Rayonier Inc (RYN) 2013 Q3 法說會逐字稿

Welcome and thank you for joining Rayonier's third quarter 2013 teleconference call.

(Operator Instructions)

I'd also like to inform participants today's call is being recorded. If you have objections, please disconnect at this time. I'd now like to turn the call over to Mr. Hans Vanden Noort, CFO. 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'd 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-K filed with the SEC, list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They're also referred to on page 2 of our presentation material. With that, let's start our teleconference with opening comments with Paul Boynton, Chairman, President, and CEO. Paul?

Thanks, Hans. Good afternoon, everyone. I'm going to make a few overall comments before turning it back over to Hans to review our financial results. Then we'll ask Lynn Wilson, Senior Vice President of Forest Resources, to comment on our timber results. Following our review of Forest Resources, Chris Corr, our newly elected Senior President of Real Estate, will discuss our Real Estate results, and Jack Kriesel, our Senior Vice President of Performance Fibers, then will take us through the results of the cellulose fibers business.

We're pleased to report third quarter earnings of $57 million, or $0.44 per share, reflecting solid business unit operating income, particularly from Forest Resources due to improving US timber markets and robust export markets in Asia-Pacific. Our operating cash flows continue to be strong with cash available for distribution well above our dividend. In addition to continued strong financial performance in the third quarter, we executed a successful ramp-up of production after the late June start-up of the complex cellulose specialties expansion project at our Jesup Mill. The equipment is performing very well, and the product quality has continued to exceed our expectations.

We're also pleased with our operating results of our New Zealand joint venture in which we increased our ownership interest in April. The venture's operating income is well ahead of our projections at the time we acquired the additional interest, reflecting both the strength of the Asian export market, as well as our ability to reduce operating costs in the new structure. We are well-positioned for a long-term play in the Asia-Pacific basin. Our balance sheet and cash flows are strong, providing us with financial strength and flexibility to execute on our strategic objectives. Now with that, let me just turn it back over to Hans and review the financials.

Thanks, Paul. Let's start on page 3 with the overall financial highlights. As Paul noted, the third quarter was very solid with sales of $385 million, operating income of $84 million, and net income attributable to Rayonier, $57 million. There were no special items this quarter. However, in the second quarter of 2013, both operating income and net income include a $16 million gain from acquisition of the additional 39% of our New Zealand joint venture. We have excluded this item and the results of our discontinued wood products business, which we sold in April, to arrive at pro forma operating income and pro forma net income, which will be used throughout this call for the comparisons with prior periods.

On the bottom of page 3, we provided an outline of capital resources and liquidity. Our year-to-date cash flow was strong with pro forma EBITDA of $425 million and cash available for distribution of $222 million. We ended the quarter with about $1.7 billion of debt and $261 million in cash. On a net debt basis, we finished at about $1.4 billion. We continue to feel very comfortable with our current balance sheet and liquidity.

Let's now run through the variance analyses. On page 4, we prepared our sequential quarterly variance analysis. In Forest Resources, third quarter operating income was comparable to the second quarter, as markets were relatively stable. Real Estate income was also comparable to the prior quarter. Moving to Performance Fibers, you can see results were well below Q2, reflecting lower cellulose specialty volumes due to the timing of customers' orders and higher wood costs, as a result of the unusually wet weather in the southeast. The impact of the CSE project conversion from absorbed materials to producing commodity viscose is included in the cost/mix/other line, and reflects the increased depreciation, the lower production rates, and incremental costs of producing commodity viscose instead of absorbed materials. Corporate and other expenses were $2 million below last quarter, which was impacted by higher legal and business development costs.

Turning now to page 5, in the year-over-year variances, the third quarter and year-to-date variances to the prior year generally have similar drivers. Our Forest Resources results reflect improved prices in volumes in most US regions, driven by strengthening demand in saw timber, and higher New Zealand earnings due to strong Asian demand and the increased ownership in the JV there. The Real Estate results were comparable for the third quarter but favorable on a year-to-date basis due to a significant first quarter 2013 non-strategic sale. In Performance Fibers, cellulose specialty prices were higher but offset by lower cellulose specialties volumes due to the timing of orders. Cellulose specialties costs were higher, primarily due to the wood costs as a result of the wet weather. Again, the as expected impact of the CSE project conversion is included in the cost/mix/other and reflects the same factors, increased depreciation, lower production rates, and incremental costs of producing the viscose which all contributed to results well below the prior year's amounts.

We turn now to page 6, where we reconcile from the cash flow operating activities which is the GAAP measure, to our non-GAAP metric of cash available for distribution. Our year-to-date cash flow is quite strong, with CAD of $222 million. This is below last year, primarily due to a $70 million tax payment we made in the first quarter of 2013 to exchange our alternative fuel mixture credit for a larger cellulose credit. Even so, our CAD is well above our dividend payout of $175 million. With that, let me turn it over to Lynn.

Thank you, Hans. Good afternoon. Let's start with page 8 and the Northern region which primarily comprises our Washington state operations. Delivered saw log prices increased from second quarter and were 17% higher than last year's third quarter, driven by strong domestic and export demand, especially to China, somewhat offset by higher delivered costs. We took advantage of the strong export demand and close proximity to port by selling 35% of our delivered saw logs into the export market. Stumpage prices declined from the prior quarter, solely due to the mix of tracks being harvested. Volumes were equal to both the prior quarter and the prior-year quarter, as we continue to take advantage of favorable pricing and operating conditions. For the fourth quarter of 2013, we believe demand will continue to remain strong, driven by domestic log markets and continued demand from China. Overall, based on current market conditions, we expect delivered log prices will be up 10% to 15% in 2013.

In the Atlantic and Gulf regions on page 9, average pine stumpage prices increased slightly from the second quarter, mainly due to supply restrictions from wet weather, as our stumpage model allowed us to flex and capture this higher localized pricing as well as increased saw log demand. Prices were above the prior quarter and same period last year for both saw logs and pulp wood. Pine saw log prices increased 13% from the second quarter and 18% from the prior-year quarter, as additional wood products capacity is slowly coming online. For the fourth quarter, we expect the pine harvest volume will be comparable to third quarter. For the full year, we anticipate pine prices for 2013 will be 5% to 10% above 2012.

Now, let's focus on our joint venture in New Zealand on page 10. In the second quarter, we acquired an additional 39% in the joint venture and increased our ownership to 65%. Although export prices were slightly down from the second quarter, we saw them lift toward the end of the third quarter, and current prices to China are at their highest level of this year. Domestic pricing increased for the quarter in New Zealand dollars by 4.5%, although the chart depicts a decline of $1 per ton in US dollars. We expect domestic pricing to increase again in the fourth quarter and export pricing to be higher than the third quarter levels. For the year, we expect export pricing to be 10% higher than 2012 on the strength of Asian demand, and we anticipate domestic pricing to increase 5% to 10% supported by both strong export markets and increased domestic construction. Total year volume will decline 10% to 15% from 2012, as we adjust New Zealand harvest to match the age class distribution across the estate. Overall, Forest Resources operating income, including New Zealand, should be well above 2012, due to stronger domestic and export demand, driving higher prices and continued strength in pine pulp wood markets. Now, let me turn it over to Chris Corr to cover Real Estate.

Thank you, Lynn, and good afternoon, everyone. Real Estate operating income was comparable to the same period last year and favorable to the second quarter. HBU volume, as seen on page 11, was greater than the same period last year, as pricing was comparable as seen on page 12, when adjusted to reflect the value of a timber reservation on a large sale in Georgia as noted. Demand for rural HBU property remains solid, particularly in the Gulf region markets, and we continue to experience strong interest in property from our recent acquisitions.

In the third quarter, non-strategic timberland sales volumes were lower but prices higher than the same period last year, as seen on page 13, reflecting the impact of a 5,500-acre sale of Georgia in 2012, on which all of the timber was reserved. Demand for our non-strategic properties is strong, and we expect that acres sold for the full year will be up significantly from each of the prior two years, due primarily to a large transaction that actually closed today. This is a timberland sale of more than 21,000 acres and a big part of our fourth quarter, and it's done now, so that's good news. Although we are not yet able to discuss specific details, we expect to close on a small but meaningful industrial property in the fourth quarter. We are under contract with a national home builder for 600 acres in the Jacksonville metropolitan area, the sale of which is expected to occur over a five-year period beginning late next year.

In summary, our third quarter Real Estate operating income was generally comparable to both the same period last year and last quarter, due to the exposure that some of our entitled and certified sites have been receiving. We anticipate that the pace of interest in certain HBU properties will continue to accelerate as the economy improves, especially for those in the Interstate 95 coastal corridor. We continue to expect significantly improved results for the full year, driven by higher demand for our non-strategic properties and continued solid interest in our rural recreational and conservation properties. Now, let me turn it over to Jack Kriesel to cover Performance Fibers.

Thanks, Chris, and good afternoon. The third quarter was highlighted by our overall strong operations, particularly the better-than-planned quality and production from our CSE project. As we begin our multi-year transition to all cellulose specialties, you will notice that we've made a couple of changes to our presentation to better explain our results. These changes include the elimination of the absorbent material product line statistics and the inclusion of commodity viscose and other, which includes off-grade.

On page 14, you see net selling prices for our product lines. Compared to the second quarter, cellulose specialties prices increased $39 a ton, or 2%, primarily due to mix. Compared to the same quarter in the prior year, cellulose specialties prices were up $56 a ton, or 3%, due to the 2013 price increase. Commodity viscose and other pricing was $789 a ton during the third quarter.

Moving on to page 15, and looking at volume, our third quarter cellulose specialties sales volume decreased 20,000 tons from the prior quarter, mainly due to timing of customer orders. Commodity viscose and other sales in the quarter were 19,000 tons, or about 15% of our total sales volume. As Hans noted, overall cost increased in the quarter as a result of higher wood prices due to wet weather, lower production volume as a result of the CSE startup, and the higher cost of commodity viscose production relative to absorbent material. As a result, we still expect that 2013 performance fibers operating income will be approximately 15% below the 2012 record results. Qualification of the CSE acetate fibers continues with customers trialing larger test quantities, and we're pleased to report that feedback has been very positive. The total cost of the project was approximately $388 million, which is within the previously-stated range.

As we have discussed in previous calls, our plan is to sell the majority of the CSE production volume as commodity viscose in the second half of 2013, and we do not see any significant change to this plan. We are currently in negotiations with most of our customers for 2014 pricing, and in some cases, volumes. It is clear that while overall market demand remains solid, we are entering a very different dynamic than we have seen in the last five years based on three main factors. First, as mentioned in our July call and by our competitors, we've seen softening in the European construction and automotive markets. Although these are not currently large markets for Rayonier, we see indications that competitors who supply those markets are trying to place volumes in the higher value sales specialties market. Second, very low viscose pulp prices are causing swing competitors to aggressively pursue higher value cellulose specialty markets. And third, additional cellulose specialties capacity is factoring into the supply/demand discussions.

Rayonier has been in the cellulose specialties business for decades, and we've seen changing dynamics before, so these are not surprising. While we're still in the midst of negotiating 2014 pricing, there is no question that downward price pressure exists. As a result, we will remain flexible in our planning and maintain our optionality. We may consider the pace at which we feather in our incremental cellulose specialties production from the CSE project to better align our supply and volume with the current market. We expect that it may now be in the 2017/'18 time frame, rather than the 2016/'17 before we fully place our incremental 190,000 tons of capacity into the cellulose specialties markets, and that incremental 2014 cellulose specialties volumes may be well below our previous estimate of 90,000 tons to possibly in the range of 25,000 tons to 40,000 tons. As has been our practice, we'll give you specific guidance in our January call, following the finalization of our negotiations. Now let me turn it back over to Hans.

Thanks, Jack. Now, I would like to provide some updates of our key metrics for 2013. We expect depreciation, depletion, and amortization of $191 million, and the non-cash cost basis of land sold of $10 million, or about $201 million in total. Capital expenditures, excluding strategic investments for timberland acquisitions and the CSE project, are expected to total about $157 million. 2013 spending on the CSE is $144 million for a total project spend of $388 million. We expect interest expense, net of interest income, of about $43 million, which is net of $6 million of interest capitalized for the CSE project.

With respect to income taxes, we expect our effective tax rate from continuing operations to range from 15% to 17%. When you put all of these elements together, we again anticipate very strong cash flow. We expect pro forma EBITDA will be moderately higher and operating income and CAD will be slightly above 2012. Now, let me turn it back to Paul for some summary comments.

Thanks, Hans. As you've heard, we had another strong quarter. For the year, we continue to expect a slight improvement in operating income, and a moderately higher earnings per share, even with the impact of the CSE conversion. In the first three quarters of the year, we benefited from a still early stage recovery of the US housing market, solid pulp wood demand, and strong saw log export markets in the Pacific Northwest and New Zealand. This quarter, we are encouraged by more widespread strength in the saw log markets, across the US South that should continue as housing markets recover. As we look forward, not only will a rising housing market propel saw log prices and improve our saw log pulp wood mix, it will also drive volume and prices for our Real Estate business. We've also noted that we are encouraged by the increased interests in our development properties, and we believe that we're entering a period of long term potential in value. These two businesses, Forest Resources and Real Estate, remain well-positioned to benefit from a stronger US economy.

In Performance Fibers, as Jack noted, we're in the middle of price negotiations revealing a new market dynamic. We're continuing our negotiations and we'll have a further update for you in January as usual. We continue to believe that the expanded capacity of high purity, technically demanding cellulose specialties from the CSE project, strategically positions our Performance Fibers business for long term growth and profitability. We are fully focused on this unique potential, creating what is truly a specialty chemicals business.

In summary, improving timber and real estate markets along with the successful CSE project start-up, with its potential for long term growth, give us confidence that we're well-positioned to drive cash flow and value creation in 2013 and the years ahead. With that, I'd like to close the formal part of the presentation and turn the call back over to the operator for questions.

(Operator Instructions)

Mike Roxland, Bank of America Merrill Lynch.

Thanks very much. Good afternoon. First question was, Jack, have you seen any of your competitors make inroads into the higher end cellulose specialties thus far? The way that I've always thought about your business is that it's relatively defensive. I want to get a sense of how quickly a competitor could get access to some of your customers in the higher end cellulose specialties.

Mike, as you know, it's difficult for people to get into this market relatively speaking. There's the aspect of customer intimacy that knowing the customer, knowing exactly what they want, particularly from an R&D perspective. The process knowledge that Rayonier has, we've gained over 85 years, is hard to duplicate. As we've discussed in the past, there's significant capital investment. It's very difficult for someone to jump in.

Now, what is creating some drive here is the delta between the current CS pricing at the $1,900 plus level, and the viscose market, which is in the $800 to $900 level. There's a lot of push both from these competitors that are typically in the commodity viscose market, to get into the CS market. There's a lot of drive from a customer perspective to try to make these other competitors work. It's not something that can happen quickly, although adjustments can be made. Again, we've seen these things, these cycles, a number of times over the years. It's not unusual. We've seen them revert back to a scenario where it's a very tight market and they go chase the commodity viscose.

Is it possible for us to actually see prices decline next year?

It's too early for us to really talk about that. As we noted, we are looking and working closely with our customers, but our prices have gone up significantly over the years. Over the last five years, it's gone up roughly 50%, so prices go up. In a different supply and demand market, prices could go down.

I think, Mike, Jack's comments earlier in the script certainly reflect the fact that these market factors, that he listed out from the European demand softness we see in construction, automotive, from the lower viscose pulp prices is creating this real dynamic differential that we haven't seen in a long time. It's just a large gap between CS prices and viscose prices as well as some additional capacity. Those factors certainly are going to put some pressure on price that we haven't seen for quite some time.

Got you. The last question, then I'll turn it over. If you were to run into the scenario where you actually have to produce, or you decide to produce, more commodity viscose in the near term 2014, will you have any impact from Chinese duties on dissolving pulp? What I'm trying to get at is if the Chinese have duties, or they place these duties on the dissolving pulp which make it uneconomical for you to actually ship, what kind of condition are you in? If you can't produce the high end stuff, or you can produce it, but if prices are declining, you're forced to produce in this case more of the commodity end, but you have to face increasing Chinese duties. I am just trying to get a sense of what alternatives you have available at your disposal to deal with that type of situation.

Mike, this is Jack again. As I think we discussed in the last call, we're working really close with the Ministry of Finance in China, as well as with others, and at this point in time, we don't really know what that impact's going to be. Initially, we expected to hear it at the end of this month. Now, they're saying it could be November. The range of the impact could be minimal for some, extensive for others. If we are faced with a duty, we have already developed some contingency plans to work around that. Certainly, I'll share those with you at our next call, but we'll see where this thing lands. We feel we're in good shape.

Thanks. Good luck in the quarter.

Thank you.

Chip Dillon, Vertical Research Partners.

Hi, just a quick clarification. I'm sorry if I missed this, but on that last question, is the duty issue in China, isn't that only related to the low alpha grades that you sell, not the high alpha grades?

That's one of the main positions, that it is related to just the low alpha. The issue the Chinese are struggling with is how do you differentiate between the high alpha, the CS pulp, and the low alpha in the ports. They believe, at least the indications we have at this point, that they're able to work around that, but again, we don't know for certain. They're fairly close-vested on this type of thing. We do see that they'll be able to work around that and probably target just the low alpha level.

Got you. Just one other question on Performance Fibers. I know that you all tend to focus, as you've done a great job in showing us, your sub-markets in the acetate realm. I know that one of your competitors had just got bought by a much bigger entity, [more in] other things, ethers. Are you seeing any cross-over? Does it make sense for you all to try to enter other customer groups in your specialty business?

Well, I'm assuming you're referring to Buckeye, and the primary markets they have been in has been the filtration and the high-tenacity rayon for tire cord and sausage casings. We, too, are in that market. They're not very heavily into the ethers market, which we are. We cross over all of the various product segments currently. With our expansion, we plan to diversify even further into those markets.

Got you. Then shifting gears, I know it's early days, but as you guys call it, as you all look at 2014 and '15, now that you have got this big project behind you and what does capital look like? Should we use that $157 million we see for the non-CSE part of Rayonier? Is there any reason that should change a lot as we look at the next couple of years, assuming that your footprint doesn't change a lot?

Chip, it's Hans. I think that's a reasonable estimate for where we're sitting today. We'll give you a little more color on that in January, but for now, I don't think that's going to be too far off.

Then one last one. I think it's TerraPointe. We haven't heard much about that for obvious reasons. Now those reasons are changing, it seems like, very rapidly, or at least it seems like things are getting better in the whole world of housing. Can you talk a little bit about what you see in '14 and '15, as we look at your swath of potential development activity in both Georgia and northern Florida? Maybe we don't see transactions, but are you getting busier in terms of maybe of making lands developable or getting them permitted for development?

Chip, it's Paul. I'll make some comments on this, and if Chris wants to come on top of that with any other thoughts. First of all, keep in mind the last several years, during the economic downturn, we put a lot of focus on entitling our property, which happened to be a great opportunity for us because things were relatively quiet. There was an appetite to spur activity in different regions. We put 39,000 acres under entitlement, so we think we're well-positioned at this point in time. I think as you correctly observed that things are changing for this business. TerraPointe now is really shifting with, one, where we are in terms of our properties which are largely entitled now, and then two, where the market is and where it's going. Chris commented, we are seeing, and we have some good empirical data, that things are different from where they were in the past. Therefore, Chris, who now is on board with some unique skill sets that we didn't have before, as well as his team are gearing up, to how do we position these entitled properties through and against this oncoming demand.

Yes, that is happening. Yes, we've got plenty of empirical data that we can point to, but we don't have a lot of external data that we can show you and say, look, see this is exactly what it is. That will follow. That will lag. We feel very good that that's coming around the corner.

Got you. That's very helpful. Thank you.

Mark Wilde, Deutsche Bank.

I've got a question on cellulose specialties and then a couple of questions on timber. Jack, I'm just trying to get a sense of the time line and when you'll really have a sense of where all of these negotiations are shaking out. Would you expect to have that by the late January report? Or is that something that could carry on in through the first quarter?

The timing of our negotiations largely take place in the fourth quarter. We'll be ready in January, our January call, to give you details of that.

Okay. All right. That's very helpful. Lynn, I'm just curious on the New Zealand business, are there particular things that you watch that we might be able to watch, just as indicators for the health of that New Zealand business?

Clearly, one of the things that we feel strongly about is the urbanization movement in China because 80% of that volume is heading into the housing market. It's that low-end housing and construction statistics that come out pretty regularly. In addition to that is port volume movement, so any movement that you can see in port inventories where shipping is very indicative of that. In addition to that, it's just overall GDP growth in China, Mark. The Rayonier New Zealand team works very closely with our Chinese team members and they really watch all of those three things pretty closely.

When I looked at your breakout today, that quarterly sales breakout, it seems like you guys might be a little more weighted to the domestic market in New Zealand than the average New Zealand timber. Is that correct?

I would characterize it as consistent with Rayonier's overall track record over the years. Primarily, our Southland has a much higher percentage of domestic. If you take a look at the statistics overall, 34% of our volume is export, and other 66%. If you looked in our Northland operations, on the North Island, it would be a little closer to 50/50 mark.

Just to jump in on that, Mark, just also keep in mind, that domestic volume as well often is highly export focused. I don't know exactly and I don't know think we have a statistic that would break that down, but I would think of our business there, at least half, 50/50, export to domestic, and if not, more than that.

Paul, when you say that, is it that some of the domestic winds up being export, is that just because it's exported in the form of lumber?

Lumber, window frames, you name it, yes. Some of it comes back here to the US and to our big box stores because we've seen it there.

You would say the domestic log prices down there tend to track pretty well with the export prices over time?

Yes, they do, there's a very strong correlation. One thing that we've seen in this past quarter is that not only are they tracking against exports, but following the earthquake of 18 months ago, the domestic construction really has ramped up. We're seeing those two factors really driving that domestic log price.

Okay. Just one other question, Lynn. I know that you guys have been working on trying to develop more log export business out of the Southern US. Can you just give us an update on where that's at, and how you think that may develop over the next couple of years?

One of the things that we're continuing to do is to test those markets. Right now, we have seen that our log export opportunities on the Atlantic ports and in the Gulf ports have been modest. We've all been container so far. No break bulk, or free hold, as we have in our Pacific Northwest operations. That shipping cost is the break point for us. Right now, our domestic markets are a better timber margin. But we're continuing to test it. We continue to have a small volume and we continue to work with opportunities that would increase that net timber margin.

Okay, that's helpful. Thanks very much. Good luck in the fourth quarter.

Steve Chercover, DA Davidson & Company.

Thanks. Good afternoon, everyone. Welcome to Chris. It sounds like you've got some new skills. I don't know if I missed it, but where did you come from, and what are those new skills?

Okay.

Thanks, Steve. I will turn it over to Chris. But yes, he joined us midsummer, and I did make those comments at that time. But it's a good point. We should refresh it. Go ahead, Chris.

Sure, hi, Steve. Thanks. It's nice to meet you over the phone. I think what Paul is talking about might be characterized as community development skills, background, and expertise. I've been in that business in a number of places, at a global consultancy called AECOM, at the St. Joe Company before that, at the Walt Disney Company before that, and my own family business then before that, too. My 25-year plus career has been focused on real estate, economic development, and the like, in the Southeast and otherwise.

Great. Forgive me if I had forgotten that from the summer, but thanks for refreshing that. I don't know, again, if I missed this, did you specify at least which region the 21,000-acre sale was?

Yes, it's in the state of Georgia.

Okay, that helps. It sounds like we should have some traction on one of the mega sites, correct?

Correct.

At least one data point?

Correct.

Then the final one, I guess, for Jack is when did it become apparent that the full sell-through of the expansion might not come through until 2017? Is this almost an issue of the ramp-up was too good?

No, I think it became apparent more here in the last month or so. We started seeing that the ramp-up may not be as strong in 2014. We mentioned that that volume drop-off is 90,000 down to potentially 25,000 tons to 40,000 tons, so about a 50,000-ton drop-off. Let me make sure you understand the difference here between the CSE expansion and what is our base volume. When you look at our CSE expansion, that incremental volume where we talked about having about 85% committed, that's still intact. The shift has been in a base volume that we thought had reached agreement earlier this year. But the current market conditions have since changed that, and we're still in negotiations with it.

Total volume, year to year, I think therefore we gave you the update, as Jack described. We thought that was important to get that out there. We really view this as a near term challenge and not a longer term issue. It's about our need to be patient and disciplined and placing this volume out there, into the market, and not to chase it with price. I think Jack and his team are doing just that.

I certainly agree with that. Not to overstate it, if you thought you had commitments from some of your core customers, are they actually reneging on commitments or just renegotiating?

No, what we're talking about is a contract that expires this year. I would not get into calling it reneging at this stage.

Thank you all for your responses.

Paul Quinn, RBC Capital.

Thanks very much and good afternoon. I'm going to hit you again with the commodity versus specialty DP question. Thanks very much for the additional guidance on when that will be fully transitioned into specialty. I think we understand that. Maybe you could give us some additional color on what you're seeing in the commodity DP market, because it sounds like you'll be in that market for longer. Then, is there any of that volume that you're currently selling in the commodity side, selling outside of China?

Yes, the commodity in the dissolving pulp market or viscose market, the demand for that product that goes into staple is still very strong. It's growing at roughly 10% or so a year. The dynamic that has caused the price reduction from that peak of $2,400 a ton down to the $800, $900 a ton, is the fact that over the last few years, a lot of conversions took place. There are people chasing that market to the tune of about 3 million extra tons over the last few years, and potentially another 2 million tons over the next 2 or 3 years. What we see is that the pricing is likely to rebound some, but certainly not to the levels that we saw a year-and-a-half ago. We would expect prices north of $1,000 type level, maybe $1,100, but not until that capacity is consumed. Again, at a 10% growth rate with staple growth, that is consuming about 500,000 tons or so a year of this viscose pulp capacity. It's coming on very strong. Some of the announced conversions have not taken place.

Jack, the only thing I would add to that is not only have they not taken place, I think we will expect some folks to go ahead and back out of the market as well. Given where pricing is today, we already know producers are out there basically running at a cash cost or below, and we know that's not sustainable. Paul, up in your area of Canada, you're already aware of an announcement of someone who's changed their plans in that area and not planning to pursue the viscose market and going back into the paper pulp market. I think we're going to see and hear more and more about that. I think Jack's right. You're going to see that continued consumption with the growth of the market in the viscose. You're going to see some folks exiting that. That will tighten that up. The timing on that is always the hard part to determine exactly.

Okay. In terms of the revised guidance of getting 100% specialty, by I guess 2017, 2018, given your pricing outlook, you do see some kind of rebound in pricing towards end of that time frame?

Well, I think we certainly hope so, but at this point, we're not commenting, Paul. We'll come back to you in January with a little more flavor. Again, we usually just put it out there from a year to year, but we will advise you as we know about it. It's obviously looking like pretty dynamic times right now.

Just on the negotiations on the specialty side, I thought everybody knew about the capacity additions coming to the market. I think one of the hopeful negotiating push-backs that you guys would have had would be the cost overruns that you experienced at Jesup. My understanding was a lot of that from your initial $300 million budget to the $388 million final was to hit that time line that you promised your customers. Are you finding that negotiating tactic is not as strong as, I don't know, maybe I was expecting? Maybe you could give us some color on what your customers' profitability that are using your CS product? Have you seen a drop, or have you noticed a drop in their profitability?

Let me start, and Jack, let me start with the second one. Certainly you see, and a lot of it is public, and on our customer side, they're doing, almost all of our customers, very well. No, we haven't seen a change in any negative direction on the profitability side. Paul, we always comment on that as one of the factors we look at, as we discuss pricing. I would say certainly that's a plus factor, when we talk about pricing with our customers. That's improved. We also talk about currency is a factor. Our costs are a factor, and then usually first and foremost it's just the demand and supply dynamics out there. I think that's where Jack really focused in on, that supply dynamics. But our customers overall are good.

We are still working very closely, obviously, with all of our customers on the trial and qualification. That's gone well. We've got customers factoring in this new volume into their plans in 2014. That part hasn't changed. It's really more of this disconnect we've got on a piece of our base volume that's been the challenge here. Again, it's too early to call where that nets out. But we thought it was prudent to go ahead and give some guidance out there.

Okay. Thanks very much. Lastly, just on the timberland side, what do you see in the timberland market? It seems like the market has heated up quite a bit, and it's very challenging and competitive out there. Maybe you could just share some of the color that you're seeing in your marketplace, close to your timberlands, and whether you guys have experienced the same sort of issues.

Are you referring on the acquisition side of things, Paul?

Yes, the acquisition and the valuation side, both.

Certainly, we think valuations are holding well and obviously continuing to improve and increase. We think that's good. On the acquisition side, just year-to-date, we've probably looked at almost the same amount of property that we looked at a year ago. There's still pretty robust availability of timberland out there. I think if there is any change, it has probably been two. I think we've seen plenty of dollars going after that availability. We definite see that out there. We're seeing a little bit, at least this year, less that fits our investment criteria. For example, I think this year, year-to-date we've probably evaluated 40 different properties. We've offered on 7 of those, which would be lower than we were last year in terms of our percentage. We actually only acquired 3 small properties, about $12 million. That's obviously separate from our New Zealand acquisition of $140 million.

Again, that would tell us that it's at least not as fitting for our portfolio as maybe some others. It also tells us again, it's a pretty robust market in terms of timber and timberland values, and that we also remain very disciplined. Over the last three years, we've put out there and invested over $700 million, and that includes the New Zealand acquisition. We can see the return on those investments. We feel very good about those returns, and those investments. We think our strategy is right on, and the disciplined nature of that strategy is right on. It just takes a while and a lot of evaluation out there before we can bring them on in.

Well, great. Great color. Thanks very much. Best of luck.

Mark Weintraub, Buckingham Research Group.

Thank you. Just returning to the Performance Fibers again, if I remember correctly your original expectation was in 2014 that you would ship roughly 600,000 tons of the cellulose specialties, and about 50,000 tons, 60,000 tons of the commodity viscose. Is that right? What's the new mix expected to be? The reduced cellulose specialties, is that going to be commodity viscose? Or are you going to ship nothing in its place?

The original plan, Mark, was for 2014, we'd have roughly about 170,000 tons of overall production on the new line. About 25,000 tons of that would be classified as off-grade. Then, about 50,000 tons or so would be as commodity viscose. Based on the numbers we shared, if you assume it's somewhere between that we drop down from 90,000 tons down to 25,000 tons to 40,000 tons, you would add another 50,000 tons or so of viscose into that which brings it up to about 100,000 tons of commodity viscose.

Okay. Got it.

If that math makes sense.

Yes, absolutely. Then, it sounds like there has been massive variation in the spreads historically between the higher alpha product and the commodity viscose. I was going to ask what a more historic spread has been, but it sounds like it's just been all over the map. But I'll give it a shot anyhow. What might be an average spread between the products?

That's a tough one to call. You may have seen the chart that we've used in the past that shows the difference between CS and commodity viscose. You can see the cyclicality there. Right now, you're seeing about a $1,000 difference. It could be on average $500, in that type of range.

It's been higher. It truly has been all over the map.

Right. Maybe I misunderstood this or misread this, your production costs, when you're making the commodity viscose, instead of the cellulose specialty, is it higher or lower? Or is that something that you can call out? I got the sense it was higher based on something that was in one of your releases, or something you were just saying on the call here.

Mark, I think what we try to distinguish is the production cost of commodity viscose is higher than the production cost of absorbent materials. That's just because you basically have less product coming out of the same number of wood tons going in. As you recall the conversion, we're basically giving up around 250,000 tons or 260,000 tons of absorbent materials, in exchange for about 190,000 tons of specialties, or commodity viscose, either one. You obviously have less fixed cost absorption over a fewer number of tons.

Okay. I realize you may not want to comment on this for competitive reasons. But as we have been trying to model it out, is the cost of commodity versus the chemical, the cellulose specialties, if is just a temporary change, is it a big difference? Is it a lot less expensive to be running the commodity viscose than the cellulose specialties?

It's less expensive. It's not the same magnitude as fluff pulp versus CS, but it's less expensive than CS.

Okay, thank you.

Collin Mings, Raymond James and Associates.

Thanks and good afternoon. A couple of questions. First off, I saw in some news report out of New Zealand about some storm damage on some of your timberland. Can you maybe put some more color around that or update us on any sort of impact there?

Hello, Collin, yes, we have a few details for you. We had a storm on September 10, as you saw in the news story. We had an area of about 1,500 hectares or 3,700 acres. The primary monetary impact to us this past quarter was that we had a write-down of premerchantable timber, so it's very modest. That's reflected in our financials. Going forward, what you'll see is that we'll have to, in 2014, salvage some of that volume, and that will go into the domestic markets. We'll have an impact of moderately higher logging costs, but really not a big impact to the overall operations and total volume.

Okay. All right. Thanks, Lynn. Then, some of your peers have recently discussed the potential to work with some institutional timberland owners that are unhappy about (inaudible) model. I'm just curious as far as how you guys are thinking about potential JV partnerships as it relates to timberland opportunities. I know you guys already touched a little bit on the acquisition environment, but just from that angle, I'd be curious to hear your thoughts.

I think we have a great JV in New Zealand right now. We're obviously working to really maximize that one. But here in the States, we're not really too actively searching for that opportunity yet.

Okay. I know you guys can't comment in much detail about the reference you made to the sales to the national home builder, but just broadly speaking, just order of magnitude, can you guys maybe speak to what you guys think an acre of entitled land would go for in one of your HBU markets in that Jacksonville area, compared to what raw timberland would be worth?

Hi, this is Chris. I think you know that all real estate markets are local, so the prices can vary widely. Honestly, depending on where you're standing, from one side of the street to the other, certainly from one zip code to the next. You're always going to get a wide ranging answer to that a question. But recently, some data points we have, and conversations around certain opportunities are giving us a little bit of direction there. For example, in the St. John's County, which is the county south of Duval, where the city of Jacksonville is located, it's a fairly active market right now. We've seen pricing for land there in the $18,000, $15,000 range, somewhere in there. That would be one data point. Obviously, if you go up the interstate a little further, it can be very different in a variety of directions. I hope that helps you a little bit.

Sure, no. That's helpful color. Thanks. Just going back to the cautious commentary regarding the specialty grade dissolving pulp pricing, I know you've already addressed a number of questions, Paul's question in particular. I'm a little surprised in the sense that your customers continue to report pretty strong results in their respective segments in that business. Can you maybe just remind us, as it relates to the demand outlook? I think clearly the issues you are seeing are on the supply side, but you can just recap what you're seeing on the demand outlook, especially as it relates to more of the acetate end uses, as well as the food and pharmaceutical applications that I know you guys are striving to focus on, on the ether side?

This is Jack. I'll take a shot at that. In the acetate arena, overall we're looking at around a 1% to 2% type growth rate. That's obviously driven by the filter tow type applications. Some of the specialty applications, for example in the LCD arena, that has flattened out somewhat as the films that they are using is getting thinner and thinner. The plastics, there's some small growth, and in the yarn, it may be flat to a small growth there. Overall, in the acetate, you're looking at 1% to 2%.

In the ethers area, it's quite varied again, and as we've already discussed and our competitors have noted, the construction segment in Europe has been stagnant. Again, we don't participate much in that arena. The food and pharma, that continues to grow at very healthy rates. However, there are some instances, short-term type instances, where we see some fluctuation in that. Longer term, our ethers customers all believe that you're looking at the upper-single digit type levels for growth rates in that arena.

Then high-tenacity rayon, you really have to look at both sausage casing and tire cord separately. Sausage casing is growing quite strong, around 5%, 6%. High-tenacity rayon, while it was relatively flat for a couple of years, it's actually picked up a little bit, maybe 1% growth or so. In the filtration market, likewise, it's growing at a 2% to 3% rate at the current time. I think I've covered most of the key areas there.

Yes, thanks for that color, Jack. I know you guys don't like to provide a whole lot of detail obviously until the first call in 2014, but just what you're seeing right now in the marketplace, I know you guys mentioned another key component as you sit down for these negotiations is the cost side of the equation. Can you maybe just talk about what you're seeing in terms of caustic soda, and just other chemical costs, and put a little bit more color around that for us as well?

In the area of chemicals, we don't see a significant shift. The biggest driver for us is caustic, and year-over-year, this year it's been relatively flat. There were some ups and downs throughout the year, but relatively flat. The biggest driver for cost for us is in fiber. As mentioned earlier, the wet weather has really driven up our fiber costs. Year-over-year, from '12 to '13, it's been about a 10% to 12% increase. That's hardwood and softwood combined. Hardwood would obviously be the higher end because it's in the wetter areas and more difficult to get. Depending upon the weather, going forward, that's going to have the biggest impact on our fiber costs.

Okay. Thank you for all of the detail there. Good luck during the quarter, especially as it relates to finalizing these price negotiations on the dissolving pulp side.

Thanks, Collin.

(Operator Instructions)

Our last question comes from Mark Wilde, Deutsche Bank.

Yes, just a couple of clean-ups on the land side. Can you guys just remind us what proportions of your lands do you have any subsurface rights with?

Mark, this is Lynn. That is an ongoing process for us to determine that, particularly with all of our new acquisitions. At this point in time, on our legacy timberlands, we still are working through the titles on that. It also changes over time because some of our properties are reverting due to state law, so we don't have an actual number. Depending on which region it's in, it's anywhere from 35% to 50% that we have our mineral rights on.

There would be some things you bought where you're not quite sure whether you've got that or not?

We have to do titles because of the states some of it is in. Some of the states revert after 10 years.

Like the thing in Louisiana, is that right?

Correct. I don't want to put a particular number. There's a range there.

Okay. Then, the other one that I wondered about, Lynn, you've got competitors who are also getting into ownerships or participations in other types of hard assets. Does that make any sense for you? How does that get treated from a REIT standpoint?

It's Hans. At this point, we're still just focused on acquiring timberlands.

Yes, okay.

We mentioned we spent about $700 million, expanding our acreage here over the last 3.5 years, and that's really been our sole focus. That avenue, I'm sure suits others. But for us, we want to stay just focused on the timberlands.

No gravel pits for you.

I think Mark asked how it's treated. I think it's a better question for the other folks because we don't know how they're actually treating it.

All right, that's fine. Good enough. Thank you.

At this time, I have no further questions.

Thanks, everybody. Please contact Ed Kiker for any follow-up questions. Thank you.

Thank you. That does conclude the call for today. You may disconnect your phone lines at this time.