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Rayonier Inc. (NYSE:RYN)

Q3 2009 Earnings Call

October 27, 2009 2:00 pm ET

Executives

Hans E. Vanden Noort – Chief Financial Officer

Lee M. Thomas – Chairman, President and Chief Executive Officer

Timothy H. Brannon – Senior Vice President, Forest Resources

Charles Margiotta – Senior Vice President, Real Estate, TerraPointe Services Inc.

Paul G. Boynton – Senior Vice President, Performance Fibers & Wood Products

Analysts

Claudia Hueston – JP Morgan

Chip Dillon – Credit Suisse

Mark Weintraub – Buckingham Research

Peter Ruschmeier – Barclays Capital

Steven Chercover – D. A. Davidson & Co.

Michael Roxland – BofA Merrill Lynch

Operator

Thank you for joining Rayonier's third quarter analyst teleconference call. (Operators Instructions) Now, I will turn the meeting over to Mr. Hans E. Vanden Noort, CFO. Sir, you may begin.

Hans E. Vanden Noort

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

Our earnings release, as well as our Form 10-K filed with the SEC, lists some of the factors which may cause the actual results to differ materially from the forward-looking statements we may make. They're also referenced on page two of our presentation material.

With that, let's start our teleconference with opening comments from Lee Thomas, chairman, president, and CEO. Lee?

Lee M. Thomas

I'll make a few overall comments and then Hans will take you through the financials, after which Tim Brannon, senior vice president Forest Resources, Charley Marigiotta, senior vice president and head of our real estate business and Paul Boynton, senior vice president of Performance Fibers & Wood Products will review those business segments.

Overall, we generated solid cash flows in the third quarter. The strength of our Performance Fiber segment, steady interest in our rural properties continue to help offset the impact of the housing market on our timber business. In Performance Fibers, we saw strong demand for our sale of specialties products and lower costs. These were partially offset by lower prices compared to the second quarter as we removed the cost-driven surcharge imposed last year.

In real estate, we recorded a 7,000-acre conservation sale to the Georgia Department of Natural Resources. Although we remain focused on divesting non-strategic timberlands, sales will be completed only if they meet our value expectations.

In Timber, we continue to operate at reduced saw timber harvesting levels and are focused on meeting pulp wood demand and cost cutting efforts. Additionally in the third quarter, we continued to strengthen our balance sheet by successfully issuing $173 million of six-year 4.5% exchangeable notes. We have a strong balance sheet, ample liquidity and are well-positioned for growth opportunities that we may see.

Now with that, let me turn it over to Hans for a review of the financials.

Hans E. Vanden Noort

Let's start on page three with the overall financial highlights. As Lee noted, we had a solid third quarter. Sales totaled $301 million while operating income totaled $111 million and net income was $81 million or $1.01 per share.

Note that these results include the benefit of the alternative fuel mixture credit which increased third quarter operating income by $56 million and net income by $49 million or $0.61 per share. Without this benefit, operating income was $55 million and net income was $32 million or $0.40 per share. These pro forma amounts will be used for the comparisons throughout this call.

On the bottom of page three we provide an outline of cash resources and liquidity. Our year-to-date cash flow remained relatively strong with adjusted EBITDA of $280 million and cash available for distribution of $163 million.

Our debt is now $810 million, reflecting the August issuance of $173 million of six-year exchangeable notes. Simultaneously with this issuance, we entered into hedge in warrant transactions which effectively increased the conversion premium such that no dilution will occur unless our stock price exceeds $60 a share. The bulk of these proceeds will be used to pay off $122 million note maturing at year-end. We ended the quarter with approximately $153 million in cash, so on a net debt basis, we finished at $690 million.

Let's now run through the variance analyses. On page four, we prepared our typical sequential quarterly variance analysis. In Timber, operating income increased slightly, primarily due to price improvement in both the eastern and western regions. Real estate income decreased $11 million due primarily to fewer non-strategic timberland acres sold partially offset by an increase in rural acres sold.

Moving to Performance Fibers, you can see a price decline which was primarily in cellulose specialties. As previously discussed, this reflects the removal of a cost-based surcharge implemented in September 2008.

Our costs have declined, as indicated here, so the surcharge has been removed. We also had improved volumes as expected, as orders rebounded from the prior quarter when customers were reducing inventories.

Let's now move to page five and the year-over-year variances. The third quarter in year-to-date variances to last year generally reflect similar drivers. Our Timber results reflect softening prices and the mix of lower saw log volumes versus pulp wood. We were able to offset some of this negative impact through reduced costs. The real estate results were comparable with some variability due to mix.

In Performance Fibers, cellulose specialty prices improved as expected but results were still adversely affected by lower cellulose specialties volumes, higher production costs and reduced absorbent materials prices.

Let's turn now to page six. On this page, we reconcile from cash provided from operating activities which is a GAAP measure to our non-GAAP metric of cash available for distribution. Cash flow remains strong with CAD of $163 million comparable to last year and well above our dividend requirement.

Turning now to page seven, we've prepared a debt maturity schedule which reflects the $173 million of six-year exchangeable notes mentioned earlier. Our $250 million revolving credit facility has $245 million of remaining capacity which is available at an interest rate of LIBOR plus 40 bps.

This facility does not expire until August of 2011. All in all, we believe our strong balance sheet, conservative credit profile, and strong and consistent cash generation provides significant liquidity which positions us well to take advantage of future growth opportunities.

With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Timothy H. Brannon

On page nine, you will notice that prices for our Western Timber increased about 10% in the third quarter off of a second quarter low. In our markets, sources of lower priced timber have been nearly exhausted and supply has tightened modestly.

We continue to hold much of our high-value saw timber off of the market as we wait for housing to recover. Year-to-date, our volume is down 32% from 2008 and 40% to 50% below the rate we would expect to harvest under more normal housing market conditions.

We estimate that in 2008 and 2009, we have deferred about 215 million board feet of timber or over $65 million at 2007 stumpage prices. In the fourth quarter, we expect prices to remain at the cyclical lows and therefore will continue our strategy of withholding volume. 2009 volume is forecast to be about 33% below 2008.

In the east, on page 10, pricing appears to have bottomed. The good news is that during the third quarter, pine saw timber markets remained stable in the south while pulp wood demand continued to be strong.

Our emphasis on pulp wood harvest and thinnings continued with pulp wood representing a mix of over 80% of our pine harvest. Our more normal mix would be about 50% pulp wood. We estimate that for the years 2008 and 2009, we will have preserved as much as 1.3 million tons of pine saw timber for future harvest when markets recover.

At 2007 stumpage prices, this conservatively represents over $30 million of deferred revenue. In the fourth quarter, we will continue to restrict our harvest of saw timber while overall we expect prices to rise modestly as we head into the winter. 2009 pine harvest is forecasted to be about 8% below that of 2008.

With that, let me turn it over to Charley Margiotta to review our real estate business.

Charley Margiotta

Since the last call, we have noticed an element of caution amongst some timberland buyers and as a result we have moderated our outlook for the remainder of the year for non-strategic timberland sales. Transactions will be completed if we can achieve our value expectations. Otherwise, we will wait until the market sentiment improves.

Page 11 details the rural acres sold. During the third quarter, a 7,000 acre conservation sale was completed with the Georgia Department of Natural Resources. The property is a hardwood flood plain in Southeast Georgia and is another example of our history of working with public and private conservation groups. The balance of the sales were smaller transactions in Florida, Georgia, Alabama and Texas. We view our rural land sales market as very stable and improving somewhat as the overall economy strengthens.

Page 12 highlights the per acre prices. The third quarter was dominated by the 7,000 acre sale to Georgia DNR at slightly over $1,700 per acre. Page 13 describes the non-strategic timberland sales. Except for some small sales in the southeast, the third quarter results were driven by a 2,300 acre sale in Washington state to the DNR for $2,900 per acre.

The property essentially contained 100% mid-rotation pre-immersion timber. While we continue to discuss additional non-strategic sells with potential buyers, the outcome is difficult to predict. However, given the strength of our balance sheet and cash flow generation across the company, we have the financial flexibility to wait for transactions that meet our return expectations.

With that, let me turn it over to Paul

Paul G. Boynton

Performance Fibers results were solid for the third quarter. On page 14, you see net selling prices for our twp Performance Fibers product line. As we mentioned previously, our Cellulose Specialty business typically has fixed annual prices under multi-year contracts. However, in September 2008, we made an exception and asked our customers to support a price surcharge due to rapidly escalating cost.

Now with these costs returning to more normal levels, we are effectively giving back last year's surcharge that was built into our 2009 price increases. As a result, Cellulose Specialty prices decline $69 a ton or 5% from the previous quarter and will decrease approximately another $24 a ton in the fourth quarter. As we look at the full year, Cellulose Specialties year-to-year annual price increase should average between 12% and 13%.

Moving to Absorbent Materials, which consists principally of fluff pulp, price has declined $16 a ton or 3% sequentially and $147 a ton or about 19% below same quarter prior year. We believe third quarter prices are at the bottom of the market as we have recently seen prices turn upward. As a result, prices should improve approximately 3% in the fourth quarter. For the full year we project price declines for Absorbent Materials of roughly 15% compared to 2008.

Moving on to page 15 and looking at volumes, you can see our third quarter Cellulose Specialty sales were up significantly compared to prior quarter as demand normalized as customers destocking efforts were largely completed in the first half of the year. For the fourth quarter we expect the volume to be 15% to 20% higher, resulting in full year Cellulose Specialty sales volumes comparable to slightly below 2008.

Absorbent Material volume of 68,000 tons increased 4% from prior quarter. We expect total year sales volume of Absorbent Materials to be about 9% above prior year.

In summary, Performance Fibers' third quarter results were strong driven by higher Cellulose Specialty volumes and reduced raw material cost, principally caustic, partially offset by lower selling prices. Due to solid global demand for our Cellulose Specialty products and cost moving towards trend line, we will generate full year operating income well above 2008.

And as we focus on our Cellulose Specialty customer contracts, we are pleased with the significant progress with our key customers regarding the extension of agreements into 2013. While the agreements have not been finalized, we are confident in the stability of the business further into the future through the certainty of volume these contracts provide.

With that, let me turn it back over to Hans.

Hans E. Vanden Noort

Thanks Paul. Through the third quarter the alternative field mixture credit totaled $142 million of which $56 million was generated in the third quarter. We expect a comparable amount to be generated in the fourth quarter. We are claiming the alternative fuel mixture credit as a refundable income tax credit, which will offset our 2009 TRS income tax liability. So we expect to have no federal cash tax liability at TRS this year.

Through September 30, we had applied about $12 million against estimated tax payments and we expect to apply about another $9 million by year-end. The excess credit above our 2009 tax liability will then be realized as a refund in 2010 after filing our 2009 tax return. Assuming the credit extends through the end of this year, we'd expect our refunds next year to be in the $170 to $180 million range.

Now I'd like to update some key statistics to assist you in refining your model. This guidance does not include any benefit from the alternative fuel mixture credit. First, we expect appreciation, depletion and amortization of $155 million and the non-cash cost base of land sold of $8 million or about $163 million in total. This is $5 million above previous guidance driven primarily by higher depletion.

Capital expenditures, excluding acquisitions, are expected to total about $90 million. We expect interest expense, net of interest income, of about $51 million versus $48 million in 2008. Finally, our effective tax rate is expected to approximate 22%, slightly above our prior guidance, which reflects the increase in the mix of income of our TRS businesses after the planned volume reductions in timber.

When you put all these elements together we continue to anticipate strong cash flow despite the adverse conditions facing our timber business and the likely absence of a significant non-strategic timberland sale in the fourth quarter. We expect EBITDA 10% below 2008. But the PAD should be comparable to last year, reflecting reduced capital expenditures and lower cash taxes. Finally, we expect EPS to be about 20% below 2008.

Now let me turn it back to Lee, the person closing comments.

Lee M. Thomas

With improving market conditions during the third quarter, the U.S. economy is beginning to recover from the worse recession any of us have experienced. In addition, we're seeing stronger global demand for products, particularly from China. Also, credit markets continue to improve and we took advantage of these favorable conditions with our successful exchangeable note offering. As a result, our balance sheet is stronger than ever and we have excellent liquidity.

I feel our businesses are performing as expected with signs of improvement as the economy recovers. In real estate there is a steady demand for our rural properties and good progress on entitling our development projects. We continue to have interest in non-strategic timberland. However, we will remain disciplined and sell only those properties where we realize attractive returns.

In forest resources, we're encouraged by signs that the housing market has troughed, but expect that housing will recover gradually over the next several years. Therefore, we'll continue to hold off harvesting our high value saw timber until prices improve.

In Performance Fibers, we're making good progress with our customers working to extend their volume contracts, while at the same time we continue our focus on improving productivity and driving down cost. Finally, we'll continue in our efforts to look for timberland acquisitions which meet our strategic and financial criteria.

In short, our unique business mix, strong balance sheet, and ample liquidity provide significant operating flexibility and position us well for growth opportunities in the future.

Now with that, let me turn it over to the operator and let's see what questions we have.

Question-and-Answer Session

Operator

Our first question comes from Claudia Hueston – JP Morgan.

Claudia Hueston – JP Morgan

Hi. Thanks very much. Good afternoon. We've heard from a number of companies, both on the timber side and on the manufacturing side, that weather issues are starting to get more significant in the south. I just wondered if that's affecting you at this point and how you've thought about that in terms of your fourth quarter outlook?

Lee M. Thomas

Well, it'll affect us somewhat as far as timber prices are concerned, and Tim you may want to just comment on whether we've seen much impact.

Timothy H. Brannon

Right. In the western – in Texas, Oklahoma, even some in Alabama, we've seen some impact of the rains there. That's of course – when that happens in the short term that has some impact on our ability to harvest. But by the same token in Georgia, Florida, that area, it has not been nearly as severe so frankly we're not anticipating a big impact from the rains.

We are looking at a hold – continuing to hold our soft timber off the market so some of that is a bit self-imposed, but not a terrific amount of impact from the weather.

Claudia Hueston – JP Morgan

And then I was just wondering if you could maybe just provide a little bit of color on how you see this BCAP program sort of unfolding and if you've given any thought to how Rayonier might be in a position to benefit from that program?

Lee M. Thomas

Claudia, we have taken a look at it. It's still very early and the regulatory process; know that the regulations are still in the formulation stage. We have taken a look at what was available. We see the potential for benefit both on our forest resource and manufacturing side. But that's really all dependant on how those regulations come out, and it's just real early in the process to speculate on what it may mean for us at this point.

Operator

Your next question comes from Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

Yes, good afternoon. Hey just a couple of clarifications. I think you gave us the absorbent volume should be up about 9% this year. What about the specialties?

Paul G. Boynton

Chip this is Paul. We said specialties should be comparable if not slightly down.

Chip Dillon – Credit Suisse

Okay, and then you mentioned something about getting contracts extended to 2013. I thought you already had some pre long-term contracts, could you just refresh our memories?

Paul G. Boynton

We put these contracts in place and most of them are written into the five-year timeframe roughly, some longer, some a little bit shorter, but on average five years. Now after several years we have – that those have been originated we're going back out and working with our customers to extend those another couple years. So essentially from this point forward we're looking at four years or more from this timeframe.

Unidentified Corporate Participant

A lot of them went into 2011.

Paul G. Boynton

Most of them went into 2011 and now we're looking at them into 2013.

Chip Dillon – Credit Suisse

Time does fly, that makes perfect sense. And when you look at the black [line] for credit, this one – maybe Hans could answer this – just on the front of the press release you mentioned that the net benefits saved, for example, $49 million for the three months but then on the footnotes there is sort of a pre-tax benefit $55.8. What accounts for that $6.8 million difference, is there some tax impact that goes along with this?

Hans E. Vanden Noort

Yes, although we believe the credit is going to be non-taxable, we are providing about 10% or so FIN 48 tax liability on the credit. So that's the delta that you're seeing there too.

Chip Dillon – Credit Suisse

Is that federal or state?

Hans E. Vanden Noort

Yes, that would be for federal.

Chip Dillon – Credit Suisse

Okay, just sort of – so there's a chance, I mean there is, obviously, not definitive but there is a chance you could end up reversing those tax accruals right?

Hans E. Vanden Noort

Correct

Chip Dillon – Credit Suisse

And then could you just give us a look – one last question is on the real estate business. Did you give us a sort of a feel for what you thought you could do in the fourth quarter? And actually two of your competitors have said that the appetite for rural land sales is actually, say quite good despite the recession, and that they're even seeing more inquiry. Is that your experience as well?

Lee M. Thomas

It is, we've continued to have a good steady rural land program that as a matter of fact, I think as the economy has continued to improve a little we've seen that pick up a little.

Chip Dillon – Credit Suisse

Got you, and the in terms of fourth quarter?

Charley Margiotta

On the rural side we really don't see anything different. I mean a good continued steady business. We don't see any reason why it should change.

Chip Dillon – Credit Suisse

Okay, but you're not in the position to give sort of a revenue guesstimate or range that we could sort of assume for the fourth quarter in terms of the overall real estate segment?

Lee M. Thomas

Not really Chip, I mean you know the real estate business is largely dependent on when properties close and it's always been pretty lumpy so we've not done that.

Chip Dillon – Credit Suisse

Okay and then the very last question. On the earnings per share – I know you did – this is your second convert situation that you've done where you have a very high effective strike price. And I believe, isn't it fair to say the rules are, you really don't take those potential shares into account unless the stock actually gets into that range?

Hans E. Vanden Noort

That's right. You'll have to be into the money at that point before you start to have any EPS dilution.

Operator

Your next question comes from Mark Weintraub – Buckingham Research.

Mark Weintraub – Buckingham Research

Thank you, first could you give some sense in terms of pricing for the chemical cellulose, as to how those look to be panning out for 2010?

Lee M. Thomas

We really haven't given any guidance at this point for 2010, and I think that would probably be the next call.

Mark Weintraub – Buckingham Research

Okay, and also you had mentioned that you've essentially put yourself in a good position now, flexibility to take advantage of opportunities with your balance sheet, etc. Where do you see yourself right now? Do you see – given where current markets are for timberlands, do you see yourself as more of a buyer or seller or how would you respond to that?

Lee M. Thomas

You know Mark, we are continuing to look at properties as they come on the market. We have taken a hard look at some properties. We have not gone follow wood on a buy on any of the ones we have looked at. So I guess I would have to say we're still certainly selling more than we're buying since we really haven't bought in about the last year and a half to two years. But my sense is we may well see more opportunities, particularly as we look over into 2010 to acquire some more properties.

Mark Weintraub – Buckingham Research

And is that a function that you think there will just be more liquidity or more available, or is it you think that it will also be at potentially more attractive returns for you?

Lee M. Thomas

I think it may be more attractive returns for us.

Mark Weintraub – Buckingham Research

Okay, and then lastly I realize BCAP is in a preliminary stage, etc. Have many of the facilities to which you supply wood, are they getting registered?

Lee M. Thomas

They are, we see a number of them getting registered and we see others that are in the midst of the registration process.

Mark Weintraub – Buckingham Research

And can you give us any sense as to what percentage of your harvest might be covered in the BCAP program?

Lee M. Thomas

I don't think we can at this point, can we Tim?

Timothy H. Brannon

Not really Mark, of course the problem that we have is that we still don't know what the new rules are going to be, and we're excepting to see a draft of that. I think it's supposed to come out on Friday or maybe early next week, and then it goes for public comment. And then it's January, I think, before they finally are going to have them finalized. So as a result it's still just awfully early to know what's going to qualify and what's not in terms of material we might supply.

Lee M. Thomas

And I guess it would be safe to say that most companies are pretty active in the registration process anticipating that they may be covered. So I think an awful lot of people are going at it from that point of view.

Mark Weintraub – Buckingham Research

Okay, that's real helpful. So it sounds like though, by January or sometime early next year that's when there may be more visibility on what this could mean for you, or would there be steps beyond what you said that would be necessary before you'd have real visibility?

Lee M. Thomas

No, I think we'll have good visibility once those rules are final. I mean we're keeping up with the process. Our people are very active, both on the timber side and the manufacturing side about what the potential may be. So I think as the rules become more final, we'll clearly know what it means to us.

Mark Weintraub – Buckingham Research

Terrific.

Lee M. Thomas

And we're interacting with all of our customers as well, so we know where they stand in the process.

Operator

Your next question comes from Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

Thanks, good afternoon. A couple questions, I'm curious – maybe a question for Paul on the sale of specialties. Are you capacity constrained at all in the business, and curious if you have any plans for debottlenecking going forward?

Paul G. Boynton

Pete, yes we are currently capacity constrained. We've done a real good job – the team has over the last 10 years – of debottlenecking the Cellulose Specialty side of our business and allowing for more capacity. But I would say we're probably close to our limit and I think we'd have to see some capital to go in potentially if we wanted any kind of incremental above what we do today.

Peter Ruschmeier – Barclays Capital

And I guess a related question would be do you have any preliminary CapEx guidance for 2010? And is there anything note worthy for Specialty Cellulose?

Lee M. Thomas

We really haven't done that. We'll do that on our next call. We are taking a look at a variety of things as we look at 2010, but I think it's too early for us to give you guidance on that.

Peter Ruschmeier – Barclays Capital

Okay, and Lee I guess I'd be curious as you look for 2010 potentially to be opportunistic on growing timberlands, I'm curious if you could help us better to understand a framework with how you think about it. Are there limitations in terms of size of a transaction or debt capacity, or the different metrics that you could help us to better understand is to how you think about what size you might limit yourself to?

Lee M. Thomas

Well, I think overall we've always said that we're going maintain our investment grade rating. So as far as debt capacity is concerned, we're not going to do anything that would jeopardize that. We've been investment grade since we were a public company and intend to continue to be that. We think that's an important part of our value proposition. So in that regard that certainly has some limitations.

On the other hand we look at property and we look at where it's located particularly as it relates to our current property. I will tell you that we're probably biased towards the U.S. as opposed to outside the U.S. We've looked outside the U.S. We still feel like within the U.S. we see good returns when we look at potential sales. We also look from a geographic point of view as to what the markets actually not only are today but may be in the future.

An example would be bio-energy. Where do we think those markets may develop more strongly and what may that mean to a particular piece of property we're looking at in addition to existing mills that may draw on that property?

We always look at what kind of HBU potential there is in the property and finally, obviously, we always look at the return on the property so those are the kind of thing we look at.

Peter Ruschmeier – Barclays Capital

Okay and maybe just a last one a quick one if I could. You've indicated how much timber you've deferred which is very helpful. I'm curious to the extent that you can quantify – I would imagine that there also been an adverse mix shift as well with perhaps with less pulpwood less saw timber. Is there any way to quantify you know how much you've been impacted by a weaker mix shift on pricing related to what you're selling?

Lee M. Thomas

Well clearly there's been a significant mix shift in what we're selling. I mean I think last quarter in the east we were at about 80%, 82% pulp wood by typically we'd be at 50%. So there's a big mix shift and the same was true in the west where we don't sell that much pulp wood but I think we were at 25% to 30%.

Hans E. Vanden Noort

We were at least in the 20%.

Paul G. Boynton

Yes, Pete, I think your question that we haven't really quantified the financial impact on that mix shift and we might be able to take a look at that and get back to you on that.

Operator

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

Steven Chercover – D.A. Davidson & Co.

I think Paul anticipated some of my questions but I just wanted to clarify if fluff is going to be 9% higher this year in specialties a wee bit down overall volumes would be higher yet again is that correct?

Paul G. Boynton

Yes that's correct overall volumes year to year will be up a couple percent, Steve.

Steven Chercover – D.A. Davidson & Co.

Okay and there's an uncoated free sheet producer that's converting to fluff over the next year or two. Will the market be able to absorb that no pun intended?

Paul G. Boynton

My guess is yes the market's growing – you know it's a 4.7 million ton market growing 3% or 4% a year. My guess is they'll phase that volume into the market place and my guess is overtime it will again no pun intended absorb it just fine

Steven Chercover – D.A. Davidson & Co.

Great and switching gears a little bit it looks like there has been some subtle restatements of your 2008 results? Is that associated with New Zealand or can you help me with that?

Hans E. Vanden Noort

Yes that's exactly what it was Steve. It was – when we took New Zealand we went to disc ops and when we terminated that selling process this year we had to bring New Zealand back into continuing ops.

I think the other element was related to the convertible debt where there was a change in the rules and effectively you had to – we have to now accrue interest expense based on the basis of what a straight debt interest cost would have been which effectively I think decreased our EPS by about $0.06 a share so those would be the two elements that are impacting '08 versus what you may have seen previously.

Steven Chercover – D.A. Davidson & Co.

Okay that's helpful so my last question is you told us basically EPS 20% lower so we should use that 187 as the base.

Hans E. Vanden Noort

Absolutely that's right.

Operator

Your next question comes from Mike Roxland – BofA Merrill Lynch.

Michael Roxland – BofA Merrill Lynch

Just a quick question on Performance Fibers, recently caustic has bounced off its lows. I wanted to get a little more color from you just on where you see caustic trending and what the potential impact could be in 4Q?

Paul G. Boynton

Mike, I think you're right caustic is kind of come back down obviously significantly from the beginning of the year. We see it moving back up in the fourth quarter as off shore supply tightens a little bit and some of the players, some of the producers take some market downtime.

So we see it going up into the fourth quarter and I don't know the range of that if you look out the industry numbers would say it's in the 15% to 30% range as far as increase but so overall we've got that factored into everything that we've already talked to you about.

Michael Roxland – BofA Merrill Lynch

What about a little bit more color on the demand trends from Asia, China? I think Lee mentioned earlier on its holding up pretty well. What are you seeing from China at this point?

Paul G. Boynton

If you were – on the Performance Fibers side of the business we certainly see continued strong demand from China. Customers existing as well as some new customers going into that region of the world so.

Lee M. Thomas

And we've seen the same thing in terms of our log exports out of New Zealand. China over the course of the last year has really surpassed South Korea to some extent in terms of volume, which – and I think that's because they moved to maybe a more diverse supply from their Russian logs that they've always imported so we're seeing good – more business out of New Zealand into China.

Michael Roxland – BofA Merrill Lynch

And just last question in terms of interest expense given that you intend to pay off the installment note in December how should we think about interest expense in 2010?

Hans E. Vanden Noort

Well, we should definitely be favorable absent any significant timberland acquisitions, but we'll come out in the January call, Mike, and narrow that down for you guys a little better where we see full year expense.

Operator

(Operator Instructions). I'm showing no other audio questions as this time.

Lee M. Thomas

Okay well thank you very much we'll look forward to talking to you at the end of next quarter.

Operator

This does conclude our conference for today. All parties may disconnect at this time thank you.

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Source: Rayonier Inc. Q3 2009 Earnings Call Transcript
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