Potlatchdeltic Corp (PCH) 2015 Q3 法說會逐字稿

Good morning my name is Phyllis and I will be your conference operator today. At this time I would like to welcome everyone to the Potlatch third quarter 2015 earnings 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)

Thank you. 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 Phyllis and good morning. Welcome to Potlatch's investor call and webcast covering our third quarter 2015 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 segment information as well as reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com.

I would now like to turn the call over to Mike for some comments and then I will cover our third quarter results and fourth-quarter outlook.

Thank you Jerry, good morning. Our resource and real estate businesses continue to perform well and contributed meaningfully to results especially during the third quarter when harvesting activity was at peak levels. With the continued decline in lumber prices through late September we had another challenging quarter in our wood products business and EBITDA has been negative this year for the first time since 2010. Lumber prices during the quarter fell unexpectedly to levels we haven't seen in some time. As a result, our wood products earnings have declined by $47 million compared to the first nine months of 2014.

Prices appear to have bottomed and lumber futures have increased over $40 since the beginning of October. Concerns about higher lumber shipments from Canada depressing prices immediately following the expiration of the softwood lumber agreement on October 12 proved to be unfounded.

Buying activity has a increased since the agreement expired as stocking distributors work to meet customer needs. If the current price trend is sustained our mills will swing back to profitability in the fourth quarter.

Recent housing news continues to be encouraging especially with the homebuilder sentiment index at 10 year highs. Housing starts are expected to finish the year between 1.1 million and 1.2 million units and we foresee continued gradual improvement into 2016 which bodes well for both our resource and our wood products businesses.

With our leverage to lumber prices it is not surprising our stock is trading at levels we have not seen in over three years. Our stock is trading approximately 35% below analyst estimates of our net asset value or to value of roughly $1000 an acre. Clearly there's a large disconnect between the public valuation of our stock in the private market value of Timberland as evidenced by recent transactions. Accordingly our capital allocation priorities have shifted away from debt repayment, growing our acreage base through bolt on acquisitions, and investing on higher return capital projects.

It is clear that the best pathway to grow shareholder value is to invest in our own Timberland by purchasing our shares. Such a program would require the sale of assets which would be more attractive beginning in 2016 when the built-in gains tax associated with our REIT conversion phases out.

I will now turn it back over to Jerry to discuss the quarter results and then we will take questions.

Thanks Mike. Beginning with page 3 of the slides accompanying this call our net income was $21.8 million or $0.53 per diluted share in the third quarter. This is up significantly compared to second-quarter earnings of $0.02 per diluted share, primarily due to seasonal higher harvest volumes.

I'll now review the results of our operating segments. The results of our resource segment are displayed on pages 4 through 6.

Operating income for the segment was $36.4 million compared to $8.8 million last quarter. Our harvest volume for the quarter was at the high end of the range that we discussed on the second quarter earnings call. Our employees and contractors work hard to achieve this result despite operating within the constraints imposed by the extremely dry conditions and heightened fire danger in the West. We had minimal fire damage on our timberlands.

Northern sawlog prices increased $3 per ton or 4% in the third quarter as presented on page 5. Western lumber prices increased in June and the first half of July. This translated into higher average sawlog prices in Idaho in the third quarter because the majority of our Idaho sawlogs are indexed to the price of lumber on a one to three-month lag.

In addition prices for Cedar sawlogs remain strong. Cedar logs are currently selling for about $250 per ton which is significantly higher than prices for other species of logs. Cedar comprises less than 10% of our northern sawlog sales volume.

Our northern harvest volumes were more than 5000 times higher in the third quarter compared to the second quarter. This is the typical seasonal pattern because spring breakup significantly constrains operating days in the second quarter and dry conditions result in the most favorable operating conditions in the third quarter.

Moving to the South on page 6. Sawlog prices increased $7 per ton or 15%. This was primarily due to a seasonal increase on the harvest of hardwood sawlogs which sell for higher prices than pine sawlogs. Southern yellow pine sawlog values remain flat and all three of our pine wood baskets.

Pulpwood prices were flat compared to the second quarter. As discussed on last quarter's earnings call, pine pulpwood prices were higher in the second quarter largely due to unusually wet weather constraining supply. A seasonal increase in hardwood pulpwood harvest in the third quarter offset the reversion of pine pulpwood prices to recent trading levels.

The total harvest volume in the South increased almost 300,000 tons in the third quarter compared to the second quarter. Our second-quarter volume was behind plan due to wet weather limiting logging operations. We were able to make up a part of the shortfall in the third quarter. As long as logging conditions remain favorable and mills need logs, we expect to make up the rest of the volume in the fourth quarter.

The results of our wood products segment are displayed on pages 7 and 8. The segment lost $5.4 million in the third quarter compared to a loss of $2 million in the prior quarter. The decrease in earnings is primarily due to lower lumber prices which resumed their slide through most of the third quarter.

High log costs in the Lake States also contributed to the week result. Our average lumber prices decline 5% quarter over quarter which is a bit higher than the drop in lumber prices implied by calculating the simple average of monthly Random Lengths framing lumber composite prices. This is largely because the composite does not include economy grade lumber as well as the fact that we are more heavily weighted to studs than the composite.

We completed the final two large wood products capital projects planned in 2015. We installed automated graders at our Warren Arkansas and St. Maries Idaho lumber mills in the third quarter. Both project have IRRs above 20% and are expected to result in improved grade recovery and lower costs.

Mill downtime associated with these projects negatively affected wood products earnings by approximately $1 million in the quarter. The effect of lower prices, mill downtime, and high log cost was partially offset by slightly higher lumber shipments in the third quarter.

The results of our real estate segment are covered on page 9. Operating income for the quarter was $4.2 million compared to $8.5 million in the second quarter. As discussed on last quarter's earnings call we sold two commercial sites during the second quarter for significantly higher prices than our typical HBU properties. We did not sell any commercial sites in the third quarter.

The Minnesota rural recreational real estate market remained strong. Corporate was lower than the normal run rate of about $9 million per quarter largely due to a year to date adjustment to the bonus accrual.

I will now turn to page 10. As Mike mentioned in his comments we are planning to refinance the $27.5 million of debt maturing in the fourth quarter of 2015 and first quarter of 2016. We expect that this will result in modest interest savings along with freeing up capital. Capital expenditures were $27 million through three quarters, we're on track to spend $36 million in 2015 which is the amount that we budgeted for the year.

Now I'd like to comment on our outlook. We plan to harvest between 1.1 million and 1.2 million tons in the fourth quarter with slightly more than half of the volume in the South. Approximately 90% of the harvest in the North and approximately 45% of the harvest in the South including stumpage are expected to be sawlogs in the fourth quarter.

We expect northern sawlog prices to decline in the fourth quarter to reflect lower lumber prices on are indexed volume. This will be compounded by seasonally wetter and heavier logs. As discussed in prior quarters, log prices are set on a dimensional basis in Idaho not based on weight.

We expect the average price that we realized for southern sawlogs in the fourth quarter to decline due primarily to a seasonally lower volume of hardwood sawlogs in the sales mix. We continue to believe that our southern pine sawlog prices will remain flat this year. We expect southern pulpwood prices to be down slightly also due to a lower volume of hardwood pulpwood in the mix. At these volumes and prices we estimate that resource earnings in the fourth quarter will approximate the segment's earnings in the first quarter of 2015.

Turning to wood products, we expect lumber shipments to increase 5% to 10% in the fourth quarter. As we discussed earlier all of our major capital projects planned in 2015 have been completed and the mills are running well. Our forecast assumes that our average lumber price in the fourth quarter will be flat to slightly lower than the third-quarter. There is upside to this forecast if the recent lumber price increases continue.

The cost of logs started moderating in the Lake States early in the third quarter. It will take a couple of quarters to work through the high cost logs that were purchased earlier in the year.

Shifting to real estate we expect to sell between 15,000 and 18,000 acres this year. Which is less than the 20,000 acres that we planned. This is primarily due to the potential for some transactions to slide into the first quarter of 2016.

Land basis is estimated to be 25% to 30% of land sales revenue for the year. We expect that corporate will return to its normal run rate of about $9 million in the fourth quarter. Interest expense and the income tax benefit in the fourth quarter are expected to be comparable to third-quarter amounts.

To summarize, we expect earnings to be lower in the fourth quarter due primarily to seasonally lower harvest volumes and lower prices. We are encouraged by the continued progress in US housing starts and the recent increase in lumber price.

That concludes our prepared remarks. Phyllis, I would now like to open the call up to Q&A.

(Operator Instructions)

Gail Glazerman, UBS.

Good morning.

Can you just give a little bit more insight and color into what you think drove the, I guess, unexpected pressure on lumber in the third quarter and what's been supporting the rebound recently? And specifically, in terms of rebound, to what extent might that be impacting log demand?

Yes Gail, this is Eric.

I think in the third quarter you had a couple things that were at play here. We saw Chinese demand weaken backing up lumber into North America. Some of that maybe currency related but it looks like demand was soft in China.

You also had the coming expiration of the Softwood Lumber Agreement. We think a lot of dealers and people that consume wood thought that the expiration of that agreement was going to cause a collapse in lumber pricing and that there would be a loll of wood that would come across the border starting October 13, the first day after the expiration had expired, or after the agreement had expired.

What happened was inventories got dragged down really low because nobody was buying lumber and then all of the sudden the lumber agreement expired. Weather conditions are good outside for construction activity, and so demand resumed and prices are very quickly rebounded. Now they are not all the way back to where they were earlier in the year, but certainly they made a nice recovery over the past several weeks.

So as that relates to log pricing and log demand, I think it's fair to say that those lower prices resulted in less converting activity at sawmills, probably pushing down demand a little bit. You saw a few mills curtail and I'm sure many mills cut back on overtime hours. But now that those prices are resuming and margins are now getting back into positive territory again, I think demand is coming back for logs.

It hasn't really translated into significant changes in log prices however. That remains to be seen.

Looking to the fourth quarter in the South, any concerns or any signs of weather impact? It looks like there certainly been some thoughts of extreme wet, including what is happening right now.

There was a hurricane that came up through Mexico and into Texas and actually we got significant rainfall in Arkansas. We actually did have to pull out of the woods for four days or so. We had a lot of rain activity.

As of now, we don't think that's going to impact our harvest plans for the fourth quarter. But we are getting into that time of year where certainly weather events can impact harvest activities.

Alright and in terms of the discussion about the potential land sales to support buybacks, can you give any sense at all about how far this discussion might have gone with the board? I am presuming it is -- because you've talked about buybacks in the past that the board has ultimately decided not to follow up on. I assume there is more support at this point from your conversation.

Yes, Gail, we've certainly had discussions with our board about the valuation of the Company by public markets and there's a very large disconnect we've seen between private transactions in the public valuation. There's a number of transactions recently to substantiate that. I think it's a pretty glaring opportunity that the best thing we can do to allocate capital is to buy back our own shares. Our own Timberland is the best investment we can make.

We look back at the decisions we made a year ago to expand into Alabama and Mississippi with the transaction we did there to buy 201,000 acres. Our stock was trading in the mid 40s at the time and we had excess cash on the balance sheet. I think for a number of strategic reasons it was absolutely the right thing to do.

But times have changed and we kind of hitched ourselves to this lumber market in terms of not only our wood products business, but indexing the price of many of our logs to the lumber market. And we've been drug down with that, we think unnecessarily so. So the opportunity before us is to sell assets and position that cash to re-buyback shares and certainly we continue to work on that discuss it with our board.

Alright and just one last question.

Can you give a little bit of insight into what you're expecting in log pricing in the fourth quarter just given I guess the movement that we've seen to date in lumber, as well as just kind of some of the wetness shift and as well as mix shift down South? Something a little more specific than what you have mentioned?

Yes Gail, so it's Eric.

As Jerry mentioned, we are going to see prices come down for our specific business in the fourth quarter. If you look at the northern region, a good portion of the drop, probably over half, is simply due to that conversion factor. We sell on a MBF basis but we report out on a dollars per ton basis. So of the drop that we anticipate, half of it will be due to that conversion factor.

We're also going to see a little bit of a mix shift as well. Cedar tends to be a little bit lighter for us in the fourth quarter as a mix percent. So that's going to impact our reported price per ton as well.

Lastly, we do think lumber prices, although they have risen in the fourth quarter, they may not have risen fast enough to bring up the overall reported lumber prices comparing Q4 to Q3. So slightly lower lumber prices across the full quarter combined with the converting factor I talked about, combined with the lower cedar mix is going to drive our log prices a little bit lower in the fourth quarter in the northern region.

[Multiple speakers] Can you give just any sense of magnitude to that?

I think you can see prices come off in the 10% to 12% kind of range.

Thank you.

Like I said, half of that is going to be due to the simply the conversion factor.

Now in the South as Jerry mentioned we are seeing continued flat pine sawlog pricing. Now prices for us are going to come off a little bit in the fourth quarter. Again, we have got a mix issue going on. Hardwood is typically harvested in the third quarter. It tends to sit in the lowlands where it is subject to getting underwater in the more wetter months.

So what happens is harvest activity for hardwood comes off in the fourth quarter. So that mix percent is going to drop from us probably in the 13% range in Q3 to 6% in Q4 as a percent of our southern sawlogs harvest volume. So that mix impact is going to drive our prices lower in the South as well.

And then finally you've seen hardwood prices come off a little bit in the South from about $80 a ton down to $69 a ton. So we expect prices to be a little bit lower for southern sawlogs as well.

Okay thank you.

George Staphos, Bank of America

This is John Babcock sitting in for George. How is everything going today?

Good morning.

Just quickly with regards to the lumber side of things. First of all, we've heard a lot about this other lumber agreement expiring and I just want to get a sense for ultimately what is holding back an agreement at this point in time and ultimately what sort of progress is being made there?

The softwood lumber agreement expired not the southern just to be clear, it covers all softwood lumber. The trade agreement between the two countries, Canada and the US, has to be negotiated by the governments. I think with the elections it just happened Canada. Certainly the political season that we're in the US, that does not facilitate country to country discussions and negotiations government to government at this point, so I think that is one thing.

There's a moratorium on filing a trade case for one year after the agreement is expired. I think that will give us, the two countries and industries time to think about. I think the fundamental difference is there is components of the US coalition that want to see a quota, there's components that want to see a tariff, and Canada certainly would like to see certainty for an important trading partner.

So I'm reasonably confident the coalition will prevail in the next year working with Canada to reach some negotiated settlement that can be brought to the government's to put a stamp on but it's going to take time. I fully expect we are going to operate without an agreement at least through into early next summer.

Then with regards to the curtailed production within the lumber side of things, at what point do those guys bring their production back on and to what extent can the impact prices and as you go into 4Q and also early into next year?

You haven't seen a ton of curtailments. We've seen a few curtailments and I think those curtailments plus this notion of the softwood lumber agreement expiring, we have seen prices recover and that's going to bring the modest amount of capacity that came off the market it's probably going to come back on the market.

Now the extent to which people put on overtime, that remains to be seen. I don't think margins are high enough yet to where it's attractive enough yet for people to start thinking about putting in a lot of overtime. We just now crossed back over into roughly breakeven territory for most mills.

It's obviously very region specific. The South is still pretty profitable manufacturing lumber under whereas Westside producers are feeling some pressure. So I guess to answer your question, I don't think you'll see a lot more incremental capacity given we haven't seen a sharp enough run in lumber prices yet.

Alright. And with regards to the capital plan or rather new capital allocation plan that you guys discussed, say that were to be an improvement with in the stock price to better reflect the values how quickly without ultimately change the plan?

That would be a high-class problem, I guess first of all. Things have changed, as I mentioned at, less than a year ago our stock was in the low to mid-40s and now we find in the high-20s so things can change in both directions. Our plans will keep pace with those changes.

So it's making a decision to reinvest in our Mills is a higher priority than say buying back our shares is something we can do fairly quickly and if that opportunity presents itself we will certainly move that way.

My last question here. I noticed you guys had a tax benefit for the quarter. What ultimately drove that?

John, this is Jerry. The tax benefit is really driven by the Mills operating at a loss, so it is -- it reflects future cash tax refunds that we'd expect as we file a tax return.

Thanks again, guys.

Thank you.

Chip Dillon, Vertical Research

Thank you and good morning.

Morning.

First question has to do with -- I just want to drill in a little bit on just so I understand the log pricing in Idaho that I know is largely tied to lumber prices. Now with the lumber prices having fallen until like September, when do you think those prices actually bottom? Is the lag like a month or two, or is it longer than that?

Yes Chip, it's a one to three month lag that our logs are indexed to the price of lumber. So it varies, but it's generally and that one to three-month kind of range.

So said differently unless it goes back the other way, the first quarter prices looking to be better than the fourth quarter in Idaho at this point.

Well yes, for certain customers yes. But the other thing to remember is that we harvest more logs early in the fourth quarter than we do late in the fourth quarter. Our harvesting activity in October is a lot higher than it is in December. You start getting into the holidays in inclement weather and that sort of thing.

So unfortunately with the rise in lumber prices, the price that we were selling logs in October was largely based upon what was happening in September and in the third quarter.

Right, okay, got you.

And then just to make sure I'm on the right page. I know in the first quarter I think resources did about $17 million. I think if I heard you right that, even with -- let's say that we end up with prices flat to slightly down in lumber, with the projects done in the mills running better, you said you had a shot at maybe being modestly profitable? I guess that still the case?

And then I guess, you've said if you assume you made a $2 million in real estate at least on an EBITDA basis and corporate goes back to $9 million and interest stays at $8 million, it looks like you are kind of saying something in very broad terms. You'll be profitable in the fourth quarter but might be $0.05 to $0.15 something like that.

Chip, this is Jerry.

You covered a lot of ground there, but maybe to start, in terms of resource we reported operating income of $15 million in Q1. In the script comments we're focused on that we expect with all the moving parts that it will be comparable to that here in the fourth quarter. And again that's a resource statement.

Maybe just fast forwarding to kind of your overall company statement as you walk through the rest of our guidance I think probably near the lower end of the range you threw out between $0.05 and $0.15 is kind of what our forecast pencils out.

Got you, yes I apologize. I don't know why I said 17, yes that would explain it.

And then the last question is, on the -- you mentioned I mean it was very clear that you guys view buybacks as more attractive than investing internally. Could you just remind us what you have authorized at this point and what sort of -- what we could expect there if the stock price stays as depressed as it is?

Given our current stock price and the disconnect between public and private Timberland valuations is why we have stock repurchase as a higher priority than any other capital allocation decision we can make at the current time. We do not currently have an authorization in place from our board to repurchase shares.

As I mentioned before, in order to execute such a plan would have to raise some money through the sale of assets which again we think is an attractive arbitrage given the value of Timberland today that's held up well in the private market. So I think that covers it.

Got you and are you open to any particular -- is there sort of a size you have in mind when he say sale of assets? Could it be something major like a couple 300,000 acres or is it likely to be something smaller or kind of all of the above?

We will look at the range of opportunities that are out there in the market and what makes sense but I think that a meaningful share buyback is something that represents between 5% and 10% of our outstanding shares, so we'd look at an asset sale to support that kind of a level.

Got you, that's very helpful. Thank you.

You're welcome.

Collin Mings, Raymond James

Good morning, guys.

Good morning.

First just following up again on the shift as far as the Cap allocation strategy. Just to clarify, would you look at just pursuing an outright land sale or are open to doing a JB type transaction like Plum Creek did?

We have not contemplated doing something along the lines of what Plum Creek did. We think it very creative they have the scale and size to do that, I think that's more challenging given our relatively small footprint compared to them and we've had no discussions with the potential JB partner about that. So at this juncture I'd say an outright asset sale if we can find one that's attractive is a higher likelihood.

Okay. And is there any regional bias one way or another to maybe look at doing something in the South versus Idaho?

No. I think it's a matter of legacy land that was converted in the re-conversion in 2006 and that exists across the geographic spectrum and it's a matter of where we can find an attractive opportunity, if we can find one. And that remains to be seen.

Okay. And just as it relates to your Arkansas footprint. Just any impact at all is it relates to Conifex and Canfor and helping some acquisitions in that southern Arkansas area recently?

Yes, so, Collin, this is Eric.

As it relates to Conifex in El Dorado, that site needs a significant amount of capital and that is going to take time for Conifex to get that location up and running. I think they're going to have to raise the capital and as you know now it can be a challenging time for a lumber producer to raise capital. So we don't know where Conifex is at as it relates to getting that mill up and running, but certainly it's an attractive wood basket and it's an attractive opportunity for them. But that's where that stands right now.

As it relates to the Anthony Mill over in Urbana which is just east of El Dorado, I don't think that transaction has closed yet. And Canfor, if I'm not mistaken, has not announced what they are going to do with that particular mill; however, that mill today consumes about 150 million board feet, logs, about 600,000 tons a year is what it is consumer today. The average Canfor Mill is significantly bigger. They average about 250 million board feet a year.

Our guess is that Canfor is going to expand capacity at that mill, which will certainly help out log demand in that particular wood basket. We have not heard yet what Canfor plans are yet.

Okay that's helpful color.

Just going back to and I recognize you are still working on 2016, but is there a way to think about just given the shift in capital spending and priorities there, how we should think about kind of a recurring CapEx number on the wood products side, versus some of the improvements you have made this year, obviously some capital going in this year. So what's kind of the core CapEx, maintenance CapEx number do you think about?

We will provide 2016 guidance in January, Collin. But I think if you back the last few years prior to 2015 you'd see more typical kind of maintenance CapEx levels and that represents somewhere between roughly $15 million for our resource business, which is requirements for planting reforestation, road construction, and so on and another $5 million to $10 million for support of our wood products business, both maintenance capital and high returns, small discretionary projects.

So a $20 million to $25 million number is more normal with $36 million to be spent this year is highly focused on four discretionary high return projects which we will not repeat in 2016. Not because they haven't done well, they've been huge home runs, but as I've said we've just got higher priorities elsewhere.

Yes, understood.

As far as the debt refinancing, just what type of term are you looking at and how do you think about? I think in the prepared remarks you're saying you expected it to be mildly accretive but just talk a little bit more about term and rate on the debt refinancing.

Sure, Collin, this is Jerry.

In terms of refinancing that debt, after interest rate swaps are considered it's a little over 500 basis points today. So we could probably save 100 basis points you know put a little over 4%. In terms of tenure we're inclined to think about it as a 10 year debt. A way to lock in these low current rates for a longer period of time and, quite frankly, we have no maturities ten years out right now.

In terms of interest savings, again, modest with the small amount of principal that probably pencils out to somewhere between $200,000 and $300,000 in interest savings per year.

That's very helpful. One last one for me and I'll turn it over.

Going back to some of the prior questions that Mike, the comment in the prepared remarks about looking at maybe swinging into some profitability if the lumber pricing gains are sustained and that momentum continues. Is there a way, and again recognizing there's a lot of moving pieces, but just thinking about the fourth quarter, is there a breakeven price as you guys report that we should think about for the wood products segment?

Well I think -- so, Collin, this is Eric.

There's is a way to think about breakeven price and I would say it's a little bit higher than where we are today. I think we reported pricing in the third quarter of about $335, $1000 on a GAAP basis. I think you could see prices if they were a little bit higher. Not a whole lot higher but a little bit higher you could see us get back to breakeven.

I think the simple way to look at it is take the $5 million of loss that we had in the quarter and think about 160 million feet of production and that math would get you to the price increase that you would need to get us to breakeven.

That's operating income breakeven not EBITDA.

Right, okay no that's very helpful. I'll turn it over guys. Thank you.

Thank you.

Mark Weintraub, Buckingham Research

First I just want to confirm. If I heard right, you would anticipate cost of debt roughly 4% which interestingly is lower than where your dividend yield is 5%. Did I heard that right, first off?

Yes you did hear that correctly, Mark.

Okay and then on the divestiture program, presumably would that be incremental to the ongoing rural land sales which have been in the 20,000 acre vicinity?

If we can find an attractive transaction yes it would be incremental.

Okay.

Just in curiosity have you begun that process yet? I recognize that you don't want to finalize the sale until next year given the anniversary of the built-in gains. But is that a process you have already began and are you hopeful or are the indications good early on or is it something that you're about to embark on?

I think we're optimistic about the opportunity to execute a transaction that is meaningful at a significant arbitrage between these private market transactions and where we trade at publicly. And recent transactions particularly in the South, which is where the best benchmarks are, to consistently show that quality southern Timberland trades between $1800 and $2100 an acre, based on what we purchased for and other's have sold for.

I think that makes us certainly hopeful and I think very optimistic given still a fair amount of money on the sidelines with T mounts and other institutional investors that still like the asset class that we can execute a transaction.

Just a detail question if I might. On the fourth quarter I noticed on the slides you had indicated interest in corporate expense you felt would be similar versus the third quarter. I just wanted to just clarify so corporate had come down at $2 million in the third quarter? Are you expecting it to go -- just clarify what sort of would corporate you expect that to be in the fourth quarter?

And also, kind of looking ahead, have there been any moves to reduce corporate such that it might be a lower number in 2016 than it was on average in 2015?

Thanks for asking that question, Mark this is Jerry.

In terms of corporate, it was lower than our normal run rate in the third quarter largely because we adjusted our bonus accrual on a year-to-date basis. The normal run rate for this year is $9 million. We do expect in the fourth quarter that corporate will return to the more normal rate of $9 million.

In terms of going forward, the main difference year over year really has been driven by pension and post retirement and we will do a year end valuation and give guidance on that when we release earnings for the fourth quarter.

Okay great. Thanks very much.

Thank you.

Albert Sebastian, Prospect Advisors

Good morning gentlemen.

Good morning.

My first question concerns the land sale. The land sale that you're referring to that would come out of the timber rate subsidiary correct?

We don't have a specific sale that we've discussed so I'm not sure what you're asking.

I guess my question, the difference is the land sales that are HBU or rural real estate, those are in a taxable rate subsidiary, correct?

Usually they are, not always but usually they are.

Okay I'm just trying to understand how frequently you can sell land out of the timber REIT subsidiary from a tax compliance standpoint. Is this something you can -- on a frequent basis or is it something kind of a one-off and it has to be a large sale or how does that work?

Yes, Al, this is Jerry Richards.

In terms of sales of Timberland out of the REIT. The one line that we can't cross is becoming a dealer in the REIT for tax purposes and that's why the normal real estate activity really comes out of our taxable REIT subsidiary. And I think, in terms of what Mike has talked about this morning and what we might be contemplating, that's probably more of a one-off type transaction as opposed to something that's a series of transactions.

Okay. I guess, given that I guess it sort of implies that if you're going to do it has to be a sizable, you know a sizable land transaction then.

Maybe to reiterate what Mike said earlier is, in order for a share repurchase to be meaningful, it probably needs to be in the 5% to 10% range of outstanding shares. I think that bookends kind of the size of the asset sale opportunities that we would look at.

Okay and just one last question, concerning the Timberland that you've purchased about a year ago the 200,000 acres in the South. Any thoughts on just sort of having operated that for about a year in terms of just sort of how it looks from an inventory perspective, side index perspective? Has it met your expectations and maybe some marketing things you might be able to do with that the previous owner could not?

I think it's exactly met our expectations. The site index was better than what we owned in an average in the South and Arkansas, the stocking was higher as well there's been no surprises.

The team that we put in place has executed very well and we are exactly on track with the pro forma that we expected and, fortunately, we've had supply agreements in place that we assumed in the purchase with International Paper and West Fraser and other producers in the area, which have served us well in these markets in those last year. So we've been quite happy with the acquisition.

Thank you, gentlemen.

Thank you.

Steve Chercover, DA Davidson

Good morning, everyone.

So it's kind of late in the Q&A, but I wanted to get your thought process on the whole manufacturing side. You're EBITDA negative, what's the calculus of when you shut down or is it also a function of either contractual obligations to the lumber and panel buyers or the fact that you need to sell the logs to your own manufacturer, like why would run when you're losing cash?

This is Eric.

The Mills did go EBITDA negative in the third quarter. They didn't go negative for a very long period of time. A lot of the calculus that is involved in trying to determine do you permanently shut down or just dial back your production activity has to do with your outlook.

Our view as we got to the end of the third quarter when we went EBITDA negative was that lumber markets were over sold and that we would see a bounce back in pricing and that's kind of what happened. So as long as we are running cash positive it makes sense to keep the mills running. But even when they're running slightly cash negative, compared to the cost of a shutdown, which by the way if fixed costs don't go away in the case of a shutdown, you'll still continue to run.

Okay that is fair enough, but I don't think I've heard you attribute the share price weakness so explicitly to what goes on in manufacturing so is it still a core business? It certainly a bigger TRS component then I guess your peers.

Well I think if you look at the share price performance of Potlatch year to date versus the timber REITs, we have under-performed all the timber REITs. If you look at our share price performance against the large lumber companies, Canfor, West Fraser, and others, our share price performance is about in line with those.

I conclude from that. We're trading like a lumber stock not a timber stock and one that has significant net asset value derived from the timber base rather than really what is quite a small wood products manufacturing business. I guess that's the take away that we have from it.

Okay, and presumably if Q4 is kind of similar on wood side, we should model another small tax refund?

That is correct, Steve. The guide in the comments was that it probably approximates an absolute dollar amount what we had in the third quarter.

Got it. Thank you. With respect to capital allocation --

Steve, we had two conversations going on at once. Jerry wanted to correct something before your next question.

I meant second-quarter not third quarter on the tax benefit, sorry.

Okay thank you for that.

And then with respect to the evolving capital allocation priorities, you know with the repo taking precedence over debt repayment, does it have any implications at all for the dividend?

No I don't think so. We still view the dividend as very significant and supported by the business, we hopefully can continue to grow it. It's probably taken a bit of the pause given the collapse we've seen in earnings from our wood products business, which bleeds over to lower log prices in our resource business but certainly the dividend is still a highest priority.

Okay, thank you.

Thank you.

Paul Quinn, RBC.

Good morning, guys.

Just very helpful with the guidance on northern log pricing quarter over quarter. I think you mentioned down 10% to 12%. Can you give us the same sort of metric in the US south here? Do you see a similar drop?

For sawlogs we anticipate a similar sort of drop. Largely driven by the mix issues that I spoke about earlier.

Hardwood prices have come off and hardwood is a mix percent in the fourth quarter and is going to be lower. Those two factors will drive prices lower by about 12%.

Southern softwood sawlogs are flat.

Pine sawlogs are flat.

Just given the flatness in southern sawlog pricing reflecting back on comments on advantages to own Timberland, have you seen any kind of weakness? I know the transactions that are out there that have closed and are about to be closed are kind of spotty but some of them have there own constraints, but do you see any weakening demand in the Timberland space especially in the US south given the flat pricing environment?

I don't think we've seen in a lack of interest. The amount of capital still is there and I think is evidenced by recent transactions that were just completed for quality timberlands that are unencumbered by supply agreements or don't have poor site index and so on, I think the recent transactions have continue to support Southern Timberland trading, call it $2000 an acre for quality timberlands.

Just lastly just back to the comment on whether wood products is core to you guys, there's obviously guys that do this full-time basis and it's obviously an issue that is causing some weakness could you consider a sale of that business?

Well we never say no to anything if we can create more shareholder value by selling it would certainly consider it. The businesses we think have a -- they have a really nice fit with out timberlands especially in Idaho and Arkansas where we are really kind of naturally hedged because about half of the volume goes from our land to the mill so when log prices are weak we capture the returns in sawmill business and vice versa.

We like that aspect of it and it's important that the mills operate and are well-maintained by somebody that doesn't have to be us, but I think we have done an okay job with it and we continue to, the last benchmarking we did our mills were still first quartile margin performers and suspect they are still in that same ZIP Code, so I think the business I think has served us well.

That's all I have. Best of luck, guys.

At this time there are no further questions.

Thank you, Phyllis. And thanks to all of you for your interest in Potlatch. That wraps up the call for today.

Thank you.

Thank you that does conclude today's conference you may now disconnect.