Potlatchdeltic Corp (PCH) 2012 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 2012 earnings conference call featuring Eric Cremers, Executive Vice President and Chief Financial Officer; and Michael Covey, Chairman, President and Chief Executive Officer for Potlatch Corporation. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a question and answer session. (Operator instructions). Thank you. I would now like to turn the call over to Mr. Eric Cremers for opening remarks. Sir, you may proceed.

Thank you and good morning. Welcome to Potlatch's investor teleconference covering our third quarter 2012 earnings.

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

I would now like to turn the call over to Mike Covey, or Chairman and CEO, who will make some introductory remarks. Then I will review our third quarter results in more detail.

Thanks, good morning. We are very pleased to announce third-quarter results that exceeded our expectations, giving us two strong back-to-back quarters in our lumber and plywood business. In our Resource business, we again realized higher sawlog prices compared to the previous quarter as well as substantially increased harvest volume caused by normal seasonality. Our Wood Products segment continued to build on what was an exceptionally strong performance in the second quarter that has exceeded our outlook from the beginning of the year. Throughout the year, favorable trends in Wood Products demand and pricing have prompted us to increase production levels at our mills primarily through increased operating hours in order to take advantage of improved market conditions.

Though our Real Estate segment results are weaker as compared to prior quarters, we continue to experience a steady level of demand for rural, recreational and HBU real estate. In reviewing our consolidated results, both our quarterly and year-to-date performance have been much longer than we originally anticipated.

Given our recent operational gains as well as meaningful turnaround in the housing industry, we maintain a very optimistic outlook over both the near- and long-term. In the near-term we expect continued strength in Wood Products pricing for a variety of reasons. Demand for Wood Products is higher, driven by higher levels of housing starts and an improving outlook for both commercial and industrial markets as well as repair and remodel markets.

At the same time, there is diminished manufacturing capacity in the industry to meet higher demand as roughly 10 billion board feet, or 15% of the industry, has been permanently shut down in North America over the past few years. Combined with relatively low inventory levels both at mills and throughout the various distribution channels, industry conditions remain very favorable for further potential pricing gains.

Over the long-term, we believe a variety of factors could work in concert to create very favorable market conditions for both our Wood Products and our Resource segments. First, we expect Chinese demand for both North American fiber, core North American fiber, to remain relatively firm. And second, we expect reduced Canadian lumber production due to the mountain pine beetle in the lower allowable cut of the eastern Canadian provinces. Additionally and most importantly, we expect increased domestic demand for Wood Products as the US housing market continues to improve.

Though both near- and long-term market conditions appear promising, we have not altered our near-term harvest plans. As we have discussed throughout the year, we remain committed to our intentional decision to defer a portion of our timber harvest activities and plan to harvest 3.5 million tons this year, which is significantly below sustainable levels. We believe it is most beneficial to our shareholders to exercise patience and preserve our timber value directly on the stump, allowing our trees to continue to grow and further increase in value while awaiting even better market conditions that we believe are in the not-too-distant future. We are encouraged by the continued improvements in the Wood Products industry and have already begun to see higher lumber prices translate into higher sawlog prices, particularly in our northern region.

Undoubtedly, pronounced continued improvements in the Wood Products industry, capacity utilization and profitability will ultimately lead to higher sawlog prices, and thus higher profits in our Resource business. Once the sawlog market recovery is clearly evidenced, we will respond by raising our harvest levels, which will increase our cash flows considerably from the trough levels they're at today.

I would now like to turn the call over to Eric to discuss the quarterly results, and then we'll take questions.

Thanks, Mike. The shown on page 3 of the slides accompanying this presentation, we reported third quarter 2012 net income of $18.6 million, or $0.46 per diluted share. This compares to net income of $25.6 million, or $0.63 per diluted share for the third quarter of 2011, and net income of $5.1 million, or $0.13 per diluted share, for the second quarter of this year. As a reminder, in the third quarter of last year, we closed on the third and final phase of a large land sale in northern Idaho which produced revenues of over $9 million in that quarter.

I would now like to review our third quarter of 2012 results, broken down by segment. Slide 4 charts operating income and margin trends in our Resource segment. Operating income was $23.6 million for the quarter, which compares to $25.6 million in last year's third quarter and $6.7 million in the prior quarter. The third quarter is routinely the strongest quarter for our Resource segment, due to higher harvest volumes, primarily in our northern region, caused by better weather that allows for excellent logging conditions during this time of year.

Therefore, the positive income variance of $16.9 million in Q3 of 2012 versus Q2 2012 was largely the result of our harvest volumes more than doubling between the sequential quarters, but higher prices were a strong contributing factor as well.

The $2 million income variance between Q3 2012 and Q3 2011 is directly attributable to our previously announced harvest deferral in 2012, which particularly impacted our southern region harvest volumes.

Page 5 exhibits volume and pricing trends for northern region of our resource business. Comparing Q3 2012 to third quarter of last year, sawlog volume decreased 5% due to the impact of a planned harvest deferral, while sawlog prices increased 3% year-over-year, primarily due to improved demand. Comparing Q3 2012 to Q2 2012, sawlog harvest volume increased almost threefold, which again is due to the improved logging conditions in the third quarter. Sawlog prices increased 10% over Q2, driven by improved lumber pricing, since approximately 65% of our sawlog harvest volume pricing in the northern region is tied to lumber indexes, which have been strong each of the past two quarters.

Looking at pulpwood, harvest volumes in northern region are flat comparing to third quarter of 2012 to last year's third quarter, while prices were up 4%. Year-over-year increases in pulpwood harvest volume and pricing experienced in our Idaho region were offset by decreased pulpwood demand and pricing in the lake states region, which was precipitated by unusually favorable logging conditions in the second quarter, has shifted a portion of our pulpwood harvest in the lake states region into the second quarter of this year instead of the third quarter.

Comparing Q3 of 2012 to Q2 of 2012, Northern pulpwood harvest volumes are up considerably, which is related to typical seasonality. However, prices declined 6% due to an oversupply of pulpwood in the markets.

Page 6 displays volume and pricing trends in the southern region of our resource business. Comparing Q3 2012 to the prior year's third quarter, sawlog harvest volume was reduced by 35%, in accordance with our planned harvest deferral, while sawlog prices increased 4%. The price increase is the result of a product mix shift between the quarters that included an increase of hardwood saw timber in Q3 of this year to capture better hardwood sawlog pricing. Pine sawlog prices remain relatively flat in the region.

In looking at the variance between the second and third quarters of 2012, harvest volumes increased 17% due to typical seasonality while sawlog prices increased 9%, which again was due to the product mix shift that included a greater proportion of hardwood sawlogs in the third quarter than the second quarter in order to take advantage of attractive hardwood pricing.

Moving to pulpwood in the southern region, our harvest volume declined 14% comparing Q3 2012 to last year's third quarter, again related to our harvest deferral. Prices increased 12% between the quarters, due partially to product mix as well as stronger pricing in general on both soft and hard pulpwood in the current quarter.

Comparing consecutive quarters of 2012, pulpwood harvest volume and prices increased 29% and 3%, respectively. The increased volume is attributed to typical seasonality, while the increase in pricing was generated by a shift in product mix toward hardwood pulpwood during the third quarter.

Moving onto our Real Estate business, page 7 displays our revenues for the segment. Our Real Estate segment produced $2.4 million in revenues for the third quarter, which compares to $8.7 million of revenue in the second quarter of 2012 and $14.8 million in last year's third quarter. The $6.3 million revenue variance between the second and third quarter of 2012 was caused by timing differences as real estate transactions can be lumpy, making sequential quarterly comparisons challenging. Comparing third quarter of 2012 with last year's third quarter, the variance was primarily related to the third and final phase of a sequential Idaho real estate sale that accounted for over $9 million of revenues.

Slide 8 presents operating income trends in our Real Estate segment, which generated operating income of $1.3 million during the quarter, which compares to $9.9 million in last year's third quarter and $6.7 million in the second quarter.

Page 9 highlights our Real Estate acres sold by product types. We continue to see a relatively consistent level of demand for our rural and recreational and HBU properties. For the quarter, we closed 28 transactions, which is consistent with our expected range of closings each quarter.

Page 10 highlights price trends for our Real Estate business summarized by product type. Overall, our average sale prices continue to be firm and fluctuations during the current quarter can be attributed to product mix differences.

Page 11 charts operating income and margin trends for our Wood Products segment. The performance of our Wood Products segment again surpassed our expectations, both from the beginning of the year as well as the beginning of the third quarter in achieving operating income of $15.2 million for the quarter compared to $2.9 million in last year's third quarter and $11.7 million in the second quarter of 2012.

Page 12 highlights our Wood Products segment's lumber price and volume trends. The strong lumber pricing experienced during the second quarter of 2012 were sustained well into the third quarter. Consequently, lumber prices finished a quarter up 1% from the prior quarter and up 21% comparing the third quarter to last year's third quarter. Shipments were consistent comparing the second and third quarters of this year but increased 4% over the prior year's third quarter.

In light of the robust Wood Products demand and solid pricing environment over the past several months, we continue to run our sawmills as well as our plywood mill with increased operating hours to capitalize on favorable market conditions. We continuously evaluate options for increasing production by adding incremental overtime, productivity enhancements and even modest capital expenditures in order to take advantage of the high operating margins.

Looking back to page 3 of our supplemental materials, corporate administration costs totaled $10.6 million for the quarter compared to $9.2 million last quarter and $5 million in last year's third quarter. The year-over-year variance was primarily caused by a $1.6 million increase in pension expense related to our legacy pension plans and a $2.6 million increase in non-cash, mark-to-market adjustments associated with our deferred compensation plans, which are tied to our stock price. Similarly, the variance between the second and third quarter of 2012 is attributed primarily to an increase of non-cash mark-to-market adjustments of $1.4 million associated with our deferred compensation plans due to a 17% increase in our stock price during the quarter.

The decrease in our book tax provision compared to the prior quarter is a result of lower net earnings generated by our taxable REIT subsidiary during the third quarter. We expect our book tax provision to be approximately 31% of net income before taxes in Q4, driven by Wood Products and Real Estate earnings in our TRS.

As a result of our strong operating performance for the quarter and year-to-date, we have a solid balance sheet with $62 million in cash and short-term investments, nearly as much as at the start of the year despite retiring $22 million of debt thus far this year. We have more than ample liquidity given our cash position, coupled with our completely undrawn $150 million revolver. Furthermore, our net debt to enterprise value is just 16%, a relatively low level. Still further, our funds available for distribution, or FAD, year-to-date is approximately $38 million or $0.93 per share, which demonstrates our ability to return our dividend directly from our business operations.

Next, I'd like to make a few comments about the outlook for each of our three segments. Our Resource segment remains on track for a total harvest of 3.5 million tons for the year, leaving us with about 850,000 tons yet to harvest in the fourth quarter. We expect modest price declines in both sawlog and pulpwood prices in both regions in Q4 and expect logging and hauling costs remain relatively stable.

Regarding the outlook for our Wood Products segment in Q4, we expect modest seasonal weakness during the quarter as building activity slows. Thus, we anticipate a modest softening in lumber prices for the quarter, perhaps $20 to $30 per 1000 feet, but expect plywood prices to remain relatively firm. Production in shipments will be slightly lower due to typical seasonality.

Lastly, in Real Estate we expect a very strong fourth quarter and expect to sell 7000 to 8000 acres in the quarter, generating revenues of approximately $18 million. For the quarter, we expect land bases to be approximately 25% to 30% of segment revenues. As you may have read, in mid-September we announced the sale of an approximately 2000-acre HBU parcel located along the Mississippi River northeast of Brainerd, Minnesota. The parcel has 2.7 miles of river frontage and is ideal for numerous outdoor activities. We have long been exploring options for this parcel, and the pending sale is the result of more than a year's collaboration among Potlatch, the Minnesota Office of the Trust for Public Land, the Lessard Sam's outdoor Heritage Council, Minnesota's Department of Natural Resources and Crow Wing County. The parcel is being purchased for $11 million by the Minnesota Department of Natural Resources for conservation purposes.

We are pleased with the resulting transaction that is beneficial not only for our shareholders, but also for the citizens of Minnesota.

To summarize, our solid financial foundation has us well positioned for the stronger log and lumber markets over the next couple of years. We're optimistic that our harvest deferral strategy will well reward shareholders as the housing market continues its inevitable march higher.

Stephanie, I would now like to put the call to Q&A.

(Operator instructions) Mike Roxland, Bank of America Merrill Lynch.

Just a quick question -- your lumber prices have recently firmed again after declining for a number of weeks. Can you give us a little color on what is driving that pricing stability? It seems to be occurring a little bit earlier than you guys had expected, given the comments in your press release pointing to December as the month in which you expected prices, lumber prices, to actually begin recovery.

Just as reminder, a lot of capacity has come out of the industry, not just on the mill side but also in the dealer network. I think I heard somewhere that 25% to 30% of the dealer yards in the country have shut down now. I think a lot of people are looking at next year and seeing very firm demand in 2013. Most people believe housing starts again are going to improve 20% to 25%. So in that kind of environment, pricing is likely or expected to move higher next year.

The question is, do you want to enter the season with low levels of inventory and have to buy next year? Or, would you rather start buying some now before prices take another run next year? And I think I've seen some forecasts that have the lumber composite up another 10% in pricing next year. So I think it's just people buying in advance of next year's building season.

Got you. And that's your assumption based on what is occurring the market right now. So it's even -- relative to your guidance, there could be additional upside to your lumber business, given what we've seen with lumber pricing at present?

Yes, I think that's correct.

Got it, thanks for that, Eric. And last question, I think on the last call, you had mentioned that -- I mean on this call, you mentioned that you're putting on some additional shifts at some of your mills. But specifically, on the last call, I recall that you mentioned were putting on additional shifts but not at all of your mails. So has that changed at all, given the better housing backdrop? And have you since added additional shifted at all your mills? And can you talk also to some of the productivity initiatives that you have made or are going to make at some of your mills to increase the output?

This is Michael. We have not added shifts at any of our mills probably in the last 20 months or so. We began running all of our mills at what we would consider full two-shift capacity in 2010. Incremental output comes from adding over time hours at various bills and adding a day or two to a schedule, but not incremental shifts. So answers your first question.

In terms of productivity opportunities and enhancements, we have a couple of modest capital investments. Each of -- two examples, both about $600,000, that combined will result in lumber production increases in the order of 10 million to 15 million board feet in future years just due to higher throughput levels that these modest capital expenditures allow. So that's a couple of examples.

I think the big picture is there's -- according to FDA data, there's around 750 mills operating in North America with about 64 billion board feet of capacity. 55 mills are idled right now completely, and I think the real question becomes what, if any, circumstances cause any of those 55 mills to start production again. That probably represents around 6 billion board feet of capacity. But at the same time, as we said in our call script, there's been over 10 billion board feet taken out of the industry permanently due to fires or closures or other things. I think all those things make for what we -- coupled with increased demand and rising housing starts, we think creates a pretty favorable environment going forward for the next few years.

Got it, thanks, good luck in the quarter.

Gail Glazerman, UBS.

In terms of your contracts that are tying your log price to the lumber price, can you remind us how long in months ago? It seems like it has been a bit more favorable for you, perhaps, than your customers. Is there any kind of signs of rethinking on that end, or are they still pretty committed?

Well, we have really two contracts covering 65% of our northern sawlog volume. One goes out three years in length, and one is with our own mill. So it's perpetuity, more or less. And the one that's out three years is renewed on an annual basis, pushing it out another year. But we have three years yet to run on it, and both parties seem to be happy with the way it's working.

Okay, and maybe just some general color on what sawlog prices would be doing were you not tied to the lumber price. Would they have been stable in the quarter, still up a bit?

Interestingly, we have done some analysis, and what we've found is that pricing for non-index customers are relatively comparable to index customers.

Is there something going on specifically in Idaho that would explain that, because Western prices were down and it was a driver helping you get prices last year? Southern prices are pretty flat. Is there something specific about the Idaho market, you think, that would support the log pricing that we are not seeing elsewhere?

Well, one factor that we are a bit insulated from here in the Inland West is the effect of the export log market. And I think log exports are down this year from the Pacific Northwest to China and other markets, and it has probably created a little bit of weakness in the market that we haven't felt as great here.

Then, I think the other thing is we have a number of customers here, producers that are outstanding lumber producers that are running their mills at full capacity as well.

Okay, and I realize the South is not your biggest market, but can you give some perspective there? You shouldn't have that export drag that you have in the West, and yet, even with the improved housing activity, there's really no sign of follow-up prices trending there. Any perspective on what is keeping that down and what you think needs to change in order to see traction in sawlog prices in the South?

Well, I will make a couple of comments. There's an awful lot of Timberland ownership by TIMOs and REITs throughout the South, as well as private landowners. I think across the board, there's been an awful lot of deferred harvest, creating an abundance of supply available to respond to market improvements. That's one factor.

There has been, I think, various closures, depending on what market area, that have further added to the weakness in log pricing. But I also think, while maybe the South has been a tough place to be in terms of log market in the last couple of years, it's also the area that we think is going to have the most upside going forward. The South is well-positioned to respond to increased lumber production and plywood production as the economy improves. And most of that response is going to come from the US South, which we think long-term will be terrific for log prices.

In that same light, I have a couple of industry studies here over the past few weeks, and one has Southern yellow pine stumpage prices up over 100% over the next few years, and the other one has them up by over 30% over the next few years. So the South is really setting itself up to be super-competitive here over the next few years.

And this study -- when did they start seeing that kick in? Is that a 2013 event or further out?

Yes, 2013 and 2014.

Okay, thank you.

Chip Dillon, Vertical Research.

Hey, good to catch up. First question is to deal with the corporate expense number. I noticed it was quite elevated in the third quarter. How should we see that? I'm not counting the interest portion in the fourth. And what would be a good run rate with this recovery we are seeing, certainly in the wood side? Let's say it continues on the Wood Products, the earnings carry over next year at a higher level. Would we expect to see this year's corporate expense be repeated, all things being equal, next year?

This is Eric. So one of the big drivers of that variance was this non-cash mark-to-market and the deferred comp plans, and that's really tied to our stock price. So part of what drives that corporate expense number really is driven by what changes in the stock price. And there's roughly 265,000 shares in the deferred comp plan. So, depending upon how the stock price moves quarter to quarter or year-over-year, that's going to drive that corporate expense line item.

Now, we did see a particularly strong hit in the third quarter because our stock really ran here in the third quarter. But I think, if you look out over the next couple of quarters, I would expect it to moderate and that corporate expense line to look more like maybe somewhere between the first and second quarter this year, maybe around $8.5 million, something like that going forward. And the pension expense variance will continue to be felt going forward.

I see. So again, the $8.5 million is what you would expect it to be if the stock is unchanged? Is that right? Is that the base to use, and then the stock changes on top of that?

Yes, that's correct.

Okay, that's very helpful. And then, I'm struggling a little bit with the tax rate. First of all, you said 850,000 tons, more or less, is the harvest for the fourth quarter. Right?

That's correct.

And then, when you looks at the tax rate for the fourth quarter, you mentioned it would be darn close to a C-corp rate. And I know, seasonally, the Wood Products earnings, I'm guessing, will back off a bit, like they always do. And so therefore, you are going to gain, certainly, a lot more income with the land sale and with the harvest level being at that level, at the 850,000 ton level. I just have a hard time seeing why that would still generate such a high tax rate. Is there some catch-up in there, or can you shed some light on that?

Yes, it's not due to catch-up. The way to think of it is in the fourth quarter, we are going to have pretty good quarter in our Wood Products business, of course. Our real estate business is going to perform exceptionally well. A lot of these land sale transactions we are talking about are happening out of our TRS. So you have to take that into consideration.

And then, if you look at the REIT side of the business, it's just the log harvesting side of it. And if you look at the income that gets generated by the REIT, roughly half of our corporate expenses are in a REIT and half are in the TRS. Well, the same thing is true for the interest expense. Roughly half is in the REIT and half is in the TRS. So the income that the REIT is going to make in the fourth quarter is going to have to be used to pay half corporate expense and half interest expense. So that's why the effective rate is relatively high in the fourth quarter.

It makes total sense. Looking at the guidance I think you give us for land sales, with the conservation transaction, which I think is like $11 million, you're saying maybe the segment might book $18 million in the quarter. Did I get that right?

Yes, you got that right.

Okay, good stuff. Lastly, I know it's quite volatile and I don't want to pin you down. But given that I think you are not involved with hedges, do you think the Wood Products segment could see double-digits in the fourth quarter, despite the seasonality, or would that be strong?

Wood Products double digits in terms of --

EBIT, earnings.

Yes, I think it's possible. If you look at it, we produce about 160 million board feet a quarter. Let's say prices declined $30 a thousand; 30 times that is about 4.8 million, something like that, off of today's earnings, all else being equal.

Got you. And one last thing. I know that it's not apples to apples. If you go back and look at the 2002, 2003, 2004 period, when you saw the Canadians really pumping a lot of lumber into the US, trying to make a point, we certainly don't see any sign of that, I would suppose, now. It just seems to me that your margin here in the last quarter in the Wood Products business was within a few -- not that far from what you saw back in that period. In fact, it was higher than what you saw back over the -- even at the last peak. And I'm sure part of that is tied to the fact that -- well, it has to be tied to your cost experience. And if you could just talk a little bit about how your system -- I know you might not have been there then, but how your system, you feel, is different than it was back in the run-up to the last housing peak.

I can't even remember back that far. I think the cost curve, I think, has come down across the industry substantially. One of the big differences today, I think, compared to several years ago is log costs for us in the lake states and in the US South are quite low relative to where they would normally be. And that has certainly helped drive margins in -- even in this strong lumber market, the margins, I think, are even better now because of lower log costs, particularly in the US South and in the lake states, for Potlatch. The Idaho long costs are probably more normalized.

But also, I think, to your point, Canadians had 35% of the share of the US market 10 years ago pre-softwood lumber agreement. Today, that number is 25% or something like that. China market didn't exist. The pine beetle wasn't around.

The market is just a really different phenomenon today than it was back then, and I think these margins that we have today are going to improve in the next few years. Even with rising long costs, I think we're going to see lumber prices over the next few years be very favorable.

Got you, thank you.

Steven Chercover, D.A. Davidson.

I just want to try and correlate what Mike said of improving lumber margins with what I understood, with the implication of the transfer prices of your logs. I thought, sooner or later, the margins that you are earning in Wood Products would transfer over to the Resource segment, and that was beneficial because it's tax efficient. Am I wrong that you expect lumber to get better, still?

No, I think what you said is exactly true. Eventually, those higher lumber prices, Steve, they will translate into higher log prices. They are already doing it in our northern region. I think what we're really talking about is over the long-term, the price trends are very favorable for the resource business, but it may not materialize this quarter, per se.

So in a rising lumber market, the mills continue to do very, very well, but, as lumber prices stabilize, ultimately the log prices by formula are bid up and the earnings will then accrue to the resource. Right?

Yes, in general, that's the case, sure.

Today in the South, it's a little bit different dynamic, right, because they are not indexed in the South. Lumber prices have really run in the South, but it hasn't translated into higher log prices. But most industry prognosticators feel like log prices are going to be moving up a lot over the next four to five years, maybe not next quarter, but over the next several years.

I don't know if you feel comfortable answering this or not, but it looks like you are on track to have $40 million-odd in operating earnings for Wood Products this year. Do you think it could be similar next year?

It's hard to talk about next year. We haven't announced our plans. But I think it's easily doable for at least that, maybe even more next year. Lumber prices are -- I think the latest forecast I saw was roughly a 10% higher composite random lengths lumber price next year. So lumber prices are going to run 10%. Most cost factors for most mills, especially in the South, are going to stay subdued. That's just going to mean more margin for the lumber manufacturers.

And then switching gears, since there's such a lead time between when you actually get the conservation deals done and when you start formulating them, can you just discuss whether you have any material conservation deals that you're working on currently?

No. The answer is we are not going to preannounce the conservation things we are working on it. To your point, the negotiations take a long time. The Mississippi Northwoods property that we just announced was a very special place and a very unique place in the Potlatch ownership, but we also have others that are attractive. They do take time, and conservation organizations and the source of conservation funding is very unpredictable. You can't really count it until you close the deal. As you know, a lot of the funding for conservation deals has come through the Land and Water Conservation Fund, and who knows what Congress is going to do with that? So we don't have any that are on the drawing board to close in 2013 at this point, but longer-term we do have others.

Great, okay, thank you both.

Joshua Barber, Stifel Nicolaus.

I'm wondering if you could talk more about your future harvest. You said that your plans haven't changed a whole lot, but it clearly sounds like there's a lot of positive things going on, both in your markets and obviously in the markets at large. Can you talk about where that could possibly go in 2013 and 2014 of the trends that we are seeing continue?

Well, we will give guidance on our harvest activity and plans for 2013 during our first-quarter earnings call in late January or early February. I think it's safe to say and we have been very clear that we took a major decision to defer a lot of harvest during this downturn and we've got significant upside potential as markets recover. And if these trends continue, we'll start bringing them back to market over the next few years.

You guys talked a little bit before about how much supply is still on the sidelines, in the lumber world, at capacity, more specifically. At what point do think that what we're seeing a number prices starts translating into what we saw from plywood earlier this quarter, and there will just be some announcements that start having a pretty decent impact on pricing? And where are we in your mind, at least, in terms of the supply relative to where the market is and where the market is going to go in the next six months?

It's really hard to say. We haven't seen a lot of mill restarts, frankly, since this recovery began, and I think a lot of people are really skittish. The industry has been through some really tough times and I think most people are looking at bringing on supply very incrementally along with demand. If you look at supply, it's up 6%, 7% year-to-date, and that's consistent with demand being higher, plus 6% or 7% year-to-date. I think people are just being really cautious, and I think the industry has been through some rough times. And credit is part of the analysis here, because to get a mill regoing again, you have got to build working capital and find the crews and whatnot. I think it's a lot harder than most people realize. So I think it will be slow to come back to market.

Last question -- are you seeing any issues in the past quarter or quarter to date both on the logging and on the lumber side in terms of contractors and trucking?

Well, we are seeing a little bit of cost pressure on the logging and hauling side. We said at the start of the year, we expect our costs to be a little bit higher for the year. And I think so far this year, our full-year outlook is logging and hauling costs of $0.50 a ton in the South and up $1.95 a ton in the north. So we're seeing a little bit of cost pressure, but it appears to be manageable.

And I don't think that -- we don't anticipate that if we did decide to raise harvest levels next year, that we would have any barriers or constraints due to lack of logging contractor capacity. We have a core contracting force that's capable of managing more output.

Great, that's helpful, thanks very much.

Albert Sebastian, Prospect Advisors.

Most of my questions have been answered, but just a quick one. I guess for modeling purposes, we should assume 160 million to 165 million board feet for lumber production is essentially full capacity?

For the fourth quarter, 160 million might be a good number.

Okay, so in terms of your ability to, other than the small debottlenecking projects you announced, that's essentially the maximum amount that you could produce over a sustained period?

Where we stand today, that's correct.

Okay, thank you.

(Operator instructions) Chip Dillon, Vertical Research.

I might have missed this, and I know it's too early and you're going to tell us early in the year, but did just make comment about what your harvest could be next year? Would it make sense maybe that would start with a 4 in terms of millions of tons?

No, we did not say that. We didn't say yes or we didn't say no. We didn't give any guidance about that. As you know, we have deferred about 1 million tons of harvest, currently at about 3.5 million tons, and we've said our sustainable level to manage to is around 4.5 million tons. So we are down about 1 million and we'll give guidance in February or late January on next year's plans.

And I guess to be realistic, that's only prudent because, hey, you want to see how the market develops; and, B, I think there are probably some very specific areas like Arkansas, I guess, where you have to see what the local interest on the ground is -- is that fair?

Yes, that's fair.

Secondly, as we see the numbers move up in Wood Products, and let's say this continues, does it behoove you all, assuming there's not a change in the near-term in the land transaction offers for you to have a bias toward maybe slowing down your pace of sales of timberlands? Or should we continue to see them at the rate we've seen in recent years? I know it has been lumpy.

Well, we said at the start of this year, Chip, that we only plan to sell 20,000 to 25,000 acres of land, and that's what we are on pace to do. Almost all of that this year, in fact all of it this year, is rural, recreational land and HBU sales. We only have 15,000 acres of nonstrategic timberland that we have identified at the start of this year that we plan to sell and we haven't sold any of that. So the large land sales, the non-strategical land sales that we did no last three years are largely behind us. But going forward, it will be the 25 or 30 transactions a quarter of small deals. That's what we will do over the next several years.

And so that -- roughly add up to like in the 10,000 to 15,000 per year range? Is it a good guess to be at?

This year, we said 20,000 to 25,000, and we also said it would be a little less next year, so we'll give more guidance on that in January.

(Operator instructions) At this time, there are no additional questions. I'll turn it back over to management for closing remarks.

Thank you all for joining us and will speak to you in our first-quarter earnings call at the start of the year.

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