Rayonier Inc (RYN) 2005 Q3 法說會逐字稿

Thank you for standing by, and welcome to Rayonier's third-quarter earnings release conference call. Today's conference is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded.

Now at this time for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President and Chief Financial Officer, Gerald Pollack. Mr. Pollack, please go ahead.

Thank you and good afternoon. I would like to once again welcome everybody to Rayonier's investor teleconference at this time covering earnings for the third quarter of 2005. Our earning statements were released this morning and supplemental materials distributed soon thereafter, and both are available on our website at Rayonier.com.

With us today is not only Lee Nutter, Chairman, President and CEO, but also of Paul Boynton, Senior Vice President and Head of our Performance Fibers business, and Hans Vanden Noort, Senior Vice President and Chief Accounting Officer. Paul will assist Lee in covering several markets and operations reports, and Hans will cover some of the financial words.

Also with us today is Carl Kraus who recently joined us as Senior Vice President of Finance and Chief Investment Officer of TerraPointe. Although Carl won't participate in the formal presentation, he is a commentator in waiting, and both he and Hans will take over my role in the conferences following my retirement this coming January.

With that, let me remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Our earnings release and other recent press releases list some of those factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also repeated on page two of our supplemental material. Please familiarize yourselves with them. This conference is being webcast and can be reached through our homepage.

With that, let's start the program with opening comments from Lee Nutter. Lee?

Thank you, Gerry. I will make a few opening comments here, and then after that, and Hans will take you through the financials. We will come back and then discuss markets and operations of our business units.

As we said in our earnings release, third-quarter results were strong in all of our business units. Despite high raw materials costs and energy, Performance Fibers continues to do well. In large part, it is due to our cellulose specialties business with its market position and long-term contracts with our fixed volumes and annual price openings.

This year EBITDA to date adjusted is 101 million, and that business is exactly where we were last year. Obviously TerraPointe, our real estate business unit, did well, which you can probably say is relatively easy in Northeast Florida and Southeast Georgia, despite the hurricanes hitting the Southern half of the gulf of the state. Perhaps one could say we do well because of them.

In our forests resources business, as is typical in the third quarter and was expected again this year, the timber harvest in Northwest declined and was even from prior year's levels. We have a very strong balance sheet, and that combined with our robust cash flow positions us well for growth opportunities in the timber, as well as real estate businesses.

Before I go back to Jerry, let me make one more point, and that is about our Performance Fibers business. And while we don't see it as a growth business, it is a very strong contributor to our cash flow.

Last year our EBITDA here was 124 million and I said year-to-date is 101 million. In particular, CapEx in this business is about 40 to 45% EBITDA. Also, because Performance Fibers is in our taxable real estate subsidiary, or TRS, it generates considerable taxable income. It provides us an opportunity to absorb considerable interest expense both currently and as we look at growth opportunities in acquiring timberland in conjunction with selling our HBU properties down to TerraPointe. As you know, real estate is our third major business unit.

Gerry, do you want to begin a review of the financials?

Thank you, Lee. Before we go into the typical discussion of this quarter's earnings as compared to previous periods, I just wanted everyone to take a look at page three of the supplemental material where we attempt to itemize the various special items that we feel should be taken into account when analyzing this quarter's earnings. What we were trying to do is to indicate at least for us what items we're adjusting in or out of reported earnings to come to a more meaningful comparative result.

At the top half of the page, we can see the 2005 reported earnings for the third quarter of $0.96 per share and EPS of $1.63 for nine months. If we adjust out several items for the quarter, in particular we come to a 2005 third-quarter pro forma earnings of $0.46 per share which we will subsequently use in our analysis. Of course, you may have your own items that you feel are important to include or exclude when analyzing our results.

Further, if you have any particular questions about any of these special items, we would be very happy to answer them during the Q&A or afterwards.

Those special items in this quarter reflect the residual charge to net income for discontinuing and selling our MDF facility in New Zealand, tax and interest associated with various IRS settlements for audit years 1989 through 2002, a tax benefit on repatriating undistributed foreign earnings and the results of a favorable arbitration award of a claim we had against our former parent related to insurance proceeds recoveries.

The impact of these and other items on the nine-month to date results for 2005 and for prior reported results for 2004 are also shown. As I indicated, we will concentrate on the $0.46 per share for the third-quarter pro forma result compared to $0.33 per share in the second quarter of last year on a similar basis.

Let's turn to chart four for the opening financial highlights. On the top of the page, we reflect this quarter's $300 million in sales which was approximately $9 million over the second quarter of 2005 with improved revenue from both real estate and Performance Fibers contributing. Lee, as is typical, will go into the major causal factors behind that topline revenue movement in a moment.

Revenue is also $32 million above the prior year with all major prior clients contributing with the exception of our trading operation. Operating income of $51 million was approximately $2 million over second quarter of 2005 with strong real estate activity overcoming lower Northwest timber volumes, some adverse cost performance in Performance Fibers and slight weakening in price and higher cost in our lumber business.

Income from continuing operations of $75 million for the quarter was considerably higher than the second quarter of 2005, as well as the comparable period in the prior year. Items between operating income and net income contributing to this favorable variance included the special items noted on the previous chart affecting interest and taxes.

Earnings per share were $0.96 in the quarter on a reported basis, but as I said, we will use $0.46 per share as we continue through this presentation. Also, non-GAAP measures used in our presentation are reconciled to the next best GAAP measure in the appendix to this package.

Before I pass the microphone over to Hans to complete the opening analysis, let me refer to the bottom half of chart four where we provide an outline of cash, resources and liquidity. Although cash provided by operating activities for the nine months through September 30 of $206 million were below last year's comparable number, adjusted EBITDA of $280 million was $11 million above the prior year's nine months. Cash available for distribution of $159 million was also favorable by $10 million over the prior equivalent period.

Cash dividends for the first nine months of 2005 were $94 million which represented the first three quarters at a post-split dividend rate of $0.41 per share. As you are aware, we have announced and declared our fourth-quarter dividend at a rate of $0.47 per share on a post-split basis payable at the end of December based on our December 9 record date.

Cash flow during the quarter continued strong as we indicated and debt was reduced by $97 million from the June 30 balance with debt reduction proceeds including $40 million from the sale of our MDF plant in New Zealand. Debt to capital improved to 42.2% from year-end's 45.3%, and we ended the quarter with approximately $110 million in cash balances.

Let me remind everybody for their models that the average diluted shares outstanding in the third quarter was 77.8 million on a post-split basis, and all per-share statistics reported in this analysis and our 10-Q will also be post-split.

With that, let me turn the next three charts over to Hans Vanden Noort, Senior Vice President and Chief Accounting Officer, who will walk you through those analysis. I will return at the end of the presentation to discuss earnings per share trends. Hans?

On chart five we show a comparison of second-quarter to the third-quarter trends. We began with $0.45 in pro forma earnings per share and conclude the second-quarter tax audit settlement of $0.09 per share and ultimately come down to our third-quarter pro forma results of $0.46 per share. As we run through the operating variances, we can see almost $8 million less of operating income in the timber group, primarily due to the seasonally lower volume in our Northwest region and higher costs. Our real estate business had a very strong quarter with both acreage sold and price per acre above the second quarter. At the end, the timing of real estate transactions during the year will vary.

Continuing down the page, we can see a 3 million decline this quarter for our Performance Fibers business unit from the second quarter as cost increases, primarily in wood fiber and energy, more than offset higher price realization in both our cellular specialty and absorbent materials product lines.

At Wood Products, which now fully reflects the lumber business, results were also slightly below the second quarter, primarily from lower prices. Overall income improved from the second quarter resulting in another strong quarter.

Let's move on to chart six to briefly review the year-over-year variances. On this chart I will focus primarily on the third quarter which as we noted on chart three starts with a pro forma of $0.33 per-share basis for income from continuing operations for 2004.

Here we can see in the timber group a stronger year-over-year contribution from higher prices, primarily from the Northwest offset by lower volume also primarily from that region. As mentioned earlier, we had strong real estate sales this quarter which resulted in an $18 million pretax improvement over last year's third quarter.

Moving down the chart, Performance Fibers pricing in both cellular specialty and absorbed materials was favorable, but was more than offset by higher wood, chemical and energy costs. Other operations results were comparable such that in total our third-quarter operating income was 19 million above prior year's.

In the tax line, you can see the absence of a significant lifetime exchange benefit we had last year which negatively impacted this comparison by $9 million. However, this was almost offset by non-lifetime exchange benefits resulting from an improved REIT versus TRS income mix. Net net, the third quarter 2005 results of $0.46 per share was well above prior year on an apples-to-apples basis.

That is how we view our cash flow as it relates to cash available for distribution on chart seven.

In this chart, we begin with nine-months adjusted EBITDA for 2005, which includes a non-cash cost basis (inaudible), and to work our way down to cash available for distribution, which is the AB (ph). This year's adjusted EBITDA of $280 million represents an $11 million increase from the prior year's equivalent period. It is driven primarily by improved prices net of somewhat higher costs as we noted earlier. This adjusted EBITDA has been reduced from capital spending and interest expense, both of which are at levels comparable to the prior year period.

The working capital on our balance sheet changes line reflects increased capital needs, as well as pension contributions 6 million above pension expense of 9 million and disposition pending of 7 million.

The other significant impact compared to prior year was the impact of lifetime exchanges in our CAD calculation. For CAD purposes, we consider the lifetime exchange benefits to represent investing activities versus operating activities since they are realizable only through reinvestment. Therefore, we reduced adjusted EBITDA to reflect taxes that would have been paid on real estate sales and the (inaudible) benefits not occurred.

While this only had a $2 million impact on the current year's CAD calculation, last year's calculation was impacted by $30 million.

Overall cash available for distribution is almost 11 million above the comparable period last year. CAD per share of $2.06 still well exceeded our first nine-months dividend of $1.24 per share.

With that, let me turn the conference over to Lee to begin covering our markets and operations.

In discussing our markets and operations, I will make a few comments about the third quarter and then briefly review our current outlook for this quarter. As always, keep in mind, and as we all have come to know, a lot can happen in a few weeks.

In the Northwest on page nine, prices moved up or moved slightly down from the second quarter, but were still 40% above last year's third quarter, and as typical, the lower volume reflects the usual seasonal slowdown that you see here. Demand remains strong, and we should see some price and volume recovery in this quarter.

For the year, average prices should range between 35 and 40% higher than last year. Volume this year should be about 10% lower than last, but as some of you may recall, volumes in 2004 reflected sales that otherwise would have occurred in 2003, but were pushed into 2004 to take advantage of our then new REIT status.

Page 10 reflects the statistics on our Southeast forest resource business. As always, this chart and my comments relate to the pine business as they have before. The pine business represents about 90% of our Southeast harvest. The remainder is hardwood for which there has been little change in price.

The average price for pine stumpage remains strong and essentially unchanged from the prior several quarters. This quarter prices should move up slightly. Also, if the hurricanes will just stay away, volume this quarter should be about 10% above third quarter. For the year, our Southeast volume is expected to be about 10% higher than 2004. This total -- this volume increase essentially reflects the impact to the 83,000 acre acquisition that we made last year.

In New Zealand on page 11 the average price moved down while volume increased, reflecting the typical pickup from the first two quarters of the prior year as you can see from this chart. On October 3, as you probably know, we closed on the sale of our 118,000 acre New Zealand timberlands to a consortium in which we will hold 49%. That investment in the joint venture will be accounted for using the equity method and will be included in the timber segment operating income as we look ahead.

As we have noted in the announcement, even though we have a minority position, we are managing the entire 343,000 acre estate with a long-term contract. The third-quarter New Zealand transaction we have accomplished a number of things. With these transactions first from the timber holdings, we have shifted $65 million in cash back to the U.S. while putting ourselves into the 353,000 acre joint venture.

In one sense, this increased our New Zealand timber asset base and moved it and the income stream to the REIT and out of the TRS. It increased our geographic footprint in Australasia, and should we choose to invest either alone or in additional joint ventures, it reduces our risk factor. Approximately 25% of the joint venture harvest is covered by long-term supply contracts. The sale of our MDF business, which clearly did not fit any one of our three business units or long-term strategy. It frees up $50 million -- or $40 million of capital -- which will also be moved back to the states.

Let me here take a couple of minutes to comment on the real estate business. As we have noticed in the past and as you have seen given the nature of this business, there will be quarter to quarter as well as year-to-year variation. Third-quarter operating income was up subsequently, as well as above the year ago level. Fourth-quarter real estate operating income is expected to be in line with third, but operating income for the year should be somewhat below that of 2004.

Note that pages 12 and 13 reflect new information on our real estate business which we have divided the information into two groups, basically by geography and markets. One, as you can see, we call development properties and the other rural properties. Development properties are represented primarily by the 11 coastal counties between Savannah and Georgia -- I mean Savannah, Georgia and Daytona Beach, Florida. I'm sorry. Rural properties are basically the balance of our Southeast ownership.

As you can see on page 12, development property sales this year have ranged from approximately 1000 acres in the second quarter to a high of 2400 acres in the third quarter. Prices in the third quarter range from slightly above $2700 to an acre to a high of almost $27,000 an acre. Prices are obviously driven by location and character of the land. These sales are basically unentitled properties.

On page 13 you see the rural sales which tend to be larger transactions. Here prices are generally in the 15 to $2000 range. These values for the various reasons we consider to be well above timberland. The price trend is an indication of the property attributes and less so than to the market.

Overall, as I said in my operating comments, the market continues to be strong for both development and real properties.

With that, let's go to Paul Boykin on Performance Fibers.

Thank you, Lee. As we look at the Performance Fibers selling prices on page 14, notice first that the fluff pulp prices for quarter three remained relatively flat as compared to the prior quarter. We consider this a positive result given the downward price pressures on paper pulp for the same quarter.

Looking ahead to this quarter, quarter four, paper pulp producers have announced slight price increases related mainly to higher costs and to a very active hurricane season. For the fourth quarter, we anticipate fluff prices to remain relatively steady with perhaps some regional downward pressures. Overall we expect 2005 fluff prices to finish the year roughly 4 to 6% above the 2004 average.

In quarter three, our cellulose specialties prices were pushed up a modest amount, mainly due to mix. We still expect average prices for 2005 to be roughly 3% above the 2004 level as noted by Lee during his comments last quarter.

In 2006 we anticipate an average price increase in the range of 5 to 7%. Also, there should be some mix improvement in the face of healthy demand.

On page 15 and looking at the third quarter for the three years shown here, you will see the results of our continued efforts to enhance our product mix by moving further to cellulose specialties. Quarter three volumes were 4% above quarter two and 6% greater than the same quarter last year. We would expect quarter four to be once again our strongest cellulose specialties sale quarter with volumes above fourth-quarter 2004 levels.

In summary, I am pleased with the Performance Fibers business as a steady source of operating income and as a major cash contributor. On energy and looking at next year and particularly early 2007, we should see a significant reduction in our use of gas and oil. This will come from relatively small capital investments at our Jesup mill and the completion of a major power boiler in early 2007 at the Fernandina mill. This boiler should reduce our consumption of oil by 200,000 barrels annually. Also, we will continue to look for ways to increase our production of cellulose specialties to meet the increased demand.

Just to indicate to you what we have been able to achieve in the recent past, from 1999 to 2005 we have increased cellulose specialties sales volume by 110,000 tons annually, most of which has been achieved by debottlenecking our operations.

With that, let me turn it back to Lee.

Before we go any further, let me anticipating some of the questions that might arise from the Weyerhaeuser Cosmopolis closure announcement last week in which they said they will close their 155,000 ton metric mill out there.

In the markets for their product, it was not a very well kept secret if you will. In fact, it was pretty well-known out in the market, and we have had a number of contacts from various customers. First, based on our estimate of their product mix, there is about 100,000 tons of acetate pulp which is a very large piece of our business.

As some of you may know, based on our product mix from our two mills, one sulfite and the other craft, are quality. We are clearly the supplier of choice, and since according the announcement that mill will stop production sometime next year, any supply shortage will generally not impact the market until then. In the meantime, we will work with their customers as well as ours to best meet their needs and our supply. Obviously some of these market changes will enable us to strengthen our product.

Back on page 16, as you can see, lumber prices were down, while volumes were essentially flat. We expect fourth-quarter average price to continue to move down to a level perhaps slightly below that of the first quarter this year. Our volume this quarter should show a slight increase.

Let me conclude here by saying that we again had a solid quarter and now a very good nine months. We remain well-positioned in our businesses, and that, combined with our strong balance sheet, robust cash flow and tax efficient restructure will allow us to further pursue growth opportunities.

With that, let me go back to Gerry, after which we can take some questions.

Thanks, Lee. As is typical, we conclude our presentation with a reflection on earnings per share trends. As I mentioned, all these per-share figures are on a restated post-split basis.

As you can see, the third-quarter pro forma results of $0.46 per share were comparable to the $0.45 in the second quarter in accordance with our expectations at that time. As we look forward and to summarize Lee's individual comments, we believe fourth-quarter results will be well above that of the fourth quarter of 2004 due to increased real estate sales and higher timber and cellulose specialties prices. What will be likely be somewhat below that of the third quarter of 2005 as we expect continued higher manufacturing cost in Performance Fibers to more than offset the higher volumes and specialties cellulose products.

Regarding the full year, we reference on this chart the First Call estimate for 2005 as of October 21 of $1.58 per share. Let me just say that based on what we know today we are comfortable with that consensus for the year being in the ballpark.

Before I turn the conference over to the conference operator for questions from our audience, I just want to mention that Lee will have to leave in about 12 or 13 minutes to make a commitment out-of-town and had to advance his departure due to Hurricane Wilma related weather we are having. Particular questions you have for him should be addressed upfront. We will then continue the conference call when he leaves to respond to individual questions.

With that, let me turn it over to the conference operator.

(OPERATOR INSTRUCTIONS). Steve Chercover, D.A. Davidson.

Thanks and thanks to you, Gerry, for everything, too. A question, there was an article this morning discussing the sale of your engineered absorbent materials business. Can you give us any view on when that is going to happen and pricing?

We anticipate that to happen mid-November. And again, just in our logic for the divestiture, we just thought it was a nice small profitable business, but the ultimate size of the business probably does not meet our overall portfolio.

Will there be any reduction in maintenance CapEx or anything associated with that?

No.

Okay.

Mark Weintraub, Buckingham Research.

Lee, I just wanted to first touch on your dividend policy and how you are thinking about timing wise. Obviously you came out kind of midyear with the latest dividend increase. Should we be thinking of -- how should we be thinking about when you look at increasing the dividend? It seems to no longer just necessarily be an annual process.

Mark, I guess I would rather, at least on making changes, get out of the routine of doing annual changes or making annual announcements. As we look at where we stand in our business and look at where we think we are going to be over the next several years, we will look at it. Certainly internally we will look at it on a routine basis. I would rather not stay on an annual basis or a nine-month. I just prefer not to get into the pattern. But just let me assure you that if we look at where we are, as well is where we think we're going to be, and based on the kind of businesses we are in, I think looking ahead is always -- our cash flow certainly is pretty predictable.

Would it be fair to say that you would hope to be able to increase your dividend annually, and then if things are going well, you take advantage of it and potentially do it more than once? Is that the way to think of it, or is it going to be more random than that?

Well, I would kind of hate to use the word random because it implies I guess it can sort of be all over. But I suppose to use the word relatively routine, but I don't want anybody to think that we're going to see another one in six months, and we are not going to see another one for two years or something. We will just continue to look at it, and as we see our cash flow, look at it. I mean we will obviously be looking at it regularly within the Company and with the board.

Okay. Great. Quickly you mentioned that none of the lands sold to date were entitled. When would be a realistic timeframe to expect to see entitled properties being sold?

I would say, Mark, you are probably looking at a year and a little further out. It is -- it is an involved process. So we're certainly moving in that direction. I think you saw the announcement of Carl Kraus, who is Chief Investment Officer in that business, as well as a financial officer here in Rayonier, and we have another key announcement which I think we will be making relatively shortly in moving that organization and bringing more strength on board.

Christopher Chun, Deutsche Bank.

A couple of questions about the real estate business. I see that some of the land that you sold has been divided into development and rural. Can you give us a breakdown on about how many acres there are available in those two buckets?

Well, I think as we indicated the HBU properties are higher and better used properties along this coastal corridor are about 200,000 acres. What we have looked at is we call rural, it seems to be almost no end of people that want to buy 40 acres or 100 acres for a horse farm or hunting leases. Sometimes it's adjacent to their adjusting existing properties they want to buy 10 acres.

You know, you can say the rural -- if somebody wants to own something along a marsh or a waterway, that it does not, I think as I indicated, is certainly not worth paying more for it than timber values. We have sort of said anything we sell outside of the 200,000 acres in our Southeast holdings basically fall into the rural properties. We had thought it was good to split the two higher value groups and give you a feel for how both of them interact, rather than getting big swings on prices based on mix.

Right. So is that about 200,000 in development then and sort of an unspecified amount on rural?

Well, I mean you can obviously do the math because the 200 is what we call HBU, and the other 1.4 I guess is what we define as rural, which is everything else that is out there.

Right. But it is hard to tell what percentage of that 1.4 would have a value that we think of as higher than typical timberland value?

Well, yes, there is a range. Certainly we would consider anything that is in the rural category to be above timberland values, and you could get some out there that is several thousand dollars an acre perhaps sitting in a particularly attractive spot. I don't think you're going to see us selling anything below what we consider timberland values, and if you kind of want to use a benchmark out there, you know for whatever it is worth, you are probably $1000 an acre would certainly be a minimum. You know, you cannot buy anything out there for less than that, even -- I don't even think you can buy a swamp out there for that these days.

Right. So getting back to the development land, can you give us an idea of where they were located in terms of attractiveness relative to your other parcels? I mean if somebody were to try to look at this per acre or figure and then try to determine whether that was representative of what might be possible for the other land?

Well, there is a wide, wide range. You are certainly looking at some properties right up around Savannah, some very attractive properties. You're looking at some major block just here north of Jacksonville and some down closer to Daytona Beach. So in a very large track and you have smaller ones and obviously even smaller than that. But that's the area that probably has the most value and the most acreage. Now I'm not going to answer how many acres and how much value, so I will leave it there.

Okay. One final question if I may before I drop out. Do you foresee the possibility of doing anything beyond just getting the land entitled before selling it? Would it be possible to create even more value by, I don't know, putting in roads or sewers or other types of infrastructure before you sell some of this land?

Yes. I think you will initially see, and maybe as I said in earlier telephone conferences, that our first steps I think will be joint ventures and then we will -- in which we will involve horizontal development. And then as we become a little better at it, perhaps moving into where we will do it ourselves. But that is one of the reasons we brought Carl Kraus onboard as we will be adding more talent in the near future to help us take a hard look at it. We did not start out having a lot of expertise in a company that was basically in Performance Fibers in the timber business.

Chip Dillon, Citigroup Investments.

My question has to do with maybe to explore a little bit with the Weyerhaeuser announcement, which could you give us an idea of their tons that they are shutting down, how much of those overlap with your specialty fibers business? And maybe compare that to kind of the proportions that you saw when IP shutdown their mill a year and a half or so ago.

Let me -- it's probably better to let Paul Boynton answer it. He is a little closer to it and maybe give you a little crisper answer. Besides I have to go. (multiple speakers)

It is Paul. We believe -- obviously we don't know exactly that there is about 100,000 tons of acetate in the Weyerhaeuser Cosmopolis mix today that we would have a direct overlap and fit within our portfolio if we decided to go pursue that. And relative to the IP Natchez closer, that represented about 150,000 tons of acetate and even a much bigger facility overall. So this is a smaller scale than that and certainly is what we would say is very interesting to our portfolio is about 100,000 tons.

As you know, they are going to run out the inventory they have in the production to satisfy their customers through 2006. But, as Lee indicated, many of those customers are already approaching us for extending multiyear contracts. And so there will be upward price pressure starting already started even though there is overlap in production between their mill and ours.

Okay. And were they in any of the businesses that both you and -- I'm sorry, that IP was also in when they were in the business?

Yes, particularly in the acetate markets, which is cigarette (inaudible) and acetate textiles.

And who else is left in that business now that IP and Weyerhaeuser are gone and you all are still in it obviously? Who else is in it?

Sure. Certainly Rayonier is the leader and has been with some 60% plus market share. Other players still out there would include Buckeye, maybe to some smaller scale some other players such as Cicor (ph) in the Southern Hemisphere and South Africa. There is a lot of other specialty players who just kind of dabble in it as well.

And then -- okay. And then shifting gears while we are on this topic in the fluff pulp area, what is your view toward the growth of the demand there, and I guess what I'm asking is, how are you looking to sustain your volumes even as you try to reduce them in the face of -- I guess these announcements from several people that they are looking to convert into fluff?

Yes, I think our position on fluff is to hold steady. We've got a real nice business today with a strong customer base. There is others out there that have larger SBSK manufacturing facilities, if you will, that are able then to convert those over to the higher valued fluff business. And as the market grows and it certainly is growing at 3% growth rate annually, these other competitors of ours were certainly in a better position to go pursue that volume. And we will obviously allow them to do that as we will continue to focus in on our fluff business and our cellulose specialties business.

Frank Dunau, Adage Capital.

I just have a few clarifying questions. I guess on the body of your report where you're talking about the operating activities in the corporate line and stuff, there's like a 2.2 million or -- on the intersegment eliminations, there's 2.2 million of some sort of insurance thing. Is that included in the unusual stuff, or is that something that is separate?

That was just included in our normal operating results for the quarter.

Okay. I was trying to get to your working capital number on the cash-flow statement. Because if I just take the working capital from the balance sheet, the current assets minus current liabilities at the end of December 31 and November 30 and then subtract cash, that was like -- it was generating cash not using cash. I'm a little confused. Or is there something like a debt thing in current liabilities -- I'm trying -- I cannot figure it out.

Well, you may have an impact on the disops coming through. I don't know if that has come through your analysis or not. But when the Q comes out, we will have the details, and that should be a little clearer.

All right. And just one last question. If you look at the chart of the development land and -- and it kind of looks kind of flat for the last eight quarters or so, or seven quarters, with this quarter being an uptick, and I'm trying to think, are we going to some new level, or is this just like a randomly up quarter versus like maybe the first quarter of 2005 which may have been randomly down? How much --?

Are you talking acres, or price or both?

Price, price, price.

Price. I think that is just reflective primarily of the particular closings that take place in this quarter compared to other quarters. I think the range is something we expect going forward, but I won't say it is random. It just really depends on the tracks that are finally closed in this quarter.

Okay. So I should not read anything into the -- necessarily into the uptrend Q1 sequentially or anything like that or should I?

Not quarter to quarter. No, annually obviously appreciation and properties go up, but on a quarter to quarter basis, you should not.

(OPERATOR INSTRUCTIONS). Mark Weintraub, Buckingham Research.

I was interested on the 35 to 40% increase in Northwest pricing if I heard that correctly. What do you think has been behind such a significant move in those prices? And is it sustainable, or has there been a lot of mix shifting going on in your business?

Mark, this is Gerry, and of course, our premier trader, Lee, left the room. But a lot of it had to do with the Canadian tariff situation on lumber and the curtailment of lumber imports. I think that was a big factor. I'm not sure how the U.S. government is going to resolve it, and I know there might have been Canadian threats on the market.

But that and coupled with, of course, the overall housing boom, I think the double impact seemed to help us pretty well.

Okay. And so that was a pretty good -- so apples-to-apples comparison, there's not much in the way of mix affecting that increase?

No. I think it is basically apples-to-apples. We don't have material mix shifts in the species of wood that we necessarily sell, and once again at least for of us, it was a low volume quarter. But we expect pricing overall to hold and on the timber side slightly pick up next quarter, and volume will pick up. So we expect continued good results in the Northwest timber business.

And then, Gerry, you had mentioned two things. One that chemical cellulose would be up about 5 to 7% in pricing next year. And you also indicated that the shut of Cosmopolis would be having some impact on future pricing. Does that 5 to 7% expectation include some of the positives from Cosmopolis, or would the positives from Cosmopolis be additional to that 5 to 7 over time?

I'm going to let Paul respond that.

I think the 5 to 7% does not include the Cosmopolis, but I would not see too much on top of that in 2006. I think you will see the benefit as Cosmopolis plans to run through the back half of 2006, the real strictening of the market will happen in 2007.

Nat Overton (ph), Morgan Keegan.

Thank you and my question was actually just asked, so thanks very much.

Steve Chercover, D.A. Davidson.

Just switching gears a little, could you discuss the impact of the hurricanes on Southern log harvests. I understand it has not had any material impact on you folks, but are they going to be able to get these logs out of the woods before the blue stain makes them without value?

I think that is a good question, Steven. I'm not sure we know firm. We know a lot about loggers or people who would come in and log for our customers have been moving in that direction. I think it's a big question, and I don't think there is an answer yet on that.

But as far as impacting our markets are concerned, a little strain on it. We do expect some improved pricing in the Southeast in the fourth quarter. But whether they can get all that wood out before the blue stain shows up, I think is still uncertain.

So if we assume that it is unlikely, which might be reasonable, might that tighten things up going forward for those of you who still have standing timber and the ability to harvest?

The biggest impact may be on the pulpmills that are in that region and their ability to source wood. As far as our -- I don't, Paul, we buy a lot of wood in our area, and I don't know that we see any major change in the pulp procurement market that we have had because of the weather that we have had in the Southeast. But I'm not sure that is adding much to it, and Paul is shaking his head at this point and saying no.

So one last question then, if Paul could get those blue stained logs for free, would he take them, or do they gum up the pulping process?

They will probably gum it up. They are too far away with fuel cost these days to log it all the way over here, so it's just out of our basket. As I said, the bigger impact I think is on the manufacturing plants that are closer to that region.

But you guys would not even take them for free? Okay, thanks.

No.

Chip Dillon, Citigroup Investments.

Just a couple of quick clarifications. I just sort of backed into these just for my own model purposes. Is your -- you are showing current maturities of long-term debt at 34, is that about right?

At the end of the third quarter, but by two weeks into October, they were all paid off with the proceeds from the New Zealand transactions.

Okay. And that brought in 40 you said?

Well, the --

The MDF brought in.

The MDF brought in 40 in the third quarter, and the rest came in the first 10 days of October.

Right. Okay. And then the joint venture transactions. And then the current assets of cash is 110, so the current assets other than cash obviously are 231.6. But there is no -- no other like marketable securities or cash like instruments in the current assets are there?

No, the only one -- is correct me at this point in my time -- but in order to consummate the New Zealand transactions, we had to put up $17 million of cash to back up an LC to complete the deal. So that was still outstanding at the end of September.

The other thing, which I will ask Hans, is whether we have any restricted cash that is set aside for LTEs at the end of the third quarter.

We have only about 1 million.

Only about a million. Because as we sell property but have not yet reinvested, we put the cash in an intermediary pending our ability to close an acquisition, and Hans is indicating that at the end of September is only about $1 million. But that would be in current assets and not in cash.

Okay. And then finally, you might have mentioned this, how many acres do you think you will roughly -- you sold 11 in the first quarter, six in the second, 10 or so in the third. What do you think you will do in the fourth quarter, and what is sort of an early look to next year?

I don't think we will quote a look to next year. As Lee indicated from an operating income standpoint, we see real estate sales about the same, and there is always in the fourth quarter even closings that will slip, and some that will advance from the first quarter. So I would probably indicate at this point on an aggregate basis comparable to this quarter, but --

To the third quarter?

To the third quarter, but once again, there is sales that move in and out all the time, and we would not want to really quote a per acre price at this point in time. (multiple speakers). But on an income basis, it is about comparable, slightly less but comparable.

And then as we kind of think about it -- I know you don't want to quote next year -- but there is no reason to think that you would not have the 100 million-ish range or more be kind of what we should see on a sustained basis in terms of sales?

90 to 100 million I think is comparable. As we have said before, we hope to be able to do more sales, more profit on less acres over time, and that is the eventual goal of TerraPointe.

Got you. Thank you.

There are no further questions in the queue, and I would like to turn the conference back to the speakers for any additional or closing remarks.

I want to thank everybody for joining us. I want to thank you especially for staying even though Lee left. Any further questions, I will be up to answer them later. Thank you, again.