Jerry Richards - Vice President and Chief Financial Officer Mike Covey - Chairman and Chief Executive Officer Eric Cremers - President and Chief Operating Officer.

Gail Glazerman - UBS John Babcock - Bank of America Merrill Lynch Chip Dillon - Vertical Research Collin Mings - Raymond James Mark Weintraub - Buckingham Research Albert Sebastian - Prospect Advisors Steve Chercover - DA Davidson Paul Quinn - RBC Capital Markets.

Good morning. My name is Felice and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed..

Thank you, Felice and good morning. Welcome to Potlatch's investor call and webcast, covering our third quarter 2015 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer and Eric Cremers, President and Chief Operating Officer. This call will contain forward-looking statements.

Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that segment information, as well as a reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com.

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

Thank you, Jerry. Good morning. Our resource and real estate businesses continued to perform well and contributed meaningfully to results, especially during the third quarter when harvesting activity was at peak level.

With the continued decline in lumber prices through late September, we had another challenging quarter in our wood products business and EBITDA has been negative this year for the first time since 2010. Lumber prices during the quarter fell unexpectedly to levels we haven’t seen in some time.

As a result, wood products earnings have declined by $47 million compared to the first nine months of 2014. Prices appear to have bottomed and lumber futures have increased over $40 since the beginning of October.

Concerns about higher lumber shipments from Canada depressing prices immediately following the expiration of the softwood lumber agreement on October 12, proved to be unfounded. Buying activity has increased since the agreement expired as stocking distributors work to meet customer needs.

If the current price trend is sustained our mills will swing back to profitability in the fourth quarter. Recent housing news continues to be encouraging, especially with the home builders sentiment index at 10 year highs.

Housing starts are expected to finish the year between 1.1 and 1.2 million units and we foresee continued gradual improvement into 2016 which bodes well for both our resource and our wood products businesses. With our leverage to lumber prices, it is not surprising our stock is trading at levels we have not seen in over three years.

Our stock is trading approximately 35% below analyst estimates of our net asset value or the value of roughly $1000 an acre. Clearly, there is a large disconnect between the public valuation of our stock and the private market value of timberland as evidenced by recent transactions.

Accordingly, our capital allocation priorities have shifted away from debt repayment, growing our acreage base through bolt-on acquisitions and investing in high return capital projects. It is clear that the best pathway to grow shareholder value is to invest in our own timberland by purchasing our shares.

Such a program would require the sale of assets which would be more attractive beginning in 2016 and the built-in gain stacks associated with our REIT conversion phases out. I’ll now turn it back over to Jerry to discuss the quarter results and then we’ll take questions. .

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

I’ll now review the results of our operating segments. Results of our resource segment are displayed on pages 4 through 6. Operating income for the segment was $36.4 million, compared to $8.8 million last quarter.

Our harvest volume for the quarter was at the high-end of the range that we discussed on the second quarter earnings call, our employees and contractors worked hard to achieve this result, despite operating within the constraint imposed by the extremely dry conditions and heightened fire danger in the west.

We had minimal fire damage on our timberlands. Northern sawlog prices increased $3 per ton or 4% in the third quarter as presented on Page 5. Western lumber prices increased in June and the first half of July.

This translated into higher average sawlog prices in Idaho in the third quarter because the majority of our Idaho sawlogs were indexed to the price of lumber on a one-to-three month lag. In addition, prices for cedar sawlog remains strong.

Cedar logs are currently selling for about $250 per ton, which is significant higher than prices for other species logs. Cedar comprises less than 10% of our Northern sawlog sales volumes. Our Northern harvest volumes were more than 500,000 tons higher in the third quarter compared to the second quarter.

This is the typical seasonal pattern because spring breakup significantly constrains operating days in the second quarter and dry conditions result in the most favorable operating conditions in the third quarter. Moving to the South on page 6. Sawlog prices increased $7 per ton or 15%.

This was primarily due to a seasonal increase in the harvest of hardwood sawlogs which sold for higher prices than pine sawlogs. Southern yellow pine sawlog values remained flat in all three of our Southern pinewood baskets. Pulpwood prices were flat compared to the second quarter.

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

The total harvest volume in the south increased almost 300,000 tons in the third quarter compared to the second quarter. Our second quarter volume was behind plan due to wet weather limiting logging operations.

We were able to make up a part of the shortfall in the third quarter as long as logging conditions remain favorable and mills need logs, we expect to make up the rest of the volume in the fourth quarter. The results of our wood products segment are displayed on pages 7 and 8.

The segment lost $5.4 million in the third quarter compared to loss of $2 million in the prior quarter. The decrease in earnings is primarily due to lower lumber prices which resumed their slide through most of the third quarter. High log cost in the lake states also contributed to the weak results.

Our average lumber prices declined 5% quarter-over-quarter, which is a bit higher than the drop in lumber prices implied by calculating the simple average of monthly Random Lengths' framing lumber composite prices.

This is largely because the composite does not include the economy grade lumber as well as the fact that we are more heavily weighted to studs than the composites. We completed the final two large wood products capital projects planned in 2015. We installed automated graders at our Warren, Arkansas and St.

Mary’s, Idaho lumber mills in the third quarter. Both projects have IRRs above 20% and are expected to result an improved grade recovery and lower costs. Mill downtime associated with these projects negatively affected wood products earnings by approximately $1 million in the quarter.

The effect of lower prices, mill downtime and high log cost was partially offset by slightly higher lumber shipments in the third quarter. The results of our real estate segment are covered on Page 9. Operating income for the quarter was $4.2 million, compared to $8.5 million in the second quarter.

As discussed on last quarter’s earnings call, we sold two commercial sites during the second quarter for significantly higher prices than our typical HBU properties. We did not sell any commercial sites in the third quarter. The Minnesota Rural Recreation real estate market remains strong.

[Indiscernible] was lower than the normal run rate of about $9 million per quarter, largely due to a year-to-date adjustment to the bonus accrual. I will now turn to Page 10. As Mike mentioned in his comments, we are planning to refinance the $27.5 million of debt maturing in the fourth quarter of 2015 and first quarter of 2016.

We expect that this will result in modest interest savings along with bringing up capital. Capital expenditures were $27 million through three quarters. We are on track to spend $36 million in 2015 which is the amount that we budgeted for the year. Now I’d like to comment on our outlook.

We plan to harvest between 1.1 million and 1.2 million tons in the fourth quarter, with slightly more than half of the volume in the south. Approximately 90% of the harvest in the North and approximately 45% of the harvest in the South including stumpage, are expected to be sawlogs in the fourth quarter.

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

We expect the average price that we realized for Southern sawlogs in the fourth quarter to decline, due primarily to a seasonally lower volume of hardwood sawlogs in the sales mix. We continue to believe that our Southern pine sawlog prices will remain flat this year.

We expect Southern pulpwood prices to be down slightly also due to a lower volume of hardwood, pulpwood in the mix. At these volumes and prices, we estimate that resource earnings in the fourth quarter will be approximate the segment's earnings in the first quarter of 2015.

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

There is upside to this forecast if the recent lumber price increases continue. The cost of logs started moderating in the lake states early in the third quarter. It will take a couple of quarters to work through the high cost logs that were purchased earlier in the year.

Shifting to real estate, we expect to sell between 15,000 and 18,000 acres this year, which is less from the 20,000 acres that we planned. This was primarily due to the potential for some transactions to slide into the first quarter of 2016. Land basis is estimated to be 25% to 30% of land sales revenue for the year.

We expect that corporate will return to its normal run rate of about $9 million in the fourth quarter. Interest expense and the income tax benefit in the fourth quarter are expected to be comparable to third quarter amounts.

To summarize, we expect earnings to be lower in the fourth quarter due primarily to seasonally lower harvest volumes and lower prices. We are encouraged by the continued progress in US housing starts and the recent increase in lumber price. That concludes our prepared remarks. Felice, I would now like to open the call up to Q&A..

[Operator Instructions] Your first question comes from the line of Gail Glazerman with UBS..

Hi, good morning. .

Good morning..

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

Yes, Gail, this is Eric. I think in the third quarter, you had a couple of things that were at play here. We saw Chinese demand weakened backing up lumber in the North America. Some of that may have been currency related, but it looks like demand was little soft than in China. You also had the coming expiration of the softwood lumber agreement.

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

And what happened was inventories got dragged down really, really low because nobody was buying lumber and then all of a sudden, the lumber agreement expired, weather conditions are good outside for construction activity and so demand resumed and so prices have very quickly rebounded.

Now, they are not all the way back to where they were earlier in the year, but certainly they’ve made a nice recovery here over the past several weeks. So, as that relates to log pricing and log demand, I think it’s fair to say that those lower prices resulted in less converting activity at saw mills, probably pushing down demand a little bit.

You saw a few mills curtail and I am sure many mills cutback on overtime hours. But now that those prices are resuming, and margins are now getting back into positive territory again, I think demand is coming back for logs. It hasn’t really translated into significant changes in log prices however. So that remains to be seen. .

Okay, and just looking to the fourth quarter in the south, any concerns or any signs of weather impact that looks like – than some thoughts of extreme wet sitting what’s happening right now?.

Yes, there was a hurricane that came up through Mexico and into Texas and actually we got significant rainfall in Arkansas and we actually did have to pull out of the woods for, I don’t know four days or so. We had a lot of rain activity. As of now, we don’t think that’s going to impact our harvest plans for the fourth quarter.

But we are getting into that time of year where certainly weather events can impact harvest activities. .

All right, and in terms of the discussion about potential land sales, to support buybacks, can you give any sense that all of that how far this discussion might have gone with the Board and assuming it is, because you’ve talked about buybacks in the past that the Board is ultimately decided not to follow-up.

I assume there is more support at this point from your conversation?.

Yes, Gail, we’ve certainly had discussions with our Board about the valuation of the company by public markets. The very large disconnect we’ve seen between private transactions and the public valuation. There is a number of transactions recently that substantiate that.

I think it’s a pretty glaring opportunity that the best thing we can do to allocate capital is buy background shares around timberland is the best investment we can make. And when we look back at the decisions we made a year ago to expand into Alabama and Mississippi, with the transaction we did there to buy 201,000 acres.

Our stock was trading in the mid 40s at the time. We had excess cash in the balance sheet.

I think for a number of strategic reasons, it was absolutely the right thing to do, but times have changed and we kind of hitched ourselves to this lumber market in terms of not only our wood products business, but indexing the prices of many of our logs in the lumber market and we’ve been drugged down with that. We think unnecessarily so.

And so the opportunity before us is to sell assets and position that cash to re-buyback shares, certainly we will continue to work on that and discuss it with our Board. .

All right, and just one last question.

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

Yes, Gail, so - it’s Eric. We are – as Jerry mentioned, we are going to see prices come down for our specific business in the fourth quarter. If you look at the northern region, a good portion of the drop, probably over half is simply due to that conversion factor. We sell on an MBF basis, but we report out on a dollars per ton basis.

So of the drop that we anticipate, half of it’s going to be just due to that conversion factor. We are also going to see a little bit of a mix shift as well, cedar tends to be a little bit lighter for us in the fourth quarter as a mix percent. So that’s going to impact our reported price per ton as well.

And then lastly, we do think lumber prices, although they have risen here in the fourth quarter, they may not have risen fast enough to bring up the overall reported lumber prices comparing Q4 to Q3.

So, slightly lower lumber prices across the full quarter combined with the converting factor I talked about, combined with the lower cedar mix is going to drive our log prices little bit lower in the fourth quarter in the northern region. .

Can you just give any magnitude….

Sorry, go ahead..

Just any sense of magnitude to that?.

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

Okay, thank you and….

Half of that’s going to be due to the – to simply the conversion factor. Now in the south, as Jerry mentioned, we are seeing continued flat pine sawlog pricing. Now, prices for us are going to come off a little bit in the fourth quarter.

Again, we’ve got a mix issue going on, hardwood, it’s typically harvested in the third quarter tends to sit in the low ends where it’s subject to getting underwater in the more wetter months. And so what happens is, harvest activity for hardwoods comes off in the fourth quarter.

So that mix percent is going to drop from us probably in the 13% range in Q3 down to 6% in Q4 as a percent of our southern sawlog harvest volume. So that mix impact is going to drive our prices lower in the south as well. And then finally, you’ve seen hardwood prices come off a little bit in the south from about $80 a ton down to $69 a ton.

So we expect prices to be a little bit lower for southern sawlogs as well. .

Okay, thank you. .

Your next question comes from the line of George Staphos with Bank of America. .

Hi guys, this is actually John Babcock sitting in for George.

How is everything going today?.

Good morning..

Good morning. .

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

Well, the softwood lumber agreement expired, not the southern, just to be clear, it covers all softwood lumber. The trade agreement between the two countries, Canada and the US has to be negotiated by the governments, I think with the elections, it just happened in Canada.

Certainly, the political season that we are in, in the US that doesn’t facilitate country-to-country discussions and negotiations, government-to-government at this point. So I think that’s one thing. There is a moratorium on filing a trade case for one year after the agreement is expired.

I think that will give us the two countries and industries time to think about it. I think the fundamental difference is there is components of the US coalition that want to see a quota, there is components that want to see a tariff and Canada certainly would like to see an uncertainty for an important trading partner.

So, I am reasonably confident the coalition will prevail in next year working with Canada to reach some negotiated settlement that can be brought to the governments to put a stamp on. But it’s going to take time. I fully expect we are going to operate with our own agreement at least through in early next summer. .

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

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

Now the extent to which people put on overtime, that remains to be seen. I don’t think margins are high enough yet to where it’s attractive enough yet for people to start thinking about putting on a lot of overtime. We just now cross back over probably into roughly breakeven territory for most mills. And it’s obviously very region-specific.

The south is still pretty profitable, manufacturing lumber, whereas west side producers are probably still feeling some pressure. So, I guess the answer to your question, I don’t think you will see a lot more incremental capacity given we are not, we haven’t seen a sharp enough run in lumber prices yet. .

All right.

And then, with regards to the capital plan, or rather new capital allocation and that you guys discussed, if say that we were to be an improvement within the stock price to better reflect the values, how quickly would that ultimately change that plan?.

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

So, I mean, that - making a decision to reinvest in our mills is the higher priority than say, buying back our shares is something that we can do fairly quickly as that opportunity presents itself, we’ll certainly move that way..

All right, great. And then, just my last question here, I noticed you guys had a tax benefit for the quarter.

What ultimately drove that?.

So, John this is Jerry. The tax benefit really is driven by the mills operating at a loss. So it reflects future cash tax refund that we’d expect as we file the tax return. .

All right, great. Thanks again, guys..

Thank you..

Your next question comes from the line of Chip Dillon with Vertical Research..

Yes, thank you and good morning. .

Good morning, Chip. .

Good morning. .

The first question has to do with, just wanted to drill in a little bit on the – just I understand the log pricing in Idaho that I know is largely tied to lumber prices.

Now, with the lumber prices having fallen until like September, when do you think those prices actually bottom, is it a lag like a month or two or is it longer than that?.

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

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

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

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

Right, right. Okay, gotcha. And then, just to make sure I am on the right page, I know in the first quarter, I think resources did about $17 million and I think if I heard you right that, even with the – let’s say that we ended up with prices flat, just slightly down in lumber with the projects done in the mill is running better.

You said you had a shot at maybe being modestly profitable and I guess, that’s still the case and I think if you said you made – if you assumingly made a couple million in the real estate at least on an EBIT basis and corporate goes back to $9 million and interest stays $8 million.

It looks like you are kind of saying something in very broad terms, you will be profitable in the fourth quarter but might be $0.05 to $0.15 something like that?.

Yes, so, Chip, this is Jerry.

You covered a lot of ground there, but maybe to start, first, in terms of resource, we reported operating income of $15 million in Q1 and the script comments were focused on that we expect with all of the moving parts that will be comparable to that here in the fourth quarter and again, that’s a resource statement, maybe just fast-forwarding to kind of your overall company statement as you walk through the rest of our guidance.

I think, probably near the lower end of the range you threw out $0.05 and $0.15 is kind of what our forecast pencils out..

Gotcha, I apologize, I’ve missed, well, is it 17, that would explain it.

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

Chip, given our current stock price and the disconnect between public and private timberland valuations is why we have stock repurchase as a higher priority than any other capital allocation decision we can make at the current time.

We do not currently have an authorization in place from our board to repurchase shares and as I mentioned before, in order to execute such a plan, we’d have to raise some money through the sale of assets which again we think is an attractive arbitrage given the value of timberland today that’s held up well in the private market.

So, I think that covers it. .

Gotcha and are you open to any particular – is there sort of a size you have in mind when you say sale of assets? I mean, could it be something major like a couple of 300,000 acres or is it likely to be something smaller or kind of all the above?.

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

Gotcha, that’s very helpful. Thank you. .

You are welcome..

Your next question comes from the line of Collin Mings with Raymond James. .

Hey, good morning guys. .

Good morning. .

Good morning. .

First, just following up again on the shift as far as the capital allocation strategy.

Just to clarify, would you look at just pursuing an outright land sale or are you open to doing kind of a JV type transaction like Plum Creek did?.

Well, we have not contemplated doing something along the lines of what Plum Creek did. I think it was very creative. They have the scale and size to do that. I think that’s more challenging given our relatively small footprint compared to them and we’ve had no discussions with the potential JV partner about that.

So, at this juncture, I’d say an outright asset sale. If we can find one that’s attractive as a higher likelihood..

Okay, and is there any regional bias one way or the other to maybe look at doing something in the south versus Idaho?.

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

Okay, and then just as it relates to your Arkansas footprint, any impact at all as it relates to Conifex and Canfor announcing some acquisitions in that Southern Arkansas recently?.

Yes, Collin this is Eric. Yes, as it relates to Conifex in El Dorado, that site needs significant amount of capital and that’s going to take time for Conifex to get that location up and running. I think they are going to have to raise that capital and as you know, now it can be a challenging time for a lumber producer to raise capital.

So, we don’t know where Conifex is at as it relates to getting that mill up and running, but certainly it’s an attractive wood basket and it’s an attractive opportunity for them. But that’s where that stands right now.

As it relates to the Anthony Mill over in Urbana which is just east of El Dorado, I don’t think that transaction has closed yet and Canfor if I am not mistaken has not announced what they are going to do with that particular mill.

However, that mill today consumes about 150 million board feet logs that’s 600,000 tons a year is what it’s consuming today. The average Canfor mill is significantly bigger. They average about 250 million board feet a year.

So, our guess is that Canfor is going to expand capacity at that mill which will certainly help out log demand in a particular wood basket. But we haven’t heard yet what Canfor’s plans are yet. .

Okay, now that’s helpful color.

And then, just going back to, I recognize you are still working on 2016, but just, is there a way to think about, just given the shift in capital spending and priorities there? How we should think about kind of a recurring CapEx number on the wood product side, versus some of the improvements you’ve made this year obviously some capital going in this year.

So what’s kind of the core kind of CapEx maintenance CapEx number do you think about?.

Well, we will provide 2016 guidance in January call, but I think if you go back to the last few years, prior to 2015, you would see more typical kind of maintenance CapEx levels and that represents somewhere between, roughly $15 million for our resource business which is requirements for planting resource station, road construction and so on.

And another $5 million to $10 million for support of our wood products business both maintenance capital and higher return small discretionary projects. So $20 million to $25 million number is more normal. The $36 million that we spent this year was highly focused on four discretionary high return projects which we will not repeat in 2016.

Not because they haven’t done well, they’ve been huge home runs, but as I said we just got higher priorities elsewhere..

Yes, understood.

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

Sure, Collin. This is Jerry. In terms of refinancing that debt, after interest rate swaps are considered, it’s a little over 500 basis points today.

So we probably could save a 100 basis points, put a little over 4% debt in terms of tender I’d be inclined to think about it as probably ten year way to lock in these low current rates for a longer period of time and quite frankly, we have no maturities ten years out right now.

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

Okay, now that’s very helpful and then just one last one, then I’ll turn it over.

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

Well, I think, Collin, this is Eric. Yes, there is a way to think about breakeven price and I would say, it’s a little bit higher than where we are today. I think we reported pricing in the third quarter of about $335,000 on a GAAP basis. I think you can see prices were a little bit higher. Not a whole lot higher, but a little bit higher.

You could see it get back to breakeven. And I think a simple way to look at it is, take the $5 million of loss that we had in the quarter and think about, I don’t know, 160 million or so feet of production and that math would get you to the price increase that you would need to get us up to breakeven. .

That’s operating income breakeven, not….

Not EBITDA..

Not EBITDA. .

Right, okay, now that’s very helpful and I’ll turn it over guys. Thank you..

Thank you..

Thank you. Your next question comes from the line of Mark Weintraub with Buckingham Research..

I just want to confirm, so, if I heard right, you had anticipated cost of debt roughly 4% which interestingly is lower than where your dividend yield is at 5%, did I hear that right first off?.

Yes, you did hear that correctly, Mark..

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

Yes, if we can find an attractive transaction, yes it would be incremental..

Okay, and, just – have you begun that process yet? I recognize that you don’t want to finalize a sale until next year given anniversarying of the built-in gains.

But, is that a process that you’ve already begun and are you hopeful or is it – or are the indications good early on or is it something that you are about to embark on?.

Well, I think we are optimistic about the opportunity to execute a transaction that is meaningful at a significant arbitrage between these private market transactions and where we traded publicly in recent transactions, particularly in the south which is where the best benchmarks are, consistently show the quality southern timberland trades between $1800 and $2100 an acre, based on what we’ve purchased for and others have sold for and I think that makes us certainly hopeful and I think very optimistic given still a fair amount of money on the sidelines with – and other institutional investors that still like the asset class that we can execute a transaction..

Okay, and then, just a detailed question if I may, in the fourth quarter, I know in the slides, you had indicated interest and corporate expense, you thought would be similar versus the third quarter. I just wanted to just clarify is that corporate had come down a couple million in the third quarter.

Are you expecting it to go, just if you could just clarify what sort of corporate, do you expect that to be in the fourth quarter and also kind of looking ahead, have there been any moves to reduce corporate such that it might be a lower number in 2016 than it was on average in 2015?.

Thanks for asking that question, Mark. This is Jerry. In terms of corporate, it was lower than our normal run rate in the third quarter largely because we adjusted our bonus accrual on a year-to-date basis. The normal run rate for this year is $9 million.

We do expect in the fourth quarter that corporate will return to the more normal rate of $9 million. In terms of going forward, the main difference year-over-year really has been driven by pension and post-retirement and we will do a year-end evaluation and give guidance on that when we release earnings for the fourth quarter..

Okay, great. Thanks very much. .

Your next question comes from the line of Albert Sebastian with Prospect Advisors..

Good morning gentlemen..

Good morning. .

My first question concerns the land sale, the land sale that you are referring to, that will come out as the timber REIT subsidiary, correct?.

We don’t have a specific sales, we’ve discussed, so I am not sure what you are asking..

Well, my question is, if the difference is the land sales that are HBU or rural real estate, those are in the taxable REIT subsidiary, correct?.

Usually, they are not always, but usually they are..

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

Yes, Al, this is Jerry Richards.

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

.

Okay, so, I guess, that – given that, I guess, it’s sort of implies that if you are going to do it as it a sizable land transaction..

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

Okay, and just one last question, concerning the timberland that you purchased about a year ago, the 200,000 acres in the south, any thoughts on just sort of having operated that for about a year in terms of – just sort of how it looks from a inventory perspective, site index perspective.

Has it met your expectations and are there maybe some marketing things you might be able to do with that that previous owner could not?.

Well, I think it exactly met our expectations. The site index was better than what we owned and average in the south and Arkansas, the stocking was higher as well. There has been no surprises. The team that we’ve put in place has executed very well.

We are exactly on track with the pro forma that we expected and fortunately, we’ve had supply agreements in place that we assumed in the purchase with International Paper and West Fraser and other producers in the area which have served us well in these markets last year. So, we feel quite happy with the acquisition. .

Okay, thank you gentlemen. .

Thank you..

Your next question comes from the line of Steve Chercover with DA Davidson..

Thanks. Good morning everyone. .

Good morning. .

So, it’s kind of late in the Q&A, but I kind of wanted to get your thought process on the whole manufacturing side. I mean, you are EBITDA negative, what’s the calculus of when you shutdown or was it also a function of either contractual obligation to the lumber channel buyers or the fact that you’ll need to sell the logs to your own manufacturing.

Why would you run when you are losing cash?.

Yes, Steve, this is Eric. The mill has been EBITDA negative in the third quarter, they didn’t go negative for a very long period of time. Lot of the calculus is involved in trying to determine the permanently shutdown or just dial back your production activity has to do with your outlook.

Our view – as we got to the end of the third quarter, when we went EBITDA negative was that lumber markets were oversold. And that we would see a bounce back in pricing and that’s kind of what happened.

So, as long as we were running cash positive, it makes sense to keep the mills running, but even when they are running slightly cash negative, compared to the cost of their shutdown, which by the way your fixed cost don’t go away in the case of a shutdown, you will still continue to run. .

Okay, that’s fair enough, but I don’t think I’ve heard you attribute share price weakness, so explicitly what goes on in manufacturing.

So, is it still a core business? It’s certainly a bigger TRF component than I guess, your peers?.

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

So I think, I could include from that we are trading like a lumber stock not a timber stock and one that has significant net asset value derived from the timber base rather than really what is quite a small wood products manufacturing business. So, I guess, that’s the takeaway that we have from it..

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

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

Got it. Thank you. And then finally, with respect to capital allocation, the changing priorities….

Hang on..

Steve, we had two conversations going on at once. .

Jerry wanted to correct something before your next question. .

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

Okay, thank you for that. And I just took a note there.

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

No, I don’t think so. I don’t – I mean, we still view the dividend as very significant, supported by the business. We hope we can continue to grow it.

That’s probably taken a bit of a pause given the collapse we’ve seen from earnings from our wood products business which bleeds over into lower log prices in our resource business, but certainly the dividend is still a highest priority..

Great. Okay, thank you..

Thank you..

Your next question comes from the line of Paul Quinn with RBC..

Yes, thanks very much and good morning guys. Just, very helpful with the guidance on northern log pricing quarter-over-quarter, I think you mentioned down 10% to 12%.

Could you give the same sort of metric in the US south here, do you see a similar drop?.

Yes, for sawlogs, we anticipate a similar sort of drop, largely driven by the mix issues that I spoke about earlier. Our wood prices have come off and our wood is a mix in the – is a mix percent, and the fourth quarter it’s going to be lower. Those two factors will drive prices lower about 12%. .

But southern sawlogs, softwood sawlogs are flat..

Pine sawlogs are flat..

Okay, and then just given that flatness in southern sawlog pricing reflecting back on comments on advantages to timberland, have you seen any kind of weakness, I mean, I know the transactions that are out there, that have closed and about to be closed or kind of spotty in some other – their own constraints, but, do you see any weakening demand in the timberland space, especially, in the US south given the flat pricing environment?.

I don’t think we’ve seen any lack of interest. The amount of capital still is there and I think as evidenced by our recent transactions they were just completed for quality timberlands that are unencumbered by supply agreements or that don’t have poor site index and so on.

I think that the recent transactions have continued to support southern timberland trading, call it $2000 an acre for quality timberland. .

And then just lastly, just back to the comment on whether wood products is core to you guys, I mean, there is obviously guys that do this full time basis and it’s obviously an issue that’s causing some weakness, do you consider a sale of that business?.

Well, we never say no to anything if we can create more shareholder value selling, and we’d certainly consider it, but the businesses we think have a – they have a really nice fit with our timberlands especially in Idaho and in Arkansas where we are really kind of naturally hedged because about half of the volume goes from our land to the mill.

So when log prices are weak, we capture the returns in saw mill business and vice versa. We like that aspect of it. It’s important that the mills operated and are well maintained by somebody. That doesn’t have to be us, but I think we’ve done an okay job with it.

We continue to – the last benchmarking we did in our mills were still first quartile margin performers and I suspect that is still in that same zip code. So, the business has I think served us well. .

Great. That’s all I had. Best of luck guys..

Thanks Paul..

Thanks..

And at this time, there are no further questions. .

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

Thank you. .

Thank you. That does conclude today’s conference. You may now disconnect..