Potlatchdeltic Corp (PCH) 2008 Q3 法說會逐字稿

Good morning, my name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Third Quarter Results conference call. (Operator Instructions).

Hosting today's call will be Eric Cremers, Potlatch Chief Financial Officer and Mike Covey, Potlatch Chairman, President and CEO. Thank you. I would now like to turn the call over to Eric Cremers. Please go ahead, sir.

Good morning, this is Eric Cremers, Chief Financial Officer for the Company and joining me is Mike Covey, our Chief Executive Officer, and Gordon Jones, the new CEO for Clearwater Paper. After taking you through our quarterly results, Mike will provide some comments regarding the outlook for Potlatch and Gordon will share his initial thoughts on the outlook for Clearwater Paper.

Before we begin, let me remind you that this call may contain forward-looking statements within the meaning of the US Securities laws. These statements include statements about the Company's future business prospects and anticipated performance in upcoming quarters. These statements are not guarantees of future performance and the Company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For discussion of certain factors that may cause actual results to differ from the results anticipated, please refer to Potlatch's recent filings with the SEC. Also please note that segment information as well as a reconciliation of non-GAAP measures can be found on our website www.potlatchcorp.com as part of the web cast for this call.

I would now like to discuss our third quarter results.

We have reported third quarter 2008 net income from continuing operations of $25.7 million, or $0.65 per fully diluted share, as can be seen on page 3 of the slides accompanying this presentation. This compares to net income of $42.5 million, or $1.08 per fully diluted share in the third quarter of last year, and $22.3 million, or $0.56 per share in the second quarter of 2008.

I would now like to shift gears and talk about our third quarter results, broken down by segment. Our Resource segment results for the third quarter were well-above the prior quarter but below the third quarter of 2007. Operating income for the segment in the third quarter totaled $30.8 million, compared to $12.2 million in the prior quarter and $38.2 million in the third quarter of last year. In comparing the third quarter of 2008 with the third quarter of 2007, higher fee harvest volume was more than offset by slightly lower prices. Across the whole company, year-over-year fee harvest volumes were up 6%. In the Northern region, fee volume was 12% higher as logging conditions were ideal in Idaho. Our Southern region fee volume was down 4% due to the challenging logging conditions from all the wet weather from hurricane activity.

As noted, lower prices contributed to the negative earnings variance in comparing to the third quarter of last year. But third quarter 2008 prices were higher compared to the second quarter of 2008. Overall prices increased sequentially approximately 3% in the Northern region, and increased approximately 7% in the Southern region, primarily due to strength in pulpwood pricing. In comparing to the third quarter of 2007, overall prices have dropped approximately 4% in both regions, with strength in pulpwood pricing more than offset by weakness in saw log pricing. We continue to monitor prices carefully, and as Mike will comment in a minute, prices haven't dropped enough for us to defer harvest activity.

Our Real Estate segment closed land sales totaling $6.5 million during the third quarter, producing $3.2 million of operating earnings. This compares favorably to last year's third quarter operating earnings of $2.4 million, but below the second quarter's earnings of $11.3 million which included the second phase of a non-core land sale of nearly 19,000 acres in northern Minnesota.

Our Wood Products segment remains under pressure due to the prolonged slump in housing starts. We did manage to produce operating earnings of approximately $800,000 for the quarter, above the $200,000 loss we experienced in the second quarter, but well below the $4.6 million we made in last year's third quarter.

In the third quarter, hurricane Gustav forced nearly 9 shifts of down-time at our Warren, Arkansas sawmill, due to a lack of power, which negatively impacted earnings. Improvement seen over the second quarter was largely due to lower administrative costs, lower saw log costs, and a 3.5% increase in average lumber selling prices. The negative comparison to last year's third quarter was driven by lower lumber and panel volumes coupled with lower lumber selling prices.

The Pulp and Paper Board segment had operating earnings of just over $500,000 during the third quarter of 2008, versus $17.6 million in last year's third quarter and $6.2 million in the second quarter of this year. Comparing to Q3 of '07, favorable pricing of $15 million was more than offset by increased wood fiber, chemical and energy costs, which negatively impacted Earnings by $10.9 million, $6.3 million, and $5.8 million respectively. Furthermore, we had a negative year-over-year earnings variance of $6.5 million in the third quarter for major maintenance expense at our Idaho mill.

Now a few words about our outlook for major maintenance expense and PPD for the fourth quarter. In our last conference all, we indicated we'd have $18 million of major maintenance costs for PPD in the second half of the year, with $15 million coming in the third quarter and $3 million in the fourth quarter. We actually spent $9 million in Q3, and I'll expect another $7 million in Q4. So the total cost has dropped from $18 million to $16 million, and the timing has changed with a little more coming in the fourth quarter.

Consumer Products reported third quarter 2008 operating income of $10.9 million versus $5.1 million in last year's third quarter and $6.9 million in the second quarter. Our positive earnings variances in this segment are being driven by record production from our tissue machines and converting operations, along with recently implemented price increases. Strength and manufacturing efficiency in pricing is somewhat offset by higher fiber, energy, packaging supplies and freight costs, though pulp costs have begun dropping which should provide a tailwind to Consumer Products earnings. We continued to see very strong demand for our private label tissue products and are selling every case we can produce.

Eliminations had a $5.6 million negative effect on operating income during the third quarter compared to a positive $5.4 million impact last quarter, and a negative impact of $8.4 million in last year's third quarter. As we have discussed on prior calls, the negative elimination entry in the third quarter is attributable to the seasonal log inventory increase we typically go through this time of year in Idaho as we begin building inventory for the winter and spring months. We anticipate another negative elimination in the fourth quarter as we continue to build log inventories.

Corporate Administration including interest expense totaled $19.9 million for the quarter compared to $19.9 million in the second quarter and $18.6 million in the last year's third quarter. The third quarter 2008 expense includes approximately $2.4 million of costs associated with the spin-off of Clearwater Paper. Net interest expense totaled $8 million for the quarter compared to $6.3 million in last year's third quarter and $8.5 million last quarter. EBITDA totaled $51.7 million in the third quarter versus $67.9 million in last year's third quarter and $50.1 million in the second quarter of 2008. Funds from continuing operations -- or FFO -- for the quarter totaled $48.8 million versus $63.3 million a year ago and $41.8 million in the second quarter of 2008. The lower EBITDA and FFO results in the year-over-year comparisons are directly attributable to lower operating earnings. The company paid a normal distribution of $20.2 million during the quarter compared to $19.1 in the third quarter of last year. Pages 4, 5, and 6 of the accompanying slides provide additional detail by segment for the variances I have described.

Our balance sheet remains quite healthy with net debt to capital at 41.9%, our last 12 months net debt to EBITDA from continuing operations was at 2.3 times, an dour interest coverage ration is 5.5 to 1. Also, as you may know, our current $250 million revolver expires in late December. We are in the process of putting a new one in place with our existing bank group and expect it to be finalized by early December.

Next, I would like to spend a minute discussing the anticipated capital structure of Clearwater Paper. Previously we had indicated that we expected to capitalize Clearwater with $175 million of senior, unsecured, high-yield notes. Unfortunately, with the credit markets currently in disarray, this currently does not appear to be a viable alternative. However, we have developed an alternate plan which we believe can still result in a spinoff in the fourth quarter of 2008. The plan involves two separate steps. In the first step, Clearwater will increase its asset-backed revolver to approximately $120 million and then immediately draw $50 million and remit that cash to Potlatch. In the second step, Clearwater will retain the obligation to repay the $100 million of credit-sensitive debentures. As these debentures don't mature until December 2009, Clearwater should have ample time to refinance those debentures and potentially refinance the draw on the revolver as well.

If the credit markets remain closed and Clearwater is unable to refinance the debentures, Potlatch will pay them off and a note will be put in place between Potlatch and Clearwater and Potlatch will get a security interest in some of Clearwater's assets. Regarding Clearwater equity, we anticipate and exchange ration and a spinoff distribution of 1 share of Clearwater for every 2.5 shares of Potlatch stock. If Potlatch has approximately 40 million shares outstanding, this should result in approximately 16 million Clearwater shares outstanding post-spin. Combined with the $150 million of debt, this capital structure should give Clearwater a relatively conservatively capitalized balance sheet, which is important given where we are at in the economic cycle. Post-spin we expect Clearwater to pay a modest dividend consistent with its peer group, but this will need to be determined by the new Clearwater board of directors. We are still reviewing what the post-spinoff capital structure and dividend policy for Potlatch will look like, so it is premature to comment on that at this point in time.

I would now like to turn the discussion over to Mike to provide some additional comments about our operations and markets, as well as give you an update on our expected spinoff of Clearwater.

Thanks, Eric, and good morning. I would like to begin focusing on our largest and most valuable asset, our Timberland and the Resource business segment. Pricing and demand for logs has held up surprisingly well over the summer and early fall despite macroeconomic conditions that have crippled the housing industry.

To date we do not believe the market conditions merit a harvest deferral and I will cover our pricing outlook in just a minute. Hence, we expect our 2008 fee harvest to be 4.4 million tons, compared to 3.9 million tons in 2007, an increase of 10% as planned in the beginning of this year. Saw log pricing remained remarkably stable through the third quarter in both Arkansas and Idaho. Over the last three months, prices have varied up and down in a very narrow range between $1.00 and $2.00 per ton for Southern Pine saw logs as well as Douglas fir and Hemlock saw logs in the Northern region. Looking ahead, nearly all of our remaining harvest volume for 2008 is under contract at values at or above current prices.

Pulpwood prices increased throughout the third quarter in the South, largely due to wet operating conditions which limited access to harvestable tracts and robust demand from pulp and paper mills from Eastern Oklahoma to Northern Louisiana and throughout Arkansas. Although pulp prices are falling, we expect pulpwood prices to remain firm throughout the fourth quarter.

Our Resource business will also benefit from falling fuel prices for diesel. Each $1.00 per gallon change for fuel cost, reduce our log and hauling cost by approximately $1.60 per ton, or about $7 million annually.

Having stated our outlook for firm pricing and stable volumes for the balance of Q4, we are very cautious about our outlook, especially moving into the spring of 2009. Clearly the housing market and lumber prices do not appear poised for near term recovery. It remains unclear whether log prices can hold up in the face of prolonged weak lumber prices.

Turning to our Real Estate segment, it is clear that we are seeing weaker demand and price pressure as we expected at the beginning of the summer. During the last quarter, our average land sales price dropped reflecting a mixed shift to sales of undeveloped rural recreational tracts, primarily in Minnesota, averaging about 100 acres in size. Excluding the one-time northern Minnesota land sale, we expect our full year land sales price to average between $1,600 and $1,800 per acre compared to $1,500 per acre in 2007. Excluding the Minnesota sale, we expect total land sales in 2008 to be approximately 17,000 acres, in line with our expectations at the start of this year, and up from the 16,000 acres sold in 2007.

At the start of the year we indicated we hoped to sell roughly 20,000 acres of real estate in 2008 at average prices of around $1,900 an acre, generating revenues of $38 million. Year to date, we have sold over 58,000 acres for nearly $43 million, exceeding our goal for the year.

Our ability to identify and sell property with higher values than timber production alone can earn, remains an important part of our long-term strategy to maximize value from our landholdings. However, our real estate segment is still a small but growing core business segment and we are optimistic about its ability to add shareholder value.

Eric has already commented on housing starts and conditions on our wood products segment during the quarter. Markets have deteriorated since the end of September and it is very difficult to see a catalyst that will change our outlook before year end. Lumber demand remains weak and we are entering a seasonally slow period for housing construction. We will continue to monitor demand and market conditions for each of our facilities and reduce operating hours if needed to match output demand.

Against the backdrop of a chaotic financial market and the uncertainty that that has caused for many of our customers, we still see strong pricing and demand in most of our business segments. We are very confident that we can execute the planned spinoff of the pulp based businesses this quarter. As we have stated previously, we have an attractive dividend currently yielding well over 5% which is supported by the cash flows from our timber and land businesses. There is no question that this is a good time to separate pulp based businesses. Over the last two years they have generated consistent cash flow and are well positioned in two desirable product segments-- private label tissue and bleached paper board. As we mentioned at the start of the call, Gordon Jones the President and CEO of Clearwater Paper is with us this morning and will provide our outlook on the tissue and paper board businesses, as well as some comments on the planned spinoff later this quarter. Gordon.

Thanks, Mike. Good morning. It is a pleasure to be here. As you know, I arrived at Potlatch on July 1st and have been working on the spinoff since that time. My concentration has been on building a team, visiting customers, and helping to develop the many transition plans and supply agreements that will be required. We have the team in place, with a great mix of internal and external experience. Linda Massman, our Chief Financial Officer who started mid-September, has extensive experience, including her last role as group VP of Finance and Corporate Planning at Super Value/Albertson's. We have one other outside hire as the Head of Human Resources, and all our other key team members are coming over from Potlatch. During the last couple of months, I have taken the opportunity to visit with some of our customers and look forward to working my way around to all of them. I feel very positive about what I have heard, and I do not anticipate any transition-related issues. As has been covered previously in this call, the proposed financing structure gives us adequate flexibility to run the business, but we do look forward to the time when the credit markets stabilize and we can refinance our obligations.

The revolver we will have is asset-backed and we have an excellent borrowing base and therefore are comfortable with our capital structure.

As for operations and particularly with respect to pricing, we have seen steady improvement throughout the year. Our net selling price on paper board is up 9.8% over the same quarter a year ago, and our consumer products finished goods are up 4.8% over the same quarter a year ago. Both our paper board capacity and our consumer products capacity have an excellent backlog of orders. Specifically with respect to paper board, these price improvements have been lagging behind cost escalation. We now believe that with some cost moderating and prices continuing to move up we will see our margins improved. We are indeed impacted by the housing situation in the United States, particularly in the West, with fewer residual chips being produced, so this cost will likely stay high until housing improves. In general, our wood costs are better in the Southeast than the West, which helps our Arkansas mill. Energy costs are moderating and this is also a helpful thing for our operations. Specifically with respect to consumer products, our strategy with private label continues to work well. Our strength in private label is demonstrating the consumer's desire for high quality at a fair price and we believe that this dynamic will continue. Our consumer products business net operating income is running $7 million higher year to date as compared to last year, due to record operating levels, manufacturing efficiencies and improving price.

As mentioned during the last web cast, a search process is underway to identify and recruit three new directors for Clearwater Paper. We expect to have these named by the date of the spin. It is our intention to issue a press release on these names when we have all three identified.

That concludes our prepared remarks and we will now take questions from the call participants.

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

Hi, good morning. Mike, can you please talk a little bit -- you talked about weakness—in some of the rural land-- a little bit what you are seeing in terms of interest for institutional timber lands. Is this creating any opportunities for you potentially to make acquisitions? Are you seeing any change at all given the financial market turmoil?

I didn't hear the part about—how is it related to institutional timber lands. Can you rephrase that?

-- if you are seeing some weakness in some of your rural land and interests there, I am just wondering what you might be seeing in terms of poor timber land and is it creating any opportunities for you potentially as an acquirer of land?

Well, I think really just the opposite. While we have certainly seen the interest in values in development land and HBU land fall off as you would expect in this environment, the demand for rural tracts for hunting and just outdoor recreation, those are mostly cash buyers that still seems strong. But the demand and interest in valuation for institutional timber land still seems very high, and the acquisition market continues to be very competitive. There were several transactions over the last quarter mostly in the US South, some here in the West that continue to go at prices that we believe are very strong, so the acquisition market remains very competitive.

Okay, can you talk a little bit, within your wood products business about cedar, how that is holding up? Is that still a key driver there?

In our wood products business, cedar is still a very important component of our strategy, as it will be for the one sawmill that will go to Clearwater Paper. Potlatch will have one sawmill to manufacture cedar and Clearwater Paper's only sawmill will also manufacture cedar. The pricing for the finished product has fallen off a little bit, but not nearly to the degree that dimensional lumber has, and that really is a reflection in the weakness in the resort, second home construction market, and—we still produce about 20% or 30% of our product mix in cedar and it is still important going forward.

Okay. Gordon, just in terms of the current performance in the consumer business, can you remind me where you would stand on the timing of a second round of tissue pricing? That wouldn't benefit the third quarter at all, would it?

Well, we are continuing to look at that all the time, Gail. We have a number of opportunities and a number of things that we are working on with customers as we are going forward. I can't quantify for you that exact amount, but we have different arrangements with different customers that will kick in, so there is some potential improvement there yet for us. But I don't have those numbers right at hand.

Okay, and just in terms of volume growth, do you have a lot of incremental capacity to continue to absorb higher volume, or are you starting to run pretty full?

Yes, we are running very full in consumer products. Every case that we make is sold, our inventories are under a bit of pressure, and we are working very hard to try to satisfy all the customer needs. The business is very robust right now.

Okay. And just finally, last question. Eric, the revolver you mentioned you are finalizing renewing that, would you expect any change in the terms, particularly? Can you comment?

Yes, given the economic environment and all this credit crisis, there is not going to be as quite as favorable terms with the new revolver compared to the last one. Our current one is one month LIBOR plus 1.125 because we are right on the grid. Our new one is likely to be in the LIBOR plus 300 to 350, so anywhere from roughly 200 basis points higher compared to where we are today, and in all likelihood, it will be a secured revolver as well, our revolver today is unsecured. We -- but it is still early in the discussion, so who knows where we will wind up.

Okay great, thank you very much.

Your next question comes from the line of Hamzah Mazari with Credit Suisse.

Thank you, just a couple of quick questions. Could you comment a little more on -- what has been responsible for the turnaround in the tissue business. You know, this business historically has been pretty volatile and you seem to -- has done a good job the last two quarters. Can we expect that turnaround to continue, and what is your goal for margins in that business?

We feel very good about where we are in that particular business right now. We think that consumers are really understanding the value of private label, particularly in this sort of economic environment. And as I have gone around and talked to some of our customers -- haven't got around to them all -- they feel very good about what the private label strategy is doing to help them out. On top of that as I mentioned before, we are basically running everything at flat-out capacity and trying to satisfy those needs, but we see some customers moving from brands to our product and we feel good about that and we trust that that will continue. So from a strategy standpoint, we are going to continue to try to satisfy all those needs with as much capacity as we have and we feel very good about it.

Also, this is Mike, we also added -- we have 26 converting lines. We added one brand new bathroom tissue line, a very highly efficient one in last year. It is up and fully running this year. We continue to optimize the performance of the converting lines, production is up year-over-year, we've had record paper machine production. So I think I share Gordon's sentiment that this business is going to have a pretty good outlook for several quarters.

And especially when you think about falling full prices, which they have been falling quite a bit here lately, Hamzah.

Right. And you know -- on your spinoff, I think last conference call you guys said that it may be completed in November, end of November sometime. Is that still the case, or is that pushed back, or you have no idea?

Well, no we have a pretty good idea, there are a couple of key gating items to making the spinoff happen. One is the IRS, one is the SEC, approval of the Form 10, and then the last one is putting the debt financing in place. We are very close to finalizing the debt financing, since it is really just a draw on the revolver, plus moving the CSC basically from Potlatch to Clearwater, we can make that happen on our own.

The SEC, we've been through several rounds now of comments, we are down now to just a couple left to deal with that are relatively inconsequential. So the final and most important gating item is IRS approval, but it is going to be a tax-free spin. We've had conversations with them about this new structure. Verbally they have indicated that they're comfortable with it, but they want to see it in writing. So we had to put the new structure in writing and give it to them. They want to review it and run it up the flag pole, their latest commentary back to us was that they thought they would give us our private letter ruling just before Thanksgiving, which would then allow for the board to declare the spinoff and set the record date and distribution date.

It is roughly 20 business days after that declaration when the spinoff could happen. So we are now looking at a roughly mid-December type of spinoff. Now, it's subject to the IRS getting back to us in a timely fashion and they are -- with all this TARP stuff from the government, congress, whatnot, there are some IRS folks that are distracted, but our view is that we can still make this happen in the fourth quarter.

Okay, and just last question -- you know, I am just curious how you guys think about the sustainability of your dividend, if things get materially worse from here. You know, have you guys stress tested that? What is your view on that? Thank you.

As regards to the dividend, just to reiterate the point that we have made for quite some time since the re-conversion, the dividend was established and raised in December of '07, based on what we thought was the sustainable cash flows from our core Timber and Land business, and we continue to be very positive about that. You look at the company's FFO and FAD numbers, they still are very strong.

Once we get the spinoff completed I think we will have more visibility about that as we reconfigure corporate overhead expenses and other things that will change post-spin. I think we have seen a fairly significant downturn in the lumber markets, the Timber markets held up reasonably well, our near term expectations for fourth quarter at least, is that it is going to continue to hold up and we will revisit the dividend at the end of this quarter and again in the spring and review it with our board.

Thank you.

Your next question comes from the line of George Staphos with Banc of America Securities.

Thanks. Hi everyone, good morning. If we can go back to Consumer for a minute. Where are you seeing the greatest tensions on operating rates right now, or available capacity? Is it on the converting side or is it in the machines?

Well, it actually is in both, George, we are running the machines as flat-out as we can and we have a lot of pressure on all of our products. I guess I would say that napkins is one that we are very tight on and we are looking close at what that situation is and how we can help ourselves relative to capacity there. But all of the products seem to be moving very strongly. The concept of private label is really paying dividends for us in this particular market. We think that that is a continuing sort of phenomenon.

Okay, one question I had -- I am not sure if it would be viable as a solution or not, is if you were freer on converting capacity relative to machine capacity, could you perhaps get parent rolls from some other producer as a way of preserving capital, while still then riding the growth and demand for private label. Would that be possible, would it be viable as you look out at the next year or two?

I think it's possible. I think it has some potentials. We have looked at things of that sort, we are always looking at options to be able to satisfy the customer requirements. And those kinds of things as they present themselves we will look hard at taking advantage of it. It really is a function now, when you look at our converting operations -- different converting lines can run different products, so we are constantly trying to match up those customer needs on the converting lines, and of course the paper machines are running full, but the converting lines are running full as well—

Right.

-- complicated though with trying to move back and forth between different products and different mixes. But from a payroll standpoint, those kinds of things have potential options. We wouldn't want to let down any of our customers relative to quality so we would have to be sure that we felt very comfortable about that quality and then work those things out in advance with our customers.

Okay. Within PPD as you look out to next year, and clearly this is important given the establishment of the spin and Clearwater and the capital structure, what kind of environment -- economically speaking -- are you planning for? Typically in recessions prices and profitability go down, now you'll have a bit of a benefit here, hopefully inflation has been worse than in most prior peaks, so you'll maybe get a better pull back, more profitable pull back as you look out to next year, but what kind of improvement, if any, in profits do you expect within PPD looking out at next year? Generally, obviously you can't guide us.

Yeah, I don't really have a specific number for you, but from a principal standpoint, our costs are moderating as I mentioned in my notes, and we still have some price improvement that is yet to achieve and has been confirmed with our customers, so when we get that we will have some natural improvement in margin. One of the things that Eric had mentioned before over on the other side of consumer products, we get helped by a little bit of a lower pulp price. Of course, we don't want that to impact our paper board price, and at this point we don't think that that move in the pulp price has done that on the paper board side, but that is one of the things we need to watch.

Our biggest concerns now are the input costs in the pulp and paper division and of course the same input cost issues over in consumer products, but particularly with the pulp and paper division. Those kinds of input costs relative to wood and energy and chemicals and transportation are -- I guess best taken as whatever assumptions that you can make about them and plug those into our model would sort of show you where we think we're going to be. And we don't feel bad at all about how those costs are beginning to moderate, we think that that helps our margins.

That's helpful Gordon. Two last quick ones. One piggybacking on Gail's earlier question -- I think I know the answer to it, but just wanted to check. Realizing that you had not on average seen any impact in recreational land sales from credit markets and the economy. In more recent transactions has there been any deterioration at all in demand and in pricing? And then just quickly, the legal settlement, I forget if you had mentioned it before, but what is behind that $2 million settlement? Thanks.

Well, this is Mike, let me just answer the last one first. We had an industry-wide class action law suit related to hydrogen peroxide, which resulted in a little bit less than a $2 million settlement to Potlatch, as well as a payment on -- an outstanding lawsuit from almost a decade ago on cold washers with a company called Boyd. Those tow things covered the $2 million. They won't be repeated.

Okay.

Back to your question about real estate, I mean in all fairness, we clearly are seeing less interest if you look at -- multiple listing data for resort markets or almost any area in the country, I think the number of transactions are going down. The time the property sits on the market in terms of its listing period has gone up, and all that of course, leads to price pressure. As it relates to rural recreational tracts that someone typically is going to buy for hunting, or it is an adjacent piece of land, they are usually a cash buyer. We haven't had as much pressure there. But as it relates to property that might be suitable for development and someone may want to subdivide it or put in some improvements or entitlements on the property, both the demand and the price for that kind of property has come down I think, across the country. So what you see in our numbers, which relates to the lower price break, is really a mixed-shift. It's a little bit different class of property, we still think it sells at a substantial premium to its inherent value as timber land. We think it makes a good chance to reemploy that capital and to do it tax efficiently with like-kind exchanges. And we will continue that for the foreseeable future here.

I appreciate the call, Mike, thank you.

You're welcome.

Your next question comes from the line of Roger Wagner with Wagner Enterprises.

Yes, good morning. A great report. I am very focused on the Consumer Products division and I want to make sure that I heard correctly that your volume was up 4.8%, did I hear that comment made?

I think in my comments what I was saying, Roger, is that for the Consumer Products finished good side—

Yes.

-- we are up 4.8% and that --

Yes.

-- and that is on pricing.

On pricing -- not physical volume.

Yes. That is our net selling price, our volume is actually up a little bit as well, but the comment about the 4.8% relates to pricing.

Alright. So that being price mix. We keep data by volume and price mix, so the volume is not up 4.8%. Could you make any comment on that? We listened to a Dallas based company yesterday indicate huge volume declines versus a year ago, in your sector, mostly branded products, but their volume as down over 4% in North America for consumer products, mostly branded. And the conversation was that some of it was going to private label. So that is what prompted this volume as to whether or not your volume might be up around 4%.

We're actually -- we've done a quick calculation here, Roger, and just looking at total volume, and we're looking at it in terms of tons—

Yes, yes.

So, from that side, we're up about 3%. That would be second quarter over third quarter, that's in the consumer processed products. Second quarter of '08 to third quarter of '08.

No ability to go against last year's quarter to quarter, third quarter of '07. You must be up at least 4% or 5% doing that.

Yeah, its about the same.

About the same.

It's just a little bit higher than that, but not a lot, Roger.

Alright, thanks so much for your help. My other questions were answered about potential converting and the ability to get parent rolls in from say, another company that meets your quality and that you do have some room on your converting lines to possibly bring in some parent rolls -- some other high quality producers. Thank you so much.

Well, thank you.

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

Thanks, good morning. Some of my questions were also answered in terms of capacity, but maybe for Gordon, if you had your dream balance sheet, how would you grow the business -- Clearwater going forward?

Well, good question Steve, but at this point, as we constitute our board, those are the kinds of things that we want to work out with the new board members once we are all on-board and really see where we are post-spin. I mean, we do believe that this particular financing that we are doing to make this spin happen makes a lot of sense. We think we have room underneath our revolver to continue to operate and look at the modest growth that we have planned. We want to take a look at really how we are as a new company and be comfortable that all the assumptions that we've made make a lot of sense. So we are going to move with a growth strategy but very cautiously in that regard, best analyzing where we are first. So the dream balance sheet, really I can't respond to that, the dream balance sheet will probably more likely happen after the credit markets stabilize and we get a chance to go out and refinance it. But we feel good about where we are now, and very comfortable with proceeding.

Okay, thanks. And I think Mike was saying that you expect Clearwater will pay a dividend -- in line with comps. Would those be one little company from Dallas, and another company from the Cincinnati area?

I tell you, I'm going to let our board make that decision based upon when data comes in Steve, but we do plan and hope to be able to pay a modest dividend.

I think the logical peer group to go and look at, Steve, might be [McNab], might be Wasau, might be [Cascades], there are a handful of companies out there that we at and compare to go.

Gotcha, yeah they are probably more real estate. And then finally, expenses associated with the Clearwater split in the fourth quarter. Can you give us a sense as to how much is left on that?

Well, the run rate that we are currently on which is roughly $2 million a quarter is probably a pretty good run rate. We will owe our financial advisor a fee for assisting us in the is spinoff, and it is probably going to be a little bit more than the $2 million that we are run rate at right now, so you might see $4 million or $5 million let's say in the fourth quarter.

Okay, thanks, Eric. That's it, thank you.

Thanks.

Thank you.

(Operator Instructions.) Your next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you, could you just remind us on Clearwater what the net pulp exposure is?

Net pulp exposure?

Right.

When we look at pulp, at the end of the day, we are a buyer of pulp. And we buy roughly 7,000 tons a month more than we sell, there's buying and selling taking place virtually every day. But if you look at it, we are net buyer between PPD and CPD.

Right, so about 85,000 tons a year net exposure. And then, also could you just also remind us on that gas, how much do you consume and do you have any hedging?

Well, we do buy forward natural gas, and in the fourth quarter we have bought about 65% of our gas needs at a price of around $7.70.

In 2009, we've bought a little over 30% at $7.20, and in 2010, we have now bought 12% at just a little over $6.00. So we -- it just depends upon the particular time frame that you are looking at, but we generally do try to buy forward, and we try to target 50% of our net gas needs going forward.

I think in terms of how much gas used around the company, its around 7 million NBTUs per year. As you might imagine it's a little bit higher in the winter time than it is in the summer time. So that is a good benchmark number.

Terrific. And just to clarify on the comparable, you mentioned Wasau, Cascades, I don't know if there are any others that you throw into that group, and when you say 'consistent' -- on what measure are you referring to. Obviously you don't' trade at any level, so a yield is not a place which would be easy to state what a consistent yield comparables with would be. So what measures were you thinking of when you are talking about being consistent with competitors?

Well, the one company that you missed in the comp group was Nina, that was another one that we look at, and there may be others offhand, I can't recall, it has been several weeks since we last looked at this. But what we are thinking about is an earnings yield -- based on earnings where we think the stock is going to trade. We obviously have ideas about where we think the stock is going to trade, the market is going to determine ultimately where it trades, but we can do back of the envelope, and try to arrive at where we think the stock is going to be and base our dividend off of that.

Okay.

That's about it.

Fair enough. And then -- Mike, not one to beat a dead horse, but do you want to clarify on the dividend going forward for the REIT you indicated that it is well supported -- the current dividend is well-supported by the cash flows from the timber and land and I understand that this is going to be a function of your discussions of the board. But if I just look at that statement, it leaves me with a powerful sense that you feel pretty comfortable at this juncture with this dividend level. Was I misinterpreting that comment?

No, I think we would have not raised the dividend to $2.04 last December if we weren't comfortable with our ability to cover it with the Timber and Land business. Now, that said, I don't think any of us anticipated the kind of macroeconomic that we are in today and the depth of the housing recession and how long it is going to take to come out of. So like every company, I guess we are going to have to see -- how long that takes for recovery.

We have a lot of, especially post-spinoff, the only capital that the company has is a primarily capital for planting of tress, there is not a lot of other discretionary capital, that number will be very low. I am very optimistic about the fact that our timber business, the harvest levels we think are completely supported by good financial backing in terms of our optimum rotation natures. The market is still strong enough that we see no reasons for harvest deferrals, and I guess to reiterate what you said, I still feel very confident about it, but that said, we will review it with our board.

And then lastly, Mike, you indicated that institutional interests for timber lands remains strong. If that continues to decay and prices continue to be robust, -- how actively would you consider going a route that one of your competitors is doing, which is selling some land and using that to buy back stock. Given that certainly the Timber REITs, and I think that it would be true for all of them, are trading at a pretty wide discount to private market values, so the argument is there is an arbitrage to sell timber lands to these institutional buyers and to buy back your own stock. Is that a strategy that makes sense to you?

It does make sense to us, absolutely, and it is something that we look at on a regular basis, and I think that one of the capital allocation decisions of the many things we look at, whether its acquisitions or buying back our stock, or investing in the business that we look at all the time. Our focus right now is to get this spinoff completed, to have a balance sheet that is clear to us in terms of not only the credit subsidies and how they are going to be refinanced, and the cash that is going to come back from Clearwater, and at that juncture we will have a decision to make with our board whether to buy back stock or take the steps that you refer to, and that is to sell a portion of our land and buy back stock that way.

Okay, thank you very much.

You're welcome.

(Operator Instructions.) At this time there are no further questions, gentlemen, do you have any closing remarks?

No, we don't, Stephanie. Thank you and we will look forward to talking with everyone next quarter.

Thank you. This does conclude today's conference call, you may now disconnect.