Rayonier Inc (RYN) 2012 Q3 法說會逐字稿

Welcome and thank you for standing by. I would like to remind all parties that your lines have been placed on listen-only until the question-and-answer portion of today's conference. Welcome and thank you for joining Rayonier's third quarter 2012 teleconference call. At this time all participants are in a listen-only mode.

(Operator Instructions) Today's conference is being recorded.

If you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Carl Kraus, Senior Vice President Finance. Sir, you may begin.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference covering third quarter earnings. Our earnings statements and presentation materials were released this morning and are available on our website at Rayonier.com. I would like to remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws.

Our earnings release, as well as our form 10-Q's and 10K, filed with the SEC, lists some of the factors which may cause actual results to differ materially from forward-looking statements we may make. They're also referenced on page 2 of our presentation materials. With that, let's start our teleconference with opening comments from Paul Boynton, Chairman, President and CEO. Paul?

Thanks, Carl. Carl is sitting in today for Hans Vanden Noort, our CFO, who is unfortunately called out of town on a family concern. I am going to make a few overall comments before turning it back over to Carl to review our financial results. Then I am going to ask Lynn Wilson, Senior Vice President US Forest Resources, to comment on our timber results.

Following our review of forest resources, Charlie Margiotta, Senior Vice President Real Estate, will discuss our land sales results and Jack Kriesel, Senior Vice President Performance Fibers, will take us through our cellulose fibers business. We had another strong quarter and pleased to report earnings per share of $0.62, in line with our expectations.

This quarter's earnings were below the prior-year period, primarily because 2011 included a $16 million non-routine tax benefit and a large non-strategic real estate sale. Year-to-date, cash available for distribution grew to $261 million compared to $242 million in 2011, which provides added support for our recently increased dividend. This solid performance stems from the continued focus on execution of our strategy. With that, let me turn it back over to Carl for a review of our financials.

Let's start on page 3, with overall financial highlights. As Paul noted, we had a strong third quarter with sales of $409 million, operating income of $113 million and net income of $81 million or $0.62 per share. We did not have any special items this quarter, but last year we had one special item in the third quarter, a $16 million benefit from reversing a reserve established back in 2009 relating to the alternative fuel mixture credit.

This reversal reflected the successful completion of an IRS audit covering 2009. And was excluded to arrive at third quarter and year-to-date amounts used for the comparisons throughout this call. On the bottom of page 3, we provide an outline of cash resources and liquidity. Our year-to-date cash flow was strong, with EBITDA of $398 million and cash available for distribution of $261 million.

We ended the quarter with approximately $1 billion of debt and $215 million in cash. So the net debt was $794 million. Now let's run through the variance analysis. Turning to page 4, we have prepared our typical sequential quarterly variance analysis. In forest resources, third quarter operating income improved compared to the second quarter, as higher volumes in all regions offset lower prices in the Gulf and Atlantic regions due to mix.

Real estate income increased by $2 million, due to higher volumes, primarily from non-strategic sales. Moving to performance fibers, improved results were driven by significant cellulose specialties volume increases due to the timing of customer orders. And lower third quarter costs because certain expenses associated with the Jesup Mill shutdown were incurred in the second quarter.

Our wood products operating income declined by $2 million as a result of somewhat lower prices and a kiln fire at one of our mills, which necessitated a $1 million write-off. Corporate and other expenses were $4 million above last quarter, which included a $2 million insurance settlement. Now, let's move on to page 5 for a review of the year-over-year variances. The third quarter and year-to-date variances to last year have similar drivers.

Our year-to-date forest resources results reflect lower prices in the Northwest driven by weaker export demand, partially offset by improved prices in the Atlantic region and the absence of a fire loss, which was accrued in 2011. Also, logging costs were higher in the Northwest on a year-to-date basis.

Real estate results were down for both periods, as last year's results included a significant non-strategic sale and a $6 million benefit from settling a property tax dispute related to several prior periods. In performance fibers, cellulose specialty prices strengthened offsetting lower absorbent material prices. However, input and labor costs were above last year.

Wood products results improved, reflecting higher lumber prices. On page 6, we reconcile cash provided by operating activities, which is a GAAP measure, to our non-GAAP metric of cash available for distribution or CAD. Our year-to-date cash flow was quite strong with CAD of $261 million, which was above last year and well above our dividend payout of $152 million. With that, let me turn the conference over to Lynn Wilson.

Thank you, Carl. Good afternoon. Let's start with page 8 and the northern region, which is primarily our Washington State operations. Prices declined in the third quarter compared to the prior-year period, due primarily to softness in Asian export demand, but were comparable to the second quarter. While we are beginning to see modest increased demand for exports to China, prices remain lower than the prior year, but are still well above 2010.

Overall, we expect delivered log prices in 2012 to be somewhat below 2011. Volumes improved compared to both the prior third quarter and the second quarter, reflecting increased domestic demand with exports remaining at 27% this quarter. Based upon the relative strength of the market, we expect to increase overall volume approximately 15% in 2012 over 2011.

In the Atlantic and Gulf regions on page 9, prices were higher than the same period last year, as fire salvaged wood negatively impacted last year's market pricing. Pine stumpage prices declined from second quarter levels due to mix reflecting strong demand for lower value pulpwood and higher thinning volume. Harvest volumes were higher than the prior quarter, but comparable to the third quarter of the prior year.

For the full-year, both pine harvest volume and prices are expected to be approximately 6% to 7% higher than 2011. Overall, forest resources operating income should be comparable to 2011. Now let me turn it over to Charlie Margiotta to cover real estate.

Thanks, Lynn. Real estate results for the third quarter were slightly improved compared to the second quarter, primarily due to increased sales of non-strategic property. Page 10 details rural and development sales. Volume slowed from prior quarters, due primarily to the timing of closings. Rural land markets are steady.

Page 11 details per acre prices. The $2,552 rural per acre price reflects a good geographic mix, including sales in east Texas and Louisiana. We continue to expect operating income to be below 2011, which included a 6,300 acre non-strategic sale in Washington State for $25 million and the previously mentioned property tax settlement. Let me turn it over to Jack Kriesel.

Thanks, Charlie. Performance fibers achieved record quarterly earnings, driven by strong cellulose specialties demand and good operating performance. On page 12, you see net selling prices for our two performance fibers product lines. Compared to the same quarter in the prior year, cellulose specialty prices were up $253 per ton or 16%, primarily due to improved pricing and mix.

Third quarter cellulose specialty prices were comparable to the second quarter. For 2012 we continue to expect an increase in cellulose specialty prices of 12% to 13% over the prior year. Prices for absorbent materials, which consist principally of fluff pulp, decline $117 per ton or 14% from the same quarter in the prior year and were comparable to the previous quarter.

As a result of weak commodity paper pulp prices, coupled with increased global fluff capacity, we believe fluff prices will weaken in the fourth quarter. Moving on to page 13 and looking at volumes, our third quarter cellulose specialties sales volumes increased 4,000 tons or 3% compared to the third quarter of 2011. Year-to-date shipments were comparable to 2011. However, we're now expecting full-year sales volumes to be 1% to 2% above 2011 due to the timing of customer orders.

Third quarter 2012 absorbent materials sales volumes were comparable to the prior-year period. For the full-year we expect volumes to be approximately 6% below prior year. Overall, we expect another record year for performance fibers, with cellulose specialties price improvements more than offsetting cost increases and lower absorbent material prices.

We continue to make good progress on our key strategic projects. The cellulose specialties expansion project at the Jesup Mill is still expected to start up in mid-2013. Total costs, however, have moved above our original $300 million budget. We'll have much better cost detail after our final engineering is completed later this year and we will provide an update on our January call.

Despite its expected cost escalation, we believe the project return will stay within our original 17% to 20% range. Carl will be providing additional information on expected future sales volumes and cost estimates in a moment. Shifting to our Fernandina mill, earlier this month we commissioned our new 22 MW turbine generator making us energy self-sufficient and able to sell approximately 2 MW of green power into the grid. Now let me turn it back over to Carl.

Thanks, Jack. Now I would like to update some key statistics to assist you in refining your model for Rayonier. We expect depreciation, depletion and amortization of $146 million and the non-cash cost basis of land sold of about $5 million or approximately $151 million in total, which is consistent with our prior guidance.

Capital expenditures, excluding strategic investments for Timberland acquisitions and the cellulose specialties expansion, are expected to be about $154 million compared to 2011 spending of $145 million. This increase will occur primarily in performance fibers, on cost reduction and efficiency projects, and in silvicultural investments on our newly acquired property. We expect 2012 spending on the cellulose specialty expansion to range between $195 million and $200 million.

For the full-year we expect interest expense net of interest income of about $46 million. Now let me update you on some recent developments pertaining to our debt. In October we amended our $450 million revolving credit agreement to provide for improved pricing, additional borrowing capacity, and enhanced flexibility to transfer assets among our subsidiaries.

Also in October the TRS 3.75% exchangeable notes' principal balance of $300 million was paid with cash funded from our revolver. We expect to refinance this $300 million borrowing with long-term debt before year-end. We anticipate our effective tax rate to be in the 23% to 25% range.

When you put all these elements together, we again anticipate very strong cash flow. We continue to expect EBITDA and operating income to be about 10% to 12% above 2011 and CAD to be between $295 million and $310 million. We are maintaining full-year EPS guidance comparable to 2011.

As promised, we have provided on page 15, estimated sales mix, volumes and cost increases for 2013 and 2014 related to the Jesup C Mill conversion. As we ramp up production and begin the process of reaching targeted levels of purity and consistency for cellulose specialties and obtaining customer qualifications, we anticipate that most of the initial C Mill production will be commodity viscose.

We expect to sell approximately 5,000 to 20,000 tons of cellulose specialties in the second half of 2013 and to substantially increase that to 90,000 to 110,000 tons in 2014. We anticipate reaching our planned capacity run rate of 190,000 tons in 2015.

In 2013 we expect cost per metric ton to increase 11% to 13% over our estimated full-year 2012 costs. This reflects our assumptions for production input cost, fixed cost absorption over fewer tons during start up, and the higher cost required to produce cellulose specialty rather than fluff pulp. 2013 cost per ton will be impacted by the additional shutdown days necessary to integrate the new C Mill equipment coupled with fewer tons produced during the startup phase.

The estimated 4% to 5% increase in 2014 costs reflects the incremental costs associated with producing higher volumes of cellulose specialties compared to commodity viscose and a full-year of higher depreciation expense. Now let me turn it over to Paul for some summary comments. Paul?

Thanks, Carl. Our performance through the first nine months positions us well for another strong year. In forest resources, we will continue to capitalize on local market opportunities. As Lynn mentioned, we have seen some recent increase in Asian demand for Northwest timber, but we have not realized the improvement we had been expecting in the second half.

However, we remain confident about the mid to long-term benefits from the Chinese export market and are well-positioned to increase harvest volumes as markets improve. In performance fibers we anticipate another record year, driven by strong cellulose specialty markets.

Also, as Jack noted, we expect to complete our cellulose specialties expansion project by mid-2013 and we're very pleased with our newly installed $25 million, 22 MW turbine generator in Fernandina, which allows us to achieve electrical self-sufficiency as part of our renewable energy strategy.

Now as we look forward, our forest resources, real estate and wood products businesses have substantial upside from an improving housing market. While we have benefited in 2012 from improved lumber prices and have seen some localized indications of stronger sawlog market, we have not yet realized significant benefit from the early stages of a homebuilding recovery. With our deferrals of sawlog harvest in recent years and our holdings of HBU real estate properties, we are well-positioned to drive substantial gain as the home market recovery builds momentum.

Providing a secure and growing dividend to our shareholders remains a key objective and we anticipate full-year cash available for distribution to be substantially above our recently increased dividend. As we execute our strategy, we will continue to invest in timberlands that meet our investment criteria and in performance fibers to drive dividend growth and total shareholder returns. Now with that I would like to close our formal part of the presentation and turn the call back to the operator for questions.

(Operator Instructions)

Mike Roxland, BofA Merrill Lynch

The first question -- we have heard some commentary from some of our contacts about slowing pricing for sale of specialties. Can you give us a sense of what is happening on the pricing front in the broader market for cellulose specialties and how 2013 pricing is shaping up?

Mike, I will turn this over to Jack, but we usually give our guidance on 2013 pricing in our January call. We'll stay to that. But Jack can give you a little bit of flavor to what he is seeing out there in the market today, just overall in demand.

I think generally if you look at CS that prices and demand remain strong. The areas that have seen some weakness are in the tire cord, a little bit in the automotive filtration also. But also remember that we have a very small percentage of our business in that sector. It is less than 5% of our total CS business.

So then pricing and demand for your key acetate and your participation to a lesser degree in ethers as well has held up?

Yes, that continues to be very strong. Ethers, when you look primarily at the food and pharma section of that, demand is growing upwards of 10% in that area. On the acetate side and specifically filter applications, that is growing at about 2% or so. There is a little bit of weakness in the LCD sector right now, but we expect that to turn around.

And then just last question. I really appreciate all the additional disclosure on your C Mill conversion. I had originally thought that your production of the commodity viscose was going to be temporary and just used as production fill until you qualified the product off the C Mill. However, it seems like there -- it seemed like you intend to produce commodity viscose on an ongoing basis, even if it is a smaller degree. Do I have that correct?

As we have been sharing with you, we all along have been planning to feather in our viscose or our acetate into the market. And the 85% level that we have been communicating to you is still consistent. And in fact, when you look at it from a on-grade production basis, that number is upwards of 90% in 2014 in terms of commitments to customers.

Mike, you do see the viscose out there, as we talked about, would be part of our standard startup. Again, we have to qualify our product for our customers in 2013. And then, of course, '14 we will continue to add a lot more volume as noted here in the chart. But Jack is right, we diminish -- most of this goes out of the plan as we go on to '15, '16 and '17.

So there is still some small amount of viscose, because we are trying to keep a little bit of buffer there for our customer's growth plans, but by and large, we won't have a viscose business.

Got you. Thanks Paul, thanks Jack.

Joshua Barber, Stifel Nicolaus.

Jack, you mentioned almost in passing that it seems that the costs on the C Mill conversion have gone up a bit. Can you give us a little bit of a range on that? Is that going up by 2% to 3% or is that going up by 10% to 15%?

Josh, as I mentioned, we're going to have a much better idea of what that number is by the end of this year. We will have all of the detailed engineering completed at that point in time, so we can give you a good figure in the January call.

Josh, just to add to that, we are still comfortable even with some cost escalation that we are still well within the 17% to 20% return range on the project.

You had also made some comments and we heard from some competitors about the weakness in the tire cord markets, which you referenced, Jack. I know you guys have talked before about some of your, on the CS expansion that some of that had to do with entering more into the ether's market and into the high-strength viscose market.

Is that an area of concern today? Is any of the volume that is pre-committed have to do more with high-strength viscose than it does with acetates and ethers?

I guess, two parts to that. One, it is a part of our growth plan with the CS expansion. But that plant doesn't really kick in until 2014 in any meaningful volumes. And we still see both those sectors as being relatively strong. I think if you talk to our customers, growth in the tire cord and filtration is 0% to 1% on a long-term basis. So this temporary, this drop right now that they have seen, I think, is just a temporary issue.

Josh, as you know, currently about 79% of our cellulose specialty production is acetate. And even though we will diversify in our various products, still probably mid-70% of the future volume will be in acetate.

I think Mike had asked about that before, but any primary, excuse me, any preliminary indications on 2013 pricing as we are going into negotiations? Is demand still remaining strong? Is virtually everything going to be sold out? And are you seeing any additional supply that might be pressuring prices into 2013, especially on your very high-grades?

I think the key thing you mentioned there, Josh, is that we are sold out. We're sold out in 2012 and we're sold in 2013. So, our order schedule is very tight. And, again, the overall demand in our acetate segment and the ether segment continued very strong.

Last question. You mentioned the convert refinancing currently on the line. Can you just give us some idea when you talk about a longer term debt, is that more likely to be replaced with a convert or would you guys try to go out 10 or 15, maybe longer years in terms of pushing out your, the right side of your balance sheet?

It is most likely to be a term loan of 7 to 10 years and we will give you more color commentary on that. It is unlikely to be an exchangeable note or a convert, Josh.

All right. Thanks very much, guys, good luck.

Mark Wilde, Deutsche Bank

Lynn, is there any chance you can give us just kind of a sense on the ground of what you're seeing in terms of a, any flow through from the pickup in lumber volumes and lumber pricing that we are seeing?

Yes, back to the stump, what we are seeing is anywhere between $1.00 to $5.00 per ton at this point in time. But it is still modest and it has been very spot basis and depending on which market that you are in across the South. At this point in time we have not seen a continued shift to higher pricing.

And what would you expect, just as you look forward over the next year or two, because I guess there are different schools of thought here. One that says there may be a lot of inventory out there. A lot of people have throttled back on their high-value volumes over the last five years because volume has been so weak.

Another school of thought kind of looks up at Canada and sees a lot less wood coming out of Canada and says maybe, the response may be a little quicker. So what is your view?

What we see is that the additional upside will come in line with housing starts. So, as you see that ramp up, we have that built into our models between now and 2015. So, it is directly in line with housing starts on the domestic side. And both domestic and export pricing will be supported by mountain pine beetle.

We firmly believe in the midterm that harvest levels are going to drop due to the mountain pine beetle mortality and the decline of the resource. And we expect upside there due to do that volume not being able to come into our US markets when the housing recovery happens.

And then over on the real estate side, are you guys seeing any sensing, any pickup in inquiries for the land along the coast there in Georgia and Florida?

Clearly, we are seeing a pickup in interest, particularly from what I would call regional and local developer builders. Hasn't translated into a whole lot of sales yet, but, clearly, increased interest from a year or two ago. So stay tuned. We are getting more optimistic. Had a lot of conversations. So, yes, clearly a pickup in interest.

And do you have any sense, Charlie, for how long you think that might be before we start to actually see some results in your numbers?

Obviously, hard to call. If there's good news its builder developers need a year or two lag time to get a lot in place, say, to sell pads. So they have got to look out a year or two. What we also have seen is a lot of excess inventory in this area, along the coast, being purchased. So there's a lot less lot supply than there was, say, two years ago. But still hard to make that call about when we will see it translate into land sales.

Okay, that's very helpful. Thank you and good luck in the fourth quarter and as we look into next year.

Steve Chercover, D.A. Davidson.

Thanks and thanks to Carl for all his help over the years.

You're welcome.

With the creep in costs at Jesup, I'm just wondering if there have been any benefits associated as well. I know that the return thresholds are still pretty much the same. Have they found any incremental capacity that they can provide as well?

Steve, I assume you're referring to the CSE project and the cost associated with that Jack mentioned?

Yes.

Yes, the costs are primarily related to pipe fabrication. That type of engineering delays. But there is no changes in terms of improving the overall performance of that project. It still remains as we planned.

Which is 190,000 metric tons of CS capacity, Jack?

Correct.

And perhaps I missed, are you still 80% sold out going forward?

Well, actually, when we look at this project, as I explained, that if you take out the off-grade production we're upwards of 90% sold out. And as Paul indicated earlier, we want to keep a percentage of that unsold so that we can meet our customer growth.

So, Jack, in translating that back and Steve to your numbers, I think 80%, so, it's really -- what we said in the past is 85%. And as Jack says, if you can take out the off-grade with that, which is standard in (Inaudible) it would be closer to 90%. So there's not a lot of room even as we look forward in the coming years on that line available for additional sales.

And final question on that one. We're not too concerned that you will be able to replicate the cellulose specialty formulas, given it is pretty much a duplicate of your existing line at Jesup, but is there any difficulty in just getting to the commodity viscose or is that a slam dunk?

No, that is a very, almost exponentially different level of achievement. It is much easier to achieve.

Jack, didn't we start there also?

Yes, that is what essentially we'll be producing for the first few months on that line as we work out all the bugs in it.

But, the team there, Steve, has been making that in very small amounts for a long time. So, they know that product very well and I think to Jack's point, as a Company we started there a long time ago. So, we are pretty rich in the viscose history and not something we want to be in for long-term, but certainly we can come up and should be able to make that very effectively.

And speaking of things that you want to be in for the long-term, it's nice that lumber is finally making contribution. Are those assets still core assets, would you say?

Steve, we have said that these are, they're good assets for us, we have continued to maintain them well, invest in them, but we have said they are not core to our business. So, we'll just leave it at that.

Okay. Thanks very much.

Collin Mings, Raymond James.

Most of my questions have already been answered, but just on the Timberland acquisition front, a few quarters ago, Charlie, I think you provided an interesting breakdown of the deals evaluated, bid on and actually closed. Can you maybe update what that looks like now year-to-date in 2012? It looks like you guys picked up a few million dollars of timberlands during the quarter.

I can't exactly update it. We have been active looking. We obviously have not been successful or we would have been talking about it. It continues to be pretty competitive out there and we have seen some compression in discount rates. But we are always looking. But we will get back to you on an update of those specific numbers.

Did you guys pick up a few million dollars worth of acres during the quarter?

I don't recall a closing in the quarter. A prior quarter, possibly.

And then just swinging back, can you guys talk just a little bit about that, obviously not a huge needle mover, but just that fire at one of your sawmills in Georgia and if it will kind of impact your results going forward?

This is Jack. Our plan with the Swainsboro sawmill is the kiln that burned we plan to replace and that should be back online by midyear, early in the second half. And we are operating at about 45% capacity of that line. So it is putting out about 50 million to 55 million board feet a year at that rate compared to the 125 million board feet capacity.

All right. Thanks, guys, and have a good quarter.

Stuart Benway, S&P Capital IQ.

I was just wondering if you could give us a little bit more detail about the timing you said that, I guess, the third quarter benefit is from the timing of shipments in specialties.

Well, Stewart, what we were saying is that when you look throughout the year, the third and fourth quarter in performance fibers are typically the highest with volume. And sometimes the recognition depends upon a lot of goods that are shipped on the ocean? So, the timing is sometimes affected there.

So, the fourth -- what Jack said is for the full-year the cellulose specialty volume will be up 1% to 2% over 2011. So, if you just take the year-to-date from and add 1% to 2% to last year, you will be able to triangulate into what the fourth quarter is. And in fact, we have given it to you on that page 15.

I guess that will make it easier. I'm hearing different things about Europe depending, I guess, on what sectors you're in. I know it's not huge for you, but what are you seeing out of Europe from a demand standpoint at this point?

Overall, when we look again at the tire cord business, that is down somewhat, but, again, we have not seen any of our orders changed at all, whether it is tire cord or in the filtration side. On the ethers, more of a drop-off on the construction segment of that ethers market. Again, that is not an area that we focus on. We focus on the food and pharma of the ethers sector, so that demand continues to be strong.

But you certainly say, Jack, we have seen evidence of it, of the slowdown in the economy in Europe as we travel through it, just like everybody else. And we saw that when we were just in Asia, both Jack and I, recently, as not directly our customers, but just, again, just the evidence that Europe has slowdown as China's largest trading partner. So, as Jack said, we really have not seen any effect on our business, fortunately.

And how about Asia? I guess that is probably a little bit more stable, because -- since it is more acetate, right?

Asia continues to be strong and you look at China and primarily acetate, that is still growing at 2% to 3% or so in China.

And do you think there's going to be any positive impact on your demand for or on overall demand for fluff pulp from the potential shortage of super absorbent polymers due to the fire there?

Well, unfortunate incident at Shokubai and it might have an impact, it depends on how long that facility is out. I believe it supplies roughly 20% of the SAP worldwide. And as you know, SAP offsets the amount of fluff that goes into any kind of sanitary product. So the longer they are out, the more of a shortage there is in that product is where you could see a bump up in fluff demand from a short-term basis.

One question on the tax rate. So, I guess, do you consider this year to be a more normal tax rate and last year was unusually low so that next year would be more like this year than 2011?

We will update you on the effective tax rate for 2013 on the January call, but directionally, yes, 2013 will be closer to 2012's effective tax rate. And the primary driver is how much, what is the relative contribution from the taxable REIT subsidiary compared to the REIT. And the year-to-year comparisons are sometimes impacted by some nonrecurring items, Stuart.

Okay thank you. And Carl, I just want to wish you the best of luck in your retirement.

Well, thank you, Sir.

Chip Dillon, Vertical Research

Carl, it seems like -- and Paul, you guys have done a good job when you've -- in your financing practices. And it was interesting that you mentioned that you would not consider a convert and you have always been able to do these converts with a very high conversion premiums.

I'm just wondering why you wouldn't consider that now? Is it just that those opportunities don't exist right now or you like the cost of straight money with rates that are low?

There's a couple reasons. One, we manage our capital structure by entity. For example, this debt resides in the taxable REIT subsidiary. And our projection is that we will be generating significant free cash flow in the near-term in the taxable REIT subsidiary, so we wanted to have the ability to pay down debt without significant make whole provisions.

So that is one reason why a term loan may be more acceptable in this particular situation. The good news is, we have all sorts of financing available to us. We could access the long-term bond market, the convert market or the term loan market. So we have put all of that on the table for evaluation, but are leaning towards the term loan, because it offers more flexibility in the near-term.

And then as we look at the next couple of years and the completion of the CS project, can you give us, and let me make sure I get this right, you're basically saying CapEx this year is $349 million to $354 million all in. So just verify that. And what should we kind of expect it to be in '13 and '14 barring any major changes?

Well, the way we think about it, Chip, is let's segregate the strategic capital from the ongoing capital. So this year we said approximately $150 million to $155 million will be the ongoing CapEx. And remember, again, that that includes some value add projects. In Jack's performance fibers business, for example, this year included the remaining dollars for the new generator, et cetera. And then as Lynn's business grows, her investment in replantings, et cetera, will rise a bit.

So probably I think we have said in the next several years, with respect to a comparable number to the $150 million, think about probably $125 million to $150 million and we will update you on that on the call. Also, we will update you on the remainder for the cellulose specialty expansion project, the remaining spend for 2013 on the January call.

But with respect to timberland acquisitions, that is always lumpy and it's very hard for us to predict how much capital will be employed in those acquisitions in any particular year. So I think it's useful, Chip, to separate the strategic capital from the ongoing capital.

I know the last thing you guys need to probably do is expand your TRS operations, given that you are doing that now but any thought to -- are there any strategic possibilities that it may make sense to actually forward integrate into a sawmill or two and beyond what you have now, especially given that we are seeing evidence that the margins, and I know this might be temporal and maybe not, but that the margins at the mill level see to be quite strong.

Chip, I think the short answer to that is no. There may be some opportunities out there. Again, as you see our business and our strategy move forward, we continue to migrate to less commodity focused manufacturing business into the higher value, higher specialty type of products that give our shareholders a good steady and attractive return. So moving into a greater position on sawmills is probably not something we would pursue. Although there probably is some opportunities out there for someone.

Got you. Okay thank you.

Paul Quinn, RBC Capital Markets

Just, I guess, we'll wait for the next quarter's results to give us an indication on specialty dissolving pulp pricing for '13. But maybe if you could give us a feel of what you're seeing in the commodity viscose markets are now?

Paul, in the commodity viscose markets right now we are seeing prices in the range of $900 to $1,000 a ton. And at that price range, the majority of the converted Chinese facilities, they are into cash, as far as we know, because they are very expensive. So, it almost might be considered to be a floor at that level.

And do you see that market picking up going forward here, as you -- while you are producing that product?

I think generally people think that the commodity viscose market grows at upwards of 10% per year. So you would see some pickup. But as everyone knows, there's a lot of capacity out there now. So, I'm not certain that you would, even if the demand picked up slightly, that you would see much of a change in pricing in 2013.

And then, Jack, you give some guidance on lower fluff pulp pricing in Q4 and I think a competitor came out and said they expected a $30 a ton drop. Is that sort of in the ballpark that you are looking at?

Yes, I think so, $20 to $30.

And then just switching over to forestry for Lynn. I missed this when you were talking about the northern region. It sounded like you've seen modest increase in demand from China, but you expect 2012 to be below 2011, even though volumes will be up?

Yes, our pricing will be lower, Paul. So total we will have upside on our volume, we will have harvested 15% more volumes, but a portion of that has moved to the domestic market. Our overall pricing is going to be somewhat lower on a per ton or per MBF basis than 2011.

So that lower contribution, is that a function of mix or is that a function of less export sales?

Less export sales.

Okay. Great. Thank you very much guys.

Thanks Paul.

Joshua Barber, Stifel Nicolaus

Just one quick follow-up. When we are looking at your cost expectations in 2013 and especially in 2014 on the CS side, what is that assuming about logs? Especially, vis-a-vis what you are expecting from a housing recovery for the next couple of years?

I don't know if we want to push speculation out there, but I think we just have some standard inflationary measures built into that logging pricing going out into 2013 and '14. We can give you more color on that the next time we're going through in January. But, I don't think we have anything out there that we'd disclose at this point in time.

Lynn always wants more and Jack wants less, Josh.

We would all like to have less on the fiber side and more on the timber side. I don't know that that happens.

As you know, it is weather dependent in terms of log pricing for us and fiber pricing. Assuming normal weather patterns, it's just normal inflation type levels, diesel cost, things like that.

And, Josh, keep in mind, most of our procurement is of hardwood and not softwood, so it is not quite a direct trade-off to what Lynn's looking at in terms of her business as well.

Okay, great. Thanks, again, and Carl good luck.

Thanks Josh.

Mark Wilde, Deutsche Bank

Yes, I'd like to come back to the C Mill conversion for a minute for next year, because it -- and maybe you can just help us a little more with kind of puts and takes as we think about what this means financially next year. Because it looks to me like the transition year is going to be a drag, at least on earnings coming out of the C Mill.

And I wondered if you can just help us think about sort of, you'll get some benefit, it looks like, from moving some of the volume from fluff up into at least commodity viscose. Looks like that is probably worth about $200 a ton right now. But at the same time, there's less volume and there is higher cost per ton.

Well, we will put all the dots together in January for you, Mark. But, that's obviously the missing variable here is what will cellulose specialties pricing be for 2013. But we would rather not speculate as to what the bottom line will be until we get on the call in January. But I think you have enough data here to do some what ifs with various assumptions, Mark.

It almost seems like, Carl, that cellulose specialties volumes that you have laid out here for 2013 are pretty modest. There is only 5000 tons, right? So that probably the bigger issues might be sort of what kind of commodity viscose price we can assume for next year, because that's going to be a much bigger piece of the mix and then where the price of fluff pulp is.

Right. There's no question 2013 will be a transitional year. And we gave you what the overall outlook is once we are stabilized out there by 2015 and 2016. Remember back to the investor day charts. And in all material respects, the returns are still within that 17% to 20% range. And this ramp-up is very consistent with our model.

And, Mark, again, I know you are trying to narrow down on the variables here. But certainly as we guided there on total volume. That is one variable. For the teams' ability to do better than that. There is some upside. And of course, on the flipside of that. Of that, then, as you noted, CS volume could there be potentially more than the 5000, yes. and Jack's comment I think he guided a bit more than that and that is a possibility out there. And then the other one certainly is just viscose pricing and where that will be in 2013. So, there are probably the key variable pieces and you can put your model together.

Okay, that's helpful, Paul. And Carl, enjoy retirement. Is this the last call, so to speak?

This is my last call, yes.

Well, listen, enjoy whatever you wind up doing. Okay?

Thank you Sir.

So with that I should add to everybody's benefit that we thank Carl for his time. He is stepping down at year-end as our Senior Vice President of Finance. He has done a tremendous job for the Company and a tremendous job for creating value for our shareholders. So, we do thank Carl for everything he has done.

Thank you, Paul

(Operator Instructions)

Mark Weintraub, Buckingham Research.

You kind of were getting to because I too was going to ask on the math on the C Mill conversion in 2013. It did seem to me as well you'd probably need commodity viscose to be up $200 from where it is for just the C Mill conversion part, not to be a drag in 2013. Of course that does not include benefits you might get from higher Chem Cell prices. I don't think you said anything that you are trying to dissuade me from the answer in Mark's prior question? Is that fair?

Well, we'd rather not comment specifically. There are obviously variables on the pricing side that we have not commented on today and we think it is premature for us to go there, Mark.

Sure. Let me just -- when you had the commodity viscose that you referred to as being in the $900 to $1000 range, is that the 60,000 tons that you would likely be selling? Is that the same product?

Yes it is.

Okay. All right. Thanks so much. Good luck Carl.

Thanks Mark.

Thank you and at this time I'm showing no further questions.

Okay, thank you, everybody. I would like to thank everybody for joining us today. And if you have any follow-up questions, please contact Ed Kiker or me and thanks again and have a great day.

This does conclude today's conference. Thank you so much for joining. You may disconnect at this time.