing in the South here, a sort of the continued discipline on the sawlog side. It looks like supply is going to be plentiful in the pulp long side. Just wondering why timberland pricing in the U.S.

South continue to trade upward or trading in? And why you wouldn't see a lag down in those -- given the rising interest rate environment?.

So there is a lot of, that timberland pricing in U.S. South is justified by a forward price curve that anticipates price is moving higher. What would drive those prices higher, obviously increased consumption of sawlogs. Where we’re going to get that increased consumption? The increase still going in the U.S.

South and we’ve talked about in prior year, but there is something like 12 million tons of incremental capacity going into our three states Arkansas, Alabama and Mississippi, a total of I don’t know 15-16 projects. So eventually that first quarter price curve will be realized, it’s just a question of when, I think not if..

Okay, it sounds like that slope of the curve looks like 50% gray to be able to get the current price down there. Maybe I'll just ask you one last question on the timberland transactions that you've got under contract the three that you talked about.

How material is that in terms of dollars amount? Is that like less than $10 million in total?.

Yes. It’s less than 10 million, Paul. These are not big transactions, but there are accretive. They fit nicely with our existing operations. They're great fit. They are done at value creating price levels. They’re logical for us to do. I’m glad that we’re nimble enough to be able to consummate more deals like this..

But it's not material enough to affect their cash balance?.

No, no..

And your next question comes from the line of Mark Weintraub of Buckingham Research..

Just wanted to -- first, just following up on, Eric. You mentioned 12 million tons coming in, in your Southern geography of demand.

Was that saw timber and pulpwood? Or was that just for saw timber?.

That’s for both, Mark. It’s roughly 5 million of sawlogs and 7 million of pulpwood..

Okay.

And also what based, just trying to get a sense as to what type of percentage increase that would represent on the saw timber side in particular?.

Well, I can give you one statistic that I know, which is that in Arkansas pre-downturn, 12 million tons per year of sawlogs are being consumed that dropped to a lower 6 million tons year, now it's now back up to 7. And I would tell you that these projects represent about 2 million tons of incremental sawlog consumption in that state.

So, we’ll take it from 7 million today to 9 million more or less, compared to 12 million, which is where we’re at pre-recession..

Okay. So hopefully more to come still, and I take it though in earlier question have been asked into this regard. Is there anything specific that would be -- for instance, there's obviously a couple of plywood facilities that went down.

Anything that seems to be getting closer to fruition that might give you greater confidence on being able to estimate the timing of when that attention in the South can lead to better pricing?.

It’s really hard to predict, Mark. There is no one project you can point to. That’s going to make or break the wood basket. It’s a cumulative effect of those projects. So to give you a sense of it, some of these that I’m looking at out, I got a list in front of me.

Some of them are an incremental production coming out of the mill, that’s just 200,000 tons of incremental consumption per year. You have that in the low end and then on the high end, you have got some papers which -- we are still optimistic that’s going to go in, down in Arkansas and that's 3 million tons per year.

Certainly, that would move the needle. But most of these are 500,000, 600,000, 700,000, 800,000 tons a year that individually aren’t going to probably move the needle on pricing in a wood basket, but cumulatively they will..

I guess I'm just trying to think through, as you pointed out you are making terrific money in the lumber business and those businesses tied to it, and that you could use that the cash that you built on your balance sheet to help bridge a period of time where you maybe want to increase the dividend in front of southern lumber pricing actually improving.

I'm just trying to get a sense is to how you can get that comfort or clarity or when you think that southern timber can indeed can move or do you -- are you willing to recognizing that there is a lot of uncertainty move on the dividend with an expectation that's reasonable that it could be better within two years, say, and then if it is, you have to adjust accordingly.

Is that the way to think about how you would likely approach it?.

Yes, we are building a long bridge, so I think with the cash balances that we have on hand and I think our optimism about the Northern Resource business and the Wood Products business that I think it's reasonable that a modest increase to the dividend certainly is not going to heed into that and give us any discomfort that we have to turn around and change the dividend in the couple of year fund, if that was the case, I don’t think the Board would move ahead..

And just curiosity, from a financial leverage perspective where your business is now.

Are the debt levels that you are carrying, are those roughly where you want them to be? Would you take it down some? Or where -- where would your thinking on that quarter to be?.

So, Mark. This is Jerry. I think we are at in terms of leverage EBITDA basis about 3.3 times, so that’s very comfortable and I think down into the kind of investment grade range. That’s based on trailing 12 month EBITDA. So, I think debt levels are certainly very comfortable. We have a lot of financial flexibilities to un-tap revolver.

But having said that, like I said, we have some high interest rate -- higher interest rate loans that are coming due, we have a strong cash balance. So, I think in the near-term our anticipation we continue to pay maturities as they come to, at least from the next 18 months or so..

And then lastly, along with the handshake there rumored from related to the softwood lumber agreement. There were also some numbers out there on potential quota levels of 27%, 28%.

Do those types of levels fit the type of -- Mike, you had originally said, how quotas make the most sense from your perspective? Is that the type of level that makes sense? Because -- or any color you can provide there..

Well, to be clear, I think there was rumor of the handshake and we have no way to confirm that there was or wasn’t. We don’t think there was any understanding, but we really don’t know. The U.S. softwood lumber coalition supports the quota based system that has quota levels that kind of or as high as 28% or may have to step down to that.

But certainly in our perspective, 28% is a final settlement point where kind of be at the higher end of what we would hope to be achieved. Hopefully, it's lower than that, that’s a framework for discussion certainly..

And your last question comes from the line of Steve Chercover of Davidson..

Thanks, a bit late in the call, but just couple of questions. In Q2 despite the duty that Canadians were happy to ship to the U.S.

So why is your expectation that they would pullback or I guess the prices will come down because there will be full throttle I mean are they already pull throttle on their volumes?.

Well, I don’t know for sure, Steve. I think that certainly with the CVD, there are some companies have more punitive CVDs and others.

And I would expect that the behavior by different companies to change depending on their CVD level, but I think the rational person would look at the market and say, if duties that roughly 20% are going to go away starting on August 28th, wouldn't you expect people to ship more lumber after August 28th and before.

And I think that's our thinking drove us to believe that they would be downward pressure on lumber prices when the CVD expires..

Yes, I mean I agree with you with respect to the direction of lumber prices. I guess just from the volume perspective, I think it's still pretty lucrative.

And then switching gears a little bit, for the bolt-on transactions, did you say that the discount rates were 5% to 10%? Could you tight not up a bit?.

No because there is a couple of different transactions here Steve and one is that the low end that 5.5 and I'm looking at one at the high-end it's 10%. So it's range..

Got it. But would that be up unit the low end 100 basis points or 200 basis points over the last couple of years is that representative of, if you could find some bigger deals would that be appropriate discount rates..

That's something if it was a larger transaction in the U.S. South, it still be down enough who knows 5.5% range yet. And I think the survey data that I've seen for Idaho is that it's slightly higher or it's maybe 6%. I think size more and size more but that a survey and it's a little bit higher in Idaho, but it's pretty low as well..

And there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks..

Very good. Thanks Karen. And I'd like to thanks everybody for your time and attention in the call this morning and look forward to catching up as we move forward..

And this does conclude today's conference call. All participants may now disconnect..