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Executives

Hans Vanden Noort - Chief Financial Officer

Paul Boynton - Chairman, President and Chief Executive Officer

Charlie Margiotta - Senior Vice President, Real Estate

Jack Kriesel - Senior Vice President, Performance Fibers

Lynn Wilson – Senior Vice President, U.S. Forest Resources

Analysts

Michael Roxland - Bank of America/Merrill Lynch

Chip Dillon - Vertical Research

Mark Wilde - Deutsche Bank

Steve Chercover - D.A. Davidson

Paul Quinn – RBC Capital Markets

Mark Weintraub – Buckingham Research

Joshua Barber - Stifel Nicolaus

Rayonier Inc. (RYN) Q4 2012 Earnings Conference Call January 24, 2013 2:00 PM ET

Operator

Welcome and thank you for joining Rayonier’s Fourth Quarter 2012 Teleconference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today’s conference is being recorded. If anyone has any objections, you may disconnect at this time.

And now, we will turn the meeting over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Hans Vanden Noort - Chief Financial Officer

Thank you, and good afternoon. Welcome to Rayonier’s investor teleconference covering fourth quarter earnings. Our earnings statements and presentation materials were released this morning and are available on our website at rayonier.com. I would like to remind you that in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release, as well as our Form 10-K filed with the SEC lists some of the factors, which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page 2 of our presentation material.

With that, let’s start our teleconference with opening comments from Paul Boynton, Chairman, President and CEO. Paul?

Paul Boynton - Chairman, President and Chief Executive Officer

Okay, thanks Hans. I will 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 timber, Charlie Margiotta, Senior Vice President of Real Estate will discuss our land sales results and then Jack Kriesel, Senior Vice President of Performance Fibers will take us through the results of our cellulose fibers business.

Well, let me start by saying that we had another great year in 2012 generating strong cash flow well above our dividend and increasing operating income 13% over last year’s pro forma amount. We believe over 20% total return our shareholders realized last year reflects our disciplined execution of our strategic initiatives along with the priority we place on growing our dividend, which we raised 10% to $0.44 per share beginning in the third quarter or $1.76 per year.

In late 2012, we have acquired 88,000 acres of productive timberland mainly in Texas that strengthened our geographic diversity in dynamic end markets and continued to upgrade the quality of our portfolio. We see great value in our growing timberland base as we positioned ourselves well for improved markets in the years ahead. Now, throughout 2012, we executed on specific opportunities in our markets to capture cash flow while growing the long-term value of our business. We took advantage of strong regional timber markets to capture higher prices in volumes in the Southeast and increased volumes from our coastal Washington properties.

Volumes from our Gulf States region increased as we effectively integrated 308,000 acres of timberland we acquired in 2011. We maintained discipline in our land sales program while we capitalized on regional market opportunities to realize higher prices for recreational properties and for conservation lands that are prized for their unique environmental attributes.

Continued strong demand for our high-purity cellulose specialties drove another record year in Performance Fibers. Our current volumes are fully committed and we made good progress on the 190,000 ton cellulose specialties expansion project at our Jesup mill as we are on schedule for completion in mid 2013. With an improving housing market, growing Asian demand for logs from our Washington timberlands and our New Zealand joint venture, and continued strong demand for our cellulose specialty products, we see ongoing operating momentum in each of our businesses that we anticipate will drive another good year in 2013.

Now, this would be a transition year for our manufacturing businesses. As we complete the CSE project and finalized the sale of our Wood Products business. These actions are key elements of our strategy to exit commodity markets and focus on growth in the specialty chemicals sector led by our high-purity cellulose specialties products.

Now, with that, let me turn it back over to Hans to review the financials.

Hans Vanden Noort - Chief Financial Officer

Thanks, Paul. Let’s start on page three with our financial highlights. Overall, we had a very strong fourth quarter. Sales totaled $434 million while operating income totaled $116 million and net income was $76 million or $0.59 per share. We didn’t have any special items this quarter. Last year however, we had two special items a fourth quarter $6.5 million non-cash charge for estimated future clean-up costs at our former Port Angeles mill site and a third quarter $60 million benefit from reversing a tax reserve established back in 2009 relating to the alternative fuel mixture credit. Both of these items have been excluded to arrive at the pro forma amounts used for the comparisons through out this call.

On the bottom of page three we provided an outline of capital resources and liquidity in comparison to 2011. Our full year cash flow was strong with adjusted EBITDA of $560 million and cash available for distribution of $304 million. In October 2012 we emended our $450 million revolving credit agreement to provide for improved pricing additional borrowing capacity and enhanced flexibility to transfer assets among subsidiaries. Also in November the $300 million 3.75% exchangeable notes were paid in cash, funded from the revolver. We then entered into a $640 million seven year term note with the delayed draw feature and borrowed $300 million on this note to replenish our revolver. At year end, we still have $340 million of borrowing capacity under this note. We closed the year with $281 million of cash. Our debt balance was $1.3 billion. On a net debt basis, we finished at a very manageable $989 million.

Let’s now run through the variance analyses. One page four, we prepared a sequential quarterly variance analysis. First in timber as expected operating income increased driven by higher recreational license income which is largely recognized in the fourth quarter. We also benefited from higher prices in the Southeast. However, increased costs reflect higher depletion, logging and benefit expenses.

Real Estate income increased $3 million mainly due to timing of closings and the significant non-strategic sales in Georgia. Moving to Performance Fibers, overall operating income decreased by $8 million. The price unfavorable is primarily due to mix as well as lower absorbent materials prices, although volumes improved due to the timing of customer shipments, our costs were unfavorable $8 million primarily due to higher wood and production costs. Finally with products income increased driven by higher lumber pricing.

Moving now to page five and the year-over-year variances, in Forest Resources the fourth quarter and year-to-date variances to last year generally reflect similar drivers of lower prices in the Northwest, followed by softer Asian demand and higher volumes in our Gulf States and Northern regions.

Moving down to Real Estate, fourth quarter results were $4 million favorable, reflecting more acres sold. However, 2012 full year results were well below 2011 which benefited from a $6 million property tax settlement and the 6300 acres non-strategic timberland sale of just under $4000 an acre.

Performance Fibers, the fourth quarter and full year benefited from improved prices din cellulose specialties which more than offset slightly lower volumes and higher input and conversion costs. Our wood products business improvements compared to 2011 were primarily driven by higher lumber prices particularly later in the year. Corporate and other expenses in the fourth quarter and full year were unfavorable to prior periods reflecting higher pension, corporate development and closed facility costs.

Turning now to page six, this page we reconcile from cash provided by operating activities, which is a GAAP measure to our non-GAAP metric of cash available for distribution. Our cash flow remains strong with CAD of $304 million, well above our dividend payout which represented just 68% of CAD.

With that let me turn the conference over to Lynn Wilson, to cover Forest Resources.

Lynn Wilson – Senior Vice President, U.S. Forest Resources

Thank you, Hans. Good afternoon. Let’s start with page eight and the northern region which is primarily our Washington state operation. Average price was slightly below the third quarter due to mix. Overall demand started to increase in the later half of he fourth quarter as domestic lumber markets improved reflecting a strengthening home building industry and as log inventories at ports in China declined. Volumes increased over the prior quarter and were significantly higher than the fourth quarter of the prior year. In 2013 we believe overall demand will continue to grow driven by improving domestic log markets and continued economic growth in China. Early sales results in the Pacific Northwest and our New Zealand operations support our expectations of improving markets. As markets continue to strengthen, we are positioned to maintain the 2012 volume levels in 2013. Overall, we expect delivered log prices will be up in 2013.

In the Atlantic and Gulf regions on page nine, pine stumpage prices increased from the third quarter as demand for both pulpwood and sawlogs increased. Prices were also higher than the same period last year as we capitalized on more competitive markets with strong pulpwood pricing. Volumes also increased over the prior quarter and were significantly higher than the fourth quarter of the prior year.

For the full year, we anticipate that the 2013 pine harvest volumes will be comparable to 2012 and that pine prices will be slightly above 2012 as sawlog demand and housing starts continued to rise. Overall, Forest Resources’ operating income should be above 2012 due to stronger demand and higher prices.

Now, let me turn it over to Charlie Margiotta to cover Real Estate.

Charlie Margiotta - Senior Vice President, Real Estate

Thanks Lynn. Real Estate results for the fourth quarter improved over the third quarter due primarily to the closing of two conservation sales in Florida and Georgia. Overall, we are seeing an increase in development property increase and strong interest in timberland properties. Page 10 details rural and development sales. Rural acres sold in 4Q were in line with expectations and the full year sales were up somewhat over the prior two years on improving markets. We expect 2013 rural and development land sales acres to be above 2012 due to strengthening demand and as we capitalize on land sales opportunities from our recently acquired timberlands in the Gulf region.

Page 11 details per acre prices. The fourth quarter price was below prior quarters due primarily in mix. Note however, the upward trend in the rural prices over the last three years we expect 2013 prices to show modest improvement subject to geographic mix. We anticipate 2013 income will be up significantly from 2012 due to overall demand across our ownership. In addition, we are seeing very strong demand for timberland parcels, as evidenced by a sale just completed in January in Washington State that resulted from an unsolicited offer. The 5,500-acre parcel was sold for $20 million or almost $3700 per acre to an adjacent landowner.

In 2012, we made important progress on our objective of achieving mega-site certification for our prime industrial development properties. Our 1100-acre Belfast Commerce Center property near Savannah, Georgia situated along I-95 with rail access to the Port of Savannah is now certified as development-ready for large industrial or commercial uses. And we made significant progress on certification for a prime 1800-acre site in Nassau County, Florida. These certifications will increase the visibility and attractiveness of these properties for industrial property users and their site selection firms.

Now, let me turn it over to Jack to cover Performance Fibers.

Jack Kriesel - Senior Vice President, Performance Fibers

Thank you, Charlie and good afternoon. I am pleased to report that Performance Fibers achieved revenue annual earnings as a result of good operations and a strong cellulose specialties market.

On page 12, you see net selling for our two Performance Fibers product lines. Cellulose specialty prices declined $35 a ton or 2% compared to the previous quarter due to mix. However, compared to the same quarter in the prior year, prices were up $216 a ton due to the 2012 annual price increase. As expected, prices for absorbent materials, which consist principally of fluff pulp declined $18 a ton or 2% from the previous quarter and $86 a ton or 11% from the same quarter in the prior year as market conditions continued to weaken.

Moving on to page 13 and looking at volumes, our fourth quarter cellulose specialties sales volume increased approximately 7,000 tons compared to the third quarter reflecting the timing of customer shipments. Total year sales volumes were comparable to the prior year. Absorbent materials sales volume increased from the previous quarter approximately 700,000 tons primarily as a result of timing of customer orders. For the full year sales volume declined approximately 13,000 tons due to a production shift from fluff pulp to viscose to achieve improved margins. As we look into 2013, we see continued strong demand for our cellulose specialty fibers. We expect 2013 cellulose specialty sales volumes to be comparable to 2012 and prices to increase approximately 2% to 3%. In our absorbent materials business annual volumes are expected to decrease 109,000 tons as a result of the completion of the cellulose specialty expansion or the CSE project.

As Paul mentioned, 2013 is going to be a transition year for Performance Fibers. We are expecting about 11% increase in per ton cost due to lower production as a result of the CSE project and higher commodity input prices. Overall, we expect to have Performance Fibers’ operating income will be 5% to 10% below 2012 record results, primarily due to additional costs and lower volumes from the CSE transition and weaker absorbent material prices.

The CSE project continues to progress for an on-time startup in mid-2013. As mentioned in our previous call the cost of the project is expected to exceed to our initial engineering estimate of approximately $300 million. Our forecast indicates that we will exceed this by approximately 25% to 30%, primarily due to cost underestimates identified after detailed engineering was completed for various elements of the project labor costs incurred to hold our schedule and higher costs for construction support labor and field supervision than estimated.

While we are disappointed with the increased costs in this large complex and fast-track project, we are pleased that it remains on-schedule to produce the volumes we have committed to our customers. We are excited that this project will position us for the growth in the high-purity cellulose specialties our customers are demanding, while meeting our initial expected financial returns despite the higher project cost. We expect the internal rate of return on the project to be within our original 17% to 20% range as the price differential between cellulose specialty and absorbent materials has increased.

Now let me turn it back over to Hans.

Hans Vanden Noort - Chief Financial Officer

Thanks Jack. Now I would like to provide some key statistics to assist you in developing the 2013 model. Note that these exclude amounts related to wood products because we expect the sale of that business to close in the first quarter. We expect depreciation, depletion and the amortization of $161 million and the non-cash cost basis of land sold of $9 million or about $170 million in total. This is about $20 million above 2012 driven primarily by depreciation on the CSE project and higher depletion on expected non-strategic timberland sales.

Capital expenditures excluding strategic investments for timberland acquisitions and the CSE project are expected to total about $142 million versus 2012 spending of $156 million. This decrease reflects a decline in Performance Fibers as we focus on completing the CSE project. We expect 2013 spending on the CSE project to range between $130 million and $145 million. We expect interest expense net of interest income of about $41 million, which is net of $5 million of interest capitalized for the CSE project.

With respect to income taxes, we expect our effective tax rate to range from 20% to 22% with a significantly lower rate in the first quarter of the year due to the timing of tax credits. When you put all these elements together we again anticipate very strong cash flow. We expect EBITDA and operating income to be slightly above 2012, CAD should range 5% to 10% above 2012. We expect earnings per share to be slightly above ’12. Overall we anticipate that 2013 earnings will be weighted more heavily to the first half of the year and particularly the first quarter reflecting anticipated realization of tax credits, our expectations around real estate closings and the impact of the CSE on the back half of the year.

Now, let me turn it back to Paul for some summary comments.

Paul Boynton - Chairman, President and Chief Executive Officer

Well, as you have heard, we have had great year in 2012 and anticipate another strong year in 2013 with slightly improved earnings and EBITDA even during this transition year for Performance Fibers as we complete the CSE project to position that business for further growth in high-margin cellulose specialties.

Beginning in 2013 and beyond with our deferrals of sawlog harvest in recent years and holdings of attractive HBU real estate properties, we expect Forest Resources and Real Estate to derive substantial benefit as the homebuilding recovery gains momentum. Our strategy is unchanged. First, we will continue to expand our timberland holdings and optimize their value through exceptional management practices. Second, we will work to monetize properties with higher and better use value than as timberland. And finally, we will maintain our global leadership in high-purity cellulose specialties through investments to increase capacity, improve product quality and technical expertise, and lower costs. We are committed to increasing our dividend over time funded by operating cash flows. With the strength of our businesses and strong conservative balance sheet, we will continue to target initiatives to create value and increase cash generation in the years ahead.

Now, with that, I’d like to close the formal part of the presentation and turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Michael Roxland, Bank of America/Merrill Lynch.

Michael Roxland - Bank of America/Merrill Lynch

Thanks very much. First question just on China, I believe you mentioned in the last call that you started to see a modest increase in demand for China for logs, but in the press release and even in some of your commentary, you called that weaker Asian demand in 4Q, is something actually happened in 3Q and 4Q and what’s happened to pricing in China? And is there any reason from your New Zealand ops are present, which would indicate that China’s demand started to improve?

Paul Boynton

Hi, Mike thanks. Well, I am going to turn it over to Lynn to field the question.

Lynn Wilson

Mike, in the fourth quarter, what we saw is for the full quarter we saw softened demand. And what we saw as we are moving towards December with the lower inventories in the ports in China, we saw that increase and we really didn’t see that impact until January, because as they were selling sales in December, those are sales that we will realize the benefit from in first quarter. And in addition what we have seen is that the market share that Russia had really decreased in the back half of the year really indicated by those statistics that we saw. And so both the New Zealand operations and the Pacific Northwest operations benefited by having an additional opening at the end of the quarter.

Michael Roxland - Bank of America/Merrill Lynch

Got you. What statistics do you mind of sharing, what statistics you were looking at?

Paul Boynton

Yeah, we got some statistics Mike that we always look at. We see China customs information. And in that data, you will see to the fourth quarter from the third quarter, China softwood log imports dropping off about 12% in that time period, so that’s consistent with what Lynn said we saw the Pacific Northwest. In New Zealand, we see healthy and strong volume continue and in both regions as noted we see this tick up in late December and continuing into now in pricing that we think gives us a good indication that the markets going to move back around. Charlie, I don’t know if you have anything to add to that or not?

Charlie Margiotta

No, I think we do have concrete evidence in New Zealand, where we sell direct that prices have moved say $5 to $8 a cubic meter over the last 60 days into China.

Michael Roxland - Bank of America/Merrill Lynch

Got you. Thanks for all the color there. Just on Performance Fibers, with commodity viscose prices continuing to decline, do you have the flexibility to expedite production of cellulose specialties, which comprises 15% that of the 85% of the new volume. And you also talked to the overall profitability of commodity viscose tonnage that you are going to produce in the second half of this year?

Jack Kriesel

Michael, first of all, the split on the volume were higher than the numbers you are showing, it’s above 70% of that 70% plus is the high value and 15% is on the commodity viscose. So, the change in the commodity viscose pricing really is not impacting our project significantly at all and I don’t see any real change in our overall mix structure for 2013. Remember that we have equivocation period that ranges from three to maybe nine months depending upon the product line and we have to go through that once we get the operation up and running in fine tune and on our sale especially will be qualifying with our customers. So, we really don’t see a shift in 2013, and then we call during our last discussion we had about a little over 100,000 tons in 2014 of the high value coming on stream for that year.

Michael Roxland - Bank of America/Merrill Lynch

Got it. And then just last question on Performance Fibers, can you give us a sense of the quarterly progression for pricing I know that Jack you mentioned that prices should be up 2% to 3% for the year, but looking at our quarterly basis, I would think that prices will be higher in the second half, excuse me in the first half rather than the second half because your commodity prices or commodity versus prices softening and you will be producing more of that tonnage in the second half so just could you help us to think about how pricing should progress through 2013 that will be helpful?

Jack Kriesel

Yeah, that’s correct, I mean, when we do our pricing whether CS it’s on an annual basis so that’s said here at the beginning of the year and you are correct that in the second half, as we ramp up the CSE project will be producing predominately viscose pulp and right now that’s in the $900 and $950 price range so, that’s going to be a pull down on the overall average of our business in the second half.

Hans Vanden Noort

Mike, it’s Hans, moving into the second half, we’ll do a split off for you and start to show the viscose pricing and whatever is coming off of sea mills kind of separate from the baseline CS pricing still give you a little better format for comparability.

Michael Roxland - Bank of America/Merrill Lynch

Got you, thanks. Good luck in the upcoming quarter.

Hans Vanden Noort

Thanks.

Operator

Your next question comes from Chip Dillon, Vertical Research.

Chip Dillon - Vertical Research

Hey good afternoon. First, I guess broad question is you all had a wonderful slide, I think last quarter that gave us the progress of the project and sort of how the production of the cost would vary. Is there – are there any major changes to that sort of progression that you gave us going out I think 14 or 15?

Jack Kriesel

Chip, this is Jack, no, not significantly and again when we are looking at our mix going out, we are going to be largely out of viscose and by the end of 2015.

Chip Dillon - Vertical Research

Got it, okay so that’s still pretty operative. Okay. Next question is I think I must have missed this, but there were some reference in the comments about a cost overrun and I heard 25 or 30%. Could you just tell us what happen again and what the total changes in the project cost from what it was before to what it is now?

Jack Kriesel

Yeah, again it’s Jack, the – let me kind of reiterate a couple of things, first of all that remember this project really was put forth because we need to meet demand of our customers to – with the higher value CSE production. They are growing needs what was really driving this and because it was a such a fast track project what we had to do is do our detailed engineering parallel with the construction and also let me remind you that this is not a simple one line type project, it involves roughly 20 major projects spread throughout the mill. When you combined those elements are being fast tracks and the complexity of it that what kind of rise is that you have unexpected cost. And as I mentioned in my talking points the three buckets of costs are underestimates, our cost ahead hold the schedule or the schedule compression if you will and then the higher cost associated with more support labeling field supervision. And then let me emphasized one other point is that the higher cost are in no way associated with any changes in the process design. We modeled this after our B mill, which is very successful part of wood acetate in the market. So, it’s a matter of a lot of unknowns that have arrived since we have done the detailed engineering.

Now, let me give you a couple of examples of what I am talking about there. In the underestimate section in general, you would say that there is a lot more quantities and that quantity could be with more structural steel, more lineal footage of pipe or concrete that type of stuff in general. But if you want to look at it even a little bit more specific, the largest area of underestimate of overrun if you will is the in the area of chip supply and that involves our truck dumps, our railcar dumps, the rail tracks, the conveyors for the systems to get the chips into the process. That was an area, where for example, we didn’t realize until the detailed engineering was done. When you attach this specific conveyor to a building, we had to shore up the building significantly more than we anticipated. So, it’s that type of thing that is making up the majority of these costs overruns.

Paul Boynton

Chip, I would just add to that naturally it’s costing us more to complete this project, then you originally expected. And of course we are disappointed with that. And as Jack mentioned, it’s certainly one of the potential outcomes of a fast-track conquered, engineered type of project, which is designed to stay on track to meet the customer demand. You know what with our understanding of these new costs, will we take this project on to our shareholders today and the answer is absolutely. Again, this project is 85%, more than 85% committed out there to our customers. It’s got to return on investment even today with these higher costs as Jack indicated solidly in the 17% to 20% return and it’s right on our strategy of maintaining our leadership position in cellulose specialties. We got a two times market share now. This only reinforces that. So, we feel real good about it. Again, it’s one of those things that happens when you are trying to meet customer demand. And again being pretty conservative, we have factored that in and I think we got a real nice return on project going forward.

Chip Dillon - Vertical Research

Got you. And just unclear on the numbers I know that the original cost was going to be, I believe 300, and so I think now you are saying probably is looking at what you spent the 43 in ‘11 and what you spent in ‘12 that all-in is around 390 is that a good place just for us to be in our models?

Hans Vanden Noort

That’s right, Chip, we are looking at 375 to 390.

Chip Dillon - Vertical Research

Okay. And just one more quick one, that’s very helpful. As I know in ‘11 you added quite a bit of to your timber base and so I know this recent one I think in Texas is it wouldn’t have had an impact, but it was interesting your as the markets get better, I noticed the revenue was I think up only a little bit from what 215 to 230 in a last two years in the resources segment. And could you just give us an again refresh our memory sort of how does the contribution from the 300 plus, I think 300,000 acres you bought in ‘11 and maybe for that matter the recent transaction how that will kind of flow into the numbers? Is that something that because of the maturity of the trees weighed out we would wait a bit for or should we see it kind of gradually come into the mix?

Lynn Wilson

To take a look at it overall, our new properties really have a younger age class distribution, Chip. So really we are going to see more of a benefit as we move towards 2015 and 2016. And we did add a modest amount of volume in 2011 to 2012 and we are actually up overall from ‘11 to ‘13 about 12%. We have started to bring in some of the volume.

Chip Dillon - Vertical Research

And that 12% is that just in the south or is that across the segment?

Lynn Wilson

That’s just in the south.

Chip Dillon - Vertical Research

Okay, sorry.

Lynn Wilson

And so in addition to that, we are still conservative on our U.S. housing outlook. And so we are remaining conservative on our pricing projection, which guides us pulled off to ramp up our sawlog production more towards that 2015/2016 window as well.

Chip Dillon - Vertical Research

Got you. Okay, thank you.

Paul Boynton

Thanks Chip.

Operator

Your next question comes from Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank

Good afternoon.

Paul Boynton

Hey Mark.

Mark Wilde - Deutsche Bank

Lynn, I wanted to just start off, can you just help us think about how the strengthening in the lumber markets and in lumber pricing may roll through to you on kind of saw timber stumpage pricing?

Lynn Wilson

Mark, at this point in time, we are still seeing very modest, very close market indications of the lumber transitioning that to the stump. We haven’t seen a big move or a big spike up. And I think people are very cautious. And number one going out and buying out there in the market to see this is a sustained trend, but what we are seeing is the willingness to pay for volume to ruin their mill for the shift that they have running at this time, but we have not seen in our particular markets on the sawlog side a big run up.

Mark Wilde - Deutsche Bank

And Lynn if you just go back and you kind of look at this historically, what kind of a lead lag would you anticipate is normal?

Lynn Wilson

Historically, we haven’t been in the situation before. Mark, it was very hard to translate this into what we would have seen back in 2008, because of very low inventories, very low cash reserves and many facilities that are quartile. So, this is unprecedented and I would be in a tough position to try and translate that back to pre-2008.

Mark Wilde - Deutsche Bank

Okay. One other question for you Lynn, are you now starting to see more impact on just pulpwood pricing from the combination of the OSB market coming back, but also more of these power plants like they are going into operation, I saw one of your competitors had an announcement out yesterday about commitments from a couple of power plants?

Lynn Wilson

Yes, in our footprint we are seeing impact in more specifically to OSB and the wood pellet facilities across our Southeast operations. We have 1.8 million acres across the south. We don’t have facilities within those announced areas that you are referring to be overall markets starting to rise up, because of increased wood consumption both from biomass consuming facilities and from OSB facilities adding shift.

Mark Wilde - Deutsche Bank

Okay.

Lynn Wilson

A great example is one in Broken Bow, Oklahoma within our footprint.

Mark Wilde - Deutsche Bank

Okay. And then Charlie just a question on land sale side, it sounds like most of the uptick we are going to see is in 2013 is more conservation sort of HBU type, so is that correct?

Charlie Margiotta

Probably, but we are cautiously optimistic that based on serious conversations we are beginning to have with developers that at some point we will start to see some transactions on a development side, certainly can’t promise them for this year.

Mark Wilde - Deutsche Bank

Yeah.

Charlie Margiotta

But I can’t say we have got more than one serious conversation, it’s the first time in several years with in one case with the national builder to begin to think about buying development land. And then on the rural side, yeah, its economy is improving. We are seeing a lot of interest. And then I have to say that our last two or three years’ acquisition efforts in the Gulf have proven pretty valuable.

Mark Wilde - Deutsche Bank

Okay. And then the last question it was just for Paul Boynton and that just if we just step back a little bit and we think about the impact on your business, if we were to start to see real move up in the dollar vis-à-vis other currencies around the world, just seems like FX is getting to be a bigger and bigger conversation out there. How do you think about the impact that across your business?

Paul Boynton

Mark, I think mainly as we look at currency effect for the most part outside of New Zealand operations is really in our Performance Fibers business, but we fell in dollars worldwide. So, it remains pretty constant to us. And so I don’t really see a lot of changes result to currency factors. We have seen them fluctuate up and down in different markets around the world for years now, but we factored that in to our annual pricing. It’s one of the factors. But again, we look across the whole globe and we come up with a said amount and it’s always sold in dollars. So, we don’t really see and we don’t anticipate a lot of fluctuation coming out of a change in currency.

Mark Wilde - Deutsche Bank

So, some of the dollar was stronger against the euro or the South African rand or the real or whatever, you don’t think this would make some of your competitors in that CS market maybe a little more aggressive on price?

Paul Boynton

Well, I mean, we have seen, I mean, possibly sure, I mean we have seen that through the years, but overall, I’d say it’s kind of a distance set of pressures. And we have watched the Brazilian real flow really strong, get weak again comeback strong. And again it pushes to and fro, but again the market is the annual pricing type of market and so a lot of those short-term fluctuations kind of get factored out, and again didn’t get folded into an annual discussion.

Mark Wilde - Deutsche Bank

Okay, alright. That’s helpful. Congratulations on a great 2012. Good luck to this coming year.

Paul Boynton

Thanks Mark.

Operator

Your next question comes from Steve Chercover, D.A. Davidson.

Steve Chercover - D.A. Davidson

Yes, good afternoon everyone.

Paul Boynton

Hi Steve.

Steve Chercover - D.A. Davidson

First of all, just want a quick clarification, does the trading business also gets sold along with the saw mills?

Charlie Margiotta

This is Charlie, Steve. The log trading business is in New Zealand predominantly and no that’s just a completely different business.

Steve Chercover - D.A. Davidson

Okay. And I know it’s pretty well break even. So, is it safe to say just as we calibrate the model that lumber contributed about a nickel in 2012?

Charlie Margiotta

Yeah, we had about $0.06 Steve.

Steve Chercover - D.A. Davidson

Okay, great. And then Lynn told us that the harvest volumes are going to be pretty flat, that seems maybe a little surprising given that you have added some acreage although I understand the trees aren’t mature. So, you are holding back a bit it seems given you statements on conservatism for housing?

Lynn Wilson

Steve, yes we are holding back and we are still looking at that price appreciation is worth waiting for as we move towards 2015 and 2016, but we could change our view as we move into 2014 if we see additional strength in the U.S housing market and that translates into lumber and stumpage pricing. In addition, we did in 2012 bump up by 12% over 2011 mid-year. So, when we say we are holding we are still 12% higher than 2011.

Steve Chercover - D.A. Davidson

Okay. And is it premature to say anything on 2014?

Lynn Wilson

It sure is, yeah.

Paul Boynton

Steve, with the rising housing market, we should expect in the coming years a mix shift that would also move into that equation as we move from less pulp into more sawlog so…

Steve Chercover - D.A. Davidson

Very good. Okay, thank you all.

Paul Boynton

Thanks, Steve.

Operator

Your next question comes from Paul Quinn, RBC Capital Markets.

Paul Quinn – RBC Capital Markets

Beat you up here, but just on the cost overrun on Performance Fibers and I can understand on the labor in the material side, I’m curious on the cost to hold the schedule given that there is significant capacity is coming into the marketplace in 2013 and what were the triggers in that contracts or was there a break fees to keep that schedule because it seems to me that like something you could let go longer?

Charlie Margiotta

Paul, I take it, again we got a certain schedule that we are committed to with our customers again Jack already put out there as we did in the third quarter call that we’ve get a 100,000 tons committed into the marketplace in 2014. With that, our customers accounting on it, let’s, what they planned on and they contracted to and therefore we can let our schedule slip because it is sold so, keeping on track and keeping at timeline is really important to it and so therefore we added this as Jack mentioned second shifts and as well as overtime for a lot of folks to make sure that we get this upon running in the 2013 and so again it’s independent of anything else out there in the marketplace.

Paul Quinn – RBC Capital Markets

Okay and then on that $100,000 – 100,000 metric tons is committed to the marketplace and in ’14 have you settled on price on that or is that still in negotiation that has happened.

Charlie Margiotta

Again that’s an annual negotiation that will have to the course of this year.

Paul Quinn – RBC Capital Markets

Okay and then just on the guidance of 2% to 3% price increase on specialty, how is that breakdown between your acetate customers and your ether customers?

Charlie Margiotta

There is not much difference there again the ranges amount 2% to 3% or maybe scenarios a little bit higher, little bit lower but in general that’s we are at.

Paul Quinn – RBC Capital Markets

Okay. Just a quick question for Lynn here on timberlands, you mentioned the 12% increase from 2011 harvest levels, where we at in terms of 2012 versus sort of the long-term sustainable yield from your timberlands.

Lynn Wilson

Right now, we have about 0.5 million to 1.2 million tons upside over the next five years, Paul.

Paul Quinn – RBC Capital Markets

Great, thanks helpful. And just last question on sale of the Wood Products business, number one, congratulations, just curious on the timing of that because it looks like lumber prices are moving up here and then some curious on the timing and then also whether you’ve got a chip supply agreement in place with Interfor?

Charlie Margiotta

Yeah, that sale is a strategic sale for us we just announced this on Tuesday, we will close it in a first quarter here so that’s a timing has a fairly rapid transition again strategic from our standpoint that another move to focus our manufacturing and our product into a stable cellulose specialties – specialty chemical type marketplace and further away from the commodity market. So, this combined with the exiting of the fluff business helped us in that direction considerably. We have not disclosed, but we are obviously working with our partners at Interfor to help continue to supply them as well as take some other residuals out of those facilities because they use some of them in our facility so, we will work on those agreements in the transition process.

Paul Quinn – RBC Capital Markets

Thanks guys, great quarter.

Paul Boynton

Thanks, Paul.

Operator

The next question comes from Mark Weintraub, Buckingham Research.

Mark Weintraub – Buckingham Research

Thank you. First I just want to make sure understand this on CapEx if I can combine the various spend, you are talking about $280 million for the year is that about right?

Paul Boynton

Yeah, Mark, the roughly 270 to 290 in that range that’s correct when you combined at all.

Mark Weintraub – Buckingham Research

Okay, great. And just trying to comeback to the question on log pricing, particularly in the South and lumber has been stronger for a fair length of time at this point and demand has improved to, we haven’t really seen much reaction in log prices. What your thoughts process as to what it will take and so we do start seeing log prices react.

Paul Boynton

Mark, let me take a stab at that and Lincoln jump on if she wants, but as I mean as I think about if you look at it, the sawmills out there are running at 65% t0 70% capacity. We’ve seen of course as you noted good run-up in lumber prices, I think for that translate back first you are going to have to see the volume come true so they are going to have to probably start adding more shifts and have more demand that’s going to translate back to the stump first which is the (indiscernible) and then after that though I think that will create attention to move prices up. We have seen that and isolated localized market, but we have not as Lynn said, seen that across the board and I think and again we’ve always related that back into we got to have a sustained movement in the housing market in the U.S. to make that happen and then we’ve seen a movement, we’ve seen translation from last year to this year of 17% more housing starts. We’ve got a range out there for the coming year 2013 that’s in anywhere from 5% to 18%, but we kind of the translated out, you really need to get into the 2015 type of timeframe to see that really sustained housing market up at the 1.3 million to 1.5 million start and with that you will have in the wake of that pretty good flow of would and you will see across the stump. It will happen before then, but that’s what is going to take we think it really have it as a sustained market.

Mark Weintraub – Buckingham Research

Okay so if I understand you correct, there can be some gradual improvement as you get to it, but really where would get relatively tight is the 1.3 million to 1.5 million start environment, which presumably might be in 2015 type of timeframe, is that a fair?

Paul Boynton

Well, I think overall I think we feel good that it will be definitely there in 2015 when that happens, I think you will see it well before then but you will see in localized market or there is that attention, but the volume has got the flow first and right now we really haven’t seen that volume, we are seeing prices of lumber rise, but we haven’t seen any increased volume level for example on the lot of our areas that we do business and we haven’t seen to ad of the second shift for the most part at any of the lumber mills. So, we have seen it a bit as Lynn said starting up in (indiscernible) and seeing some attention there in the pulpwood market, but you really haven’t seen that added volume level into the sawmills.

Mark Weintraub – Buckingham Research

That’s the puzzling part because you certainly do read about that there is and you can look at the production statistics and there is more lumber being produced so and I realized it’s about getting to threshold etcetera. But that was a little bit difficult to understand and there are some, there are shifting at it etcetera and it doesn’t seem to be showing up and I guess you are saying that in your particular market you haven’t really seen it are there examples where there have been a shift or to added and you’ve seen that has translated into higher pricing for logs in your would basket.

Lynn Wilson

Mike, this is Lynn. We actually have in the Texas market in that East Texas would basket we’ve seen some favorable results because there is localized tension and the moved at enough shifts in the region to create tension in stumpage markets which are the quickest to respond.

Paul Boynton

And we’ve seen in the Pacific Northwest some of the mills running harder there as well. So, we’re definitely seeing it in spots, so just again really getting that lift off the stump may take a little bit longer.

Mark Weintraub – Buckingham Research

Okay. Thank you.

Operator

Your next question comes from Joshua Barber with Stifel Nicolaus.

Joshua Barber - Stifel Nicolaus

Hi, good afternoon. I apologize for the background noise in advance. Can I go back to the cellulose specialties expansion for a moment, costs were up 25% to 30% and you guys are talking about an increased cost base which is not any difference than what you guided to last quarter. Can you talk in broad strokes about your pricing outlook for that business for the next two to three years especially given that more supply is coming on and that presumably there will be a slightly lower value mix as you guys are incorporating more high-strength viscose and ethers into the next couple of years. Just – I’m just trying to understand now the 17% to 20% ROE or return on invested capital still working with the costs up so much over the last year?

Paul Boynton

Yeah, Jack you can jump in as well. But I mean first of all just on the price increase we’ve seen, as you look backwards last three years on average with what Jack just announced about 9% type of increase annualized. So, real healthy as you know over the past several years. Josh we don’t put out prices increases going forward beyond the year we just haven’t done that. And again is a discussion that we’ll start in a handful of months with all of our customers and finalize at the end of the year. But again as our perspective on our business is solid as we talked about 85% of that’s already sold of the new volume. So, we feel very good about where this business is going in the future, but it’s too hard to give you a call on pricing at this point in time.

Jack Kriesel

The one last thing I might add, Josh, is on the return side remember we’re comparing the spread between CS pricing and fluff pricing if we had stayed in fluff. And so while that spread has definitely widened and particularly if you look at where fluff prices have dropped, we’re doing a little bit better on CS pricing than what we expected back when we started the project. But the spread right now for example is at least a couple of hundred dollars a ton greater than what we expected and that’s really how that returns still stays in the range.

Joshua Barber - Stifel Nicolaus

Okay.

Paul Boynton

Josh, if you go back to our September Investor Meeting that’s a good guideline to take a look at the return on this project and that business. I think we’re holding true to that. And again if you look at the pricing in there and you look at the volume commitments I’d say we are right on track with that. So, I say that’s a good guide you can fall back on.

Joshua Barber - Stifel Nicolaus

Okay, thanks. When it comes to sale of the wood products business as well as the Texas timberland purchased in the fourth quarter. Can you talk about what that does to your retests and where you guys are now going toward and where you expect that to I guess help you by the year end ‘13?

Jack Kriesel

Well, I mean the acquisition of the timberlands in Texas obviously helps the test a little bit, but really not much has changed there from what we’ve talked about previously Josh. I mean we’re very rigorous in applying the test. At this point we’re in full compliance and so it’s not a really material impact.

Joshua Barber - Stifel Nicolaus

Okay. And even that combined with the Texas thing would not be enough to make a material impact on that?

Jack Kriesel

Correct.

Joshua Barber - Stifel Nicolaus

Okay, okay thanks very much. I appreciate it. Good luck guys.

Paul Boynton

Thanks Josh.

Operator

(Operator Instructions) Your next question comes from Chip Dillon, Vertical Research.

Chip Dillon - Vertical Research

Hi, I just had a follow-up I think probably for Charlie just on the land sale plans. I think you’ve talked about with the improving demand outlook that you’re going to up the amount of sales this year end. Could you give us some or maybe you mentioned and I missed it, but could you give us an idea of sort of what the range of acres could be and or any other guidance you want to give us in terms of how the revenues or income and for that matter the basis of land being sold, actually given us that. But either the acres of the revenues would flow for the year ‘13 versus ‘12?

Charlie Margiotta

That’s a tough one. So, early in the year obviously the $20 million sales that we’ve completed last week that was a great start. I would - we’re thinking that rural acres will be up somewhat over ‘12 beyond that, so early in the year it’s hard to give we have said our income will be up substantially year-over-year, but it’s really hard to give specific guidance here third week of January.

Chip Dillon - Vertical Research

I mean could you see the acres up 20% year-to-year is that reasonable, was that probably too strong?

Charlie Margiotta

That’s probably at the high end.

Chip Dillon - Vertical Research

Got you. Okay that’s helpful. Thank you.

Operator

At this time I will turn it back to you for closing remarks.

Hans Vanden Noort - Chief Financial Officer

This is Hans Vanden Noort. We thank everybody for joining us on the conference. And please contact Ed Kiker with follow-up questions. Thank you.

Operator

This does conclude today’s conference. Thank you for attending, you may disconnect at this time.

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