Rayonier's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.27.14 | About: Rayonier Inc. (RYN)

Rayonier Inc. (NYSE:RYN)

Q4 2013 Results Earnings Call

January 27, 2014 10:00 AM ET

Executives

Hans Vanden Noort - CFO

Paul Boynton - Chairman, President and CEO

Lynn Wilson - EVP, Forest Resources

Chris Corr - SVP, Real Estate

Jack Kriesel - SVP, Performance Fibers

Analysts

Mike Roxland - Bank of America Merrill Lynch

Chip Dillon - Vertical Research Partners

Mark Wilde - Deutsche Bank

Mark Weintraub - Buckingham Research

Steve Chercover - D. A. Davidson

Paul Quinn - RBC Capital Markets

Collin Mings - Raymond James & Associates

Operator

Welcome. And thank you for joining Rayonier’s Fourth Quarter 2013 Teleconference Call. At this time all participants are in listen-only mode. (Operator Instructions)

Today’s call is being recorded, if you have objections please disconnect at this time. Now I’d like to turn the meeting over Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Hans Vanden Noort

Thank you and good afternoon. Welcome to Rayonier’s investor teleconference, covering fourth quarter earnings, as well as our announcement regarding our plan to separate the Performance Fibers business from the Forest Resources and Real Estate businesses.

Our earnings statements, announcement about our plan to separate and two sets of 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, separation announcement and 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 two of our presentation material.

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

Paul Boynton

Hey. Thanks, Hans. Good morning, everyone. Obviously, we've got some significant and exciting news to share with you on our call this morning. First, we will discuss our fourth quarter and full year results, and then we will get into the announcement we made this morning about separating Rayonier Performance Fibers business from its Forest Resources and Real Estate businesses. Following our comments we will have some time for questions-and-answers.

First regarding the quarter and full year results, I’d like to make a few overall comments before turning it back over to Hans to review our financial results. Then we'll ask Lynn Wilson, Executive Vice President, Forest Resources to comment on our timber results. Following our -- review of timber; Chris Corr, Senior Vice President of Real Estate will discuss our land sales results; and Jack Kriesel, Senior Vice President, Performance Fibers will take us through the results of our cellulose specialties business.

Let me start by saying that we had another great financial year in 2013, generating strong cash flow well above our dividend, increasing pro forma operating income over last year’s pro forma amount and increasing pro forma earnings by 14% per share. We also increased our quarterly dividend by 11% to $0.49 per share or $1.96 per year.

In addition to achieving strong financial performance, we executed on a number of significant strategic objectives in 2013. In Forest Resources, we increased our ownership in New Zealand joint venture from 26% to 65% to gain additional leverage to strong Asian export markets and we sold our New York timberlands to further focus our portfolio on core regions.

In Performance Fibers, we completed the cellulose specialties expansion project at our Jesup mill and achieved product quality well ahead of expectations. In addition, we sold our wood products business as part of our strategy to exit commodity markets and focus on our specialty products in our manufacturing operations.

Although, our share price has decreased over the past few months due to the challenges we disclosed relative to 2014 prices for cellulose specialties, we are pleased with our 2013 financial results and a strategic actions we completed that positioned our business for long-term growth.

We remain committed to growing these businesses and increasing their long-term value for our shareholders, our plan to separate the business is consistent with that objective.

With that, let me turn it over to Hans to review the financials.

Hans Vanden Noort

Thanks, Paul. Let’s start on page three with our financial highlights. Overall, we had a very strong fourth quarter, sales totaled $520 million while operating income totaled $113 million and net income was $80 million or $0.62 per share. There was one special item this quarter, $2 million accrual for our discontinued operations.

Pro forma income for 2013 and 2012 excludes the operating results and gain on sale of the wood products business and 2013 also excludes the gain related to the consolidation of the New Zealand joint venture and the $2 million accrual. These items have been excluded to arrive at the pro forma amounts used for the comparisons throughout this call.

On the bottom of page three, we have provided an outline of capital resources and liquidity in comparison to year end 2012. Our full year cash flow was strong with pro forma EBITDA of $598 million and cash available for distribution of $334 million, both about 10% above last year. We closed the year with $200 million of cash. Our debt balance was $1.6 billion, while our net debt basis we finished at a very manageable $1.4 billion.

Our typical variance analyses are provided on pages four and five of the financial presentation material. However, we are now going to move right into markets and operations on page eight, so I’d like to turn the teleconference over to Lynn Wilson to cover Forest Resources.

Lynn Wilson

Thank you, Hans. Good morning. I’ll start with page eight and the Northern region which is primarily comprised by our Washington State operation. Delivered saw log prices continued the upward trend and were 19% higher than last year’s fourth quarter, driven by strong domestic and export demand, especially to China.

In the fourth quarter, we again took advantage of the robust export demand by selling 35% of our delivered saw logs into the export market. In 2014, we believe overall demand will continue to grow driven by improved domestic log market and sustained demand from Asia.

Based on current market conditions, we expect delivered log prices will increase at least 5% in 2014. Early 2014 sales results in the Pacific Northwest and New Zealand support our expectations of improving market. We also anticipate that Pacific Northwest 2014 volumes will be slightly above 2013.

In the Atlantic and Gulf regions on Page 9, average client stumpage prices decreased from the third quarter, mainly due to increased pulpwood thinnings delayed from the previous quarters due to wet weather. Prices were above the same period last year for both saw logs and pulpwood.

Pine saw log prices increased 8% from the prior year quarter as additional wood products capacity is slowly coming online, driving increased demand in our key markets. We anticipate that 2014 pine harvest volume will be slightly higher than 2013 based on current stumpage sales results in the Atlantic region. We anticipate pine prices will be 8% to 12% above 2013, reflecting improving saw log demand.

In our Gulf region, we expect that pine saw log prices will be up 10% to 12% and that overall pine prices will be 3% to 5% above 2013 as higher saw log prices in our Gulf region will be partially offset by mix changes, including an increased level of pulpwood thinnings.

Now let’s focus on our joint venture in New Zealand on Page 10, in which we own 65% interest. Export prices continue to increase during the quarter and we ended the quarter at the highest level of 2013. Domestic pricing although lagging export pricing also increased from the third quarter and prior year quarter by 1% and 7% respectively.

In 2014, we believe export demand will continue to drive strong pricing in our New Zealand operations. In addition, full year 2014 volume will be slightly below 2013 due to age class distribution of the New Zealand estate.

Overall Forest Resources operating income including New Zealand increased 76% in 2013. We are very encouraged by our early 2014 results and expect this year’s operating income to be well above 2013 due to improving demand across all markets.

Now, let me turn it over to Chris Corr to cover Real Estate.

Chris Corr

Thank you Lynn and good morning everybody. Our Real Estate business had a good fourth quarter with improved operating income as well as progress made on market catalyst initiatives and certain HBU project areas along the Interstate 95 coastal corridor.

Operating income was favorable to both the prior quarter and the prior year due primarily to large sales of non-strategic timberland, including sales of approximately 21,000 acres adjoining the Okefenokee National Wildlife Refuge in Georgia, and approximately 3,900 acres in Washington.

In addition, we completed the sale of our timberland properties in New York. Page 11 details rural and development sales volume. We sold fewer rural HBU acres in the fourth quarter than we did in the third, mainly due to lower sales activity in Alabama and Georgia.

Of note, in our development segment, we closed our first sale in the Belfast Commerce Center industrial park. The purchaser, Caesarstone, is an international quartz countertop manufacturer, now constructing its first facility in the U.S. The sale totaling 45 acres at $35,000 per acre, with a phase 2 option on an additional 19 acres is meaningful to us because our site won out in a very competitive process.

The industrial park in Bryan County, Georgia includes 1,100 entitled acres is Megasite certified and strategically located less than 20 minutes south of the Port of Savannah. It is connected by rail and Interstate 95 to markets up and down the Atlantic seaboard and west to Atlanta and beyond via the wider transportation network.

Moving ahead as shown on Page 12, rural HBU price was favorable due to increased activity in our gulf states markets, notably Texas where we were able to capitalize on sales of HBU land from recent acquisitions. The significant increase in the development price per acre is due to the Belfast Commerce Center sale.

Non-strategic timberland sales volumes were significantly higher than the prior quarter in the same period last year as seen on Page 13, reflecting the sale of 21,000 acres in Georgia as I mentioned previously. This chart excludes the sale of 128,000 acres in New York which closed in late December as we consider it to be a strategic repositioning outside the scope of our core sales business.

In summary, our fourth quarter Real Estate operating income was favorable due to both the same period last year and last quarter. We saw some favorable activity in the market and we reach key milestones in 2013 on certain market catalyst initiatives.

We anticipate that 2014 operating income will be somewhat comparable to 2013. We expect continued interest in HBU properties as the economy improves and our project initiatives in the I-95 corridor advance. We also expect demand for timberland to remain strong.

Now let met turn it over to Jack Kriesel to cover Performance Fibers.

Jack Kriesel

Thanks Chris and good morning. Performance fibers finished the year with a solid quarter driven by improved Cellulose Specialties sales volume. In addition, we made great progress in customer qualifications of Cellulose Specialties production from our CSE project.

One key customer has now proved commercial shipments in the first quarter and others are near completion. We expect our customers to complete the qualification process in the first half of this year.

On Page 14, you see net selling prices for our two Performance Fibers product line. Cellulose Specialties prices were comparable to the previous quarter however compared to the same quarter in the prior year, prices were up $90 or 5% primarily due to 2013 price increase and improved mix. Prices for commodity viscose and other declined $25 a ton or 3% compared to the previous quarter.

Moving onto Page 15 and looking at volumes, our fourth quarter cellulose specialty sales volume increased approximately 25,000 tons compared to the third quarter reflecting the timing of customer shipments and the impact of the extended shutdown for the CSE project during the third quarter.

Sales volume for commodity viscose and other increased the previous quarter by approximately 13,000 tons due to the higher production related to the CSE project. Looking forward to 2014, despite lower prices as we previously announced, we are encouraged by the trends in our key Cellulose Specialties markets.

As state demand remains solid and the weakness in European construction and automotive markets appears to the bottom, our year-over-year Cellulose Specialties sales volumes are expected to increase 30,000 to 50,000 metric tons.

The previously disclosed extended outage for recovery for our maintenance which we decided to pull forward from 2015 to 2014 will reduce 2014 production of commodity grades by 35,000 to 40,000 tons. This decision allows us more flexibility in 2015 when we expect markets to improve.

The impact on EBITDA are producing 35,000 to 40,000 fewer tons in 2014 is estimated to be $12 million to $14 million. With the addition of production capacity provided by the CSE project, we are well positioned to grow sales volume, margins and cash flows without significant new investment.

Now, let me turn it over to Paul.

Paul Boynton

Hey. Thanks, Jack. So, as you’ve heard, we finished 2013 with a strong quarter and had another great operational and financial year.

With that, we will now turn to our discussion for the planned separation of our businesses that we announced this morning. A presentation regarding the separation of the performance by this business is available on our website at rayonier.com. We will use that presentation to guide our discussions.

Beginning almost two years ago, senior management and our Board of Directors undertook a thorough review of the company's businesses and strategic alternatives in order to assess options to maximize long-term shareholder value. We concluded that a separation of the performance by this business via a tax-free spin-off was the best strategic path for our shareholders. And we believe now is the optimal time for this separation.

As you can see on page three, the separation will create two industry-leading public companies. One, a leading pure-play Forest Resources and land company with superior timberlands and the best Real Estate assets among its peers. The other, the world's leading producer of high-value cellulose specialties with best-in-class technology and margins. We believe the separation will create two companies better positioned to increase long-term value for the shareholders.

On page 4, you will see four boxes laying out the strategic rationale for the separation. They show that these businesses have different markets, drivers and value creation strategies. The businesses have distinct investment identities. The separation will provide investors do more focused investment opportunities. Each company will be able to allocate capital more efficiently to suit its own specific strategies and objectives. It gives each company flexibility in its capital structure.

And lastly, as we’ve operated these businesses from many years in a non-innovative fashion, with separation each company’s management can focus on the company’s opportunities for growth and long-term profitability. They will have directly aligned incentives and sheer focus. So the question is why now? Page five shows the timeline of key strategic actions the company has made over the past three years to position these businesses for growth.

You will see that we recently acquired $700 million of high-quality timberland. But during the downturn, we obtained land-use entitlements to position development HBU properties for higher sales values. And of course, we recently completed the CSE project. We’ve also sold non-core assets, including the Wood Products business and our New York timberland, enabling us to tighten the focus on our business portfolios. With these actions behind us and with an improving housing market and economy, you can see why we believe that now is the optimal time to separate the businesses.

Now, let me turn it over to Hans for few comments about the financial profiles of each company.

Hans Vanden Noort

Thanks, Paul. Page six shows that the separation will result in financially sound companies, each with good scale and financial flexibility. In connection with the separation, we are planning Performance Fibers to raise approximately $1 billion in new debt, the proceeds of which will be distributed to Rayonier.

On a net debt basis, we expect that Rayonier then have low leverage, it can maintain its investment-grade rating. With debt of $1 billion, Performance Fibers company will have financial flexibility with the capacities to reduce leverage through its strong cash flows. We are targeting a mid double-B rating for Performance Fibers.

Paul?

Paul Boynton

Thanks, Hans. Now, let’s turn to page 7. When we see the Performance Fibers business, we will be the world’s leading producer of cellulose specialties. It has industry-leading technology, product quality and customer support. We also anticipate that amongst specialty chemical companies, we will have best-in-class margins and free cash flow.

Building on those advantages, Performance Fibers will have compelling, organic and acquisition growth opportunities. As a refresher regarding the market segments that Performance Fibers serves, and our CSE project to expand capacity to serve those markets, we've included the information shown on pages eight through 10.

Now, I’m going to move on to page 11, where we highlight what Rayonier will look like after separation. Rayonier will be a best-in-class pure-play timber REIT post separation with 2.6 million acres of high-quality, geographically diverse timberland and it will have the best located high-value HBU platform amongst its peers.

And also remember that in most of the timberlands we’ve recently acquired, have relatively young timber that will reach maturity at a time when we expect the housing markets will be much stronger. In 2016, we expect to have an incremental million tons of pine harvest volume above the 2013 levels.

On page 12 -- page 12 provides details on our timberland and HBU ownership. As you can see, our timberland properties are located in the highly productive timber growing regions with strong markets. Likewise, our HBU properties along the Florida, Georgia, coastal I-95 core growth are well situated for development.

Each company has distinct value creation strategies. Page 13 shows that each company will have a growth focus and it lays out the strategies and capabilities that each company will employ to create value. Rayonier’s strategic focus to maximize shareholder value will be, one, to get the most value out of each of the acres and two, to profitably grow its timberland base.

Rayonier will continue to manage its timberland business for long-term value and positioned its HBU for higher sales values. The Performance Fibers company will focus on completing the ramp-up of cellulose specialty sales from its new capacity and continuing its critical initiatives, maintaining its product quality leadership, leveraging its manufacturing technology, flexibility and expertise and providing world-class customer support.

Performance Fibers will also pursue growth in logical adjacent products. We are confident this strategy will grow EBITDA and long-term value at both company.

Now, let me turn it over to Hans for comments about the capital structures, dividend expectations and 2014 financial outlook for each company. Hans?

Hans Vanden Noort

Thanks, Paul. Page 14 provides some more details around capital structure and expected dividend policies. Both capital structures will be tailored to support each company's value creation strategies. As I mentioned before, we expect Performance Fibers to raise about a $1 billion of debt, the proceeds of which will be distributed to Rayonier.

We’ll provide a little more detail here about the expected components of Performance Fibers debt. We anticipate about 40% will consist of bank debt with the remaining amount coming from longer-term bonds. This will allow Performance Fibers to use its initial cash flows through efficiently reduce debt.

Upon receipt of the $1 billion distribution, Rayonier will have net debt of about $300 million, which will give us the strongest balance sheet of Rayonier timber REITs and provide for significant financial flexibility going forward. We expect to have increasing cash flows used for dividend growth, timberland acquisitions or stock buybacks. With respect to dividend, we expect both companies will initially pay dividend at levels consistent with the respective peer groups. We’ll provide more detail as we get closer to separation.

I’d like to move now forward to page 17. The financial summary on page 17 provides 2014 guidance for key financial metrics by business unit. As we expect the separation to be complete around midyear, we’ve not provided consolidated Rayonier guidance.

Now, I would like to turn it back to Paul for some final comments.

Paul Boynton

Thanks, Han. As we wrap up this portion of the call, I’d like to just take a moment to put the announcement of our separation in a broader perspective. Rayonier’s history spans nearly nine decades. As any company that stands the test of time and say, change has always played an important role in our success. Over the last 87 years, our ability to evolve and adapt to our marketplace is a key reason, we consistently delivered value to our shareholders.

Looking back to the 1930s, Rayonier first became a public company and made a landmark decision to expand its business from the Olympic Peninsula in Washington state to the U.S. southeast by building our Fernandina Beach, Florida mill, a decision will split the permanent change in the company strategic direction and future investments.

In the 1950s, the company continued its strategic evolution by building our mill in Jesup, Georgia, a mill which was, at the time the largest of its kind in the world as we pioneered new applications for cellulose specialties. More recently in 1985, Rayonier became unique amongst forest product companies by restructuring to operate its timber and manufacturing businesses a separate independent businesses to an MLP structure.

We then took bold steps in 1999 when we purchased a million acres of timberland in the Southeast, and then again in 2004 when we converted Rayonier to a timber REIT. And then finally last year when we completed our CSE project at Jessup. With the strength of our convictions and confidence of our strategy, we have pushed forward, resulting in industry-leading shareholder value creation over many, many years. And each of those strategic decisions played a key role in positioning us for our announcement here today.

It is with this perspective and my confidence and the rigorous analysis that we've done that I can say, I'm excited about what this separation means for the futures of both Rayonier and our Performance Fibers business. Our long proud heritage and the values we’ve established as a company will carry through to these organizations and will unlock even greater opportunities to create long-term value for our shareholders.

Thank you. And I look forward to your question shortly. Hans?

Hans Vanden Noort

All right. We’d like to open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from Mike Roxland, Bank of America Merrill Lynch.

Mike Roxland - Bank of America Merrill Lynch

Thanks very much. Congratulations on the deal and on a very good quarter as well.

Paul Boynton

Thanks, Mike.

Mike Roxland - Bank of America Merrill Lynch

Understanding the transformation the company has gone through, including the sale of Wood Products business, the CSE expansion - the CSE expansion, what do you think right now is the right time to be spinning Performance Fibers given the softness in the market. And really some of the Paul, some of the positives that you’ve mentioned really focusing the company but given the softness that we've seen in some of the excess capacity, would it make more sense to hold off and try to get more value for the company, if there is potentially some capacity rationalization down the road?

Paul Boynton

Yeah Mike. We do think it’s the right time, and again, for both sides. First of all, as we mentioned already, if you look at what’s happening in our timber and our land side of the business, we see really nice emerging markets there in terms of the housing starts coming back. We see a lot of interest in our Real Estates and so when we reported the growth that we had in 2013 and we’re projecting 2014.

Similar in CSE, with our CSE now complete, Performance Fibers, we think it’s well positioned. And we noted that we’ve had some price expectation decrease here in 2014 but mid, long-term views of that business, Mike, are still very strong. And again, we think, it’s appropriate time to go ahead and put it out there because we got a lot of runway.

And specifically looking just in 2014, we’re now able to offer up and sell 30,000 to 50,000 tons incremental CSE. We’ve been locked the last five years without the ability to grow that business and now that we’ve completed the CSE expansion, we can do that. So yes, there may be a little bit of softness in markets that we’ve talked about over last year but again, we think it’s a good platform for growth going forward right now.

Mike Roxland - Bank of America Merrill Lynch

Guys, is there anything that gives you concern from a regulatory vantage point as to why this spin would not be consummated?

Paul Boynton

No, nothing that we are aware of, no.

Mike Roxland - Bank of America Merrill Lynch

Got you. And then just lastly on the businesses themselves, actually the Performance Fibers, as you guys think about 2014 and the excess capacity of high alpha pulp and also the additional capacity that’s expected to come in from commodity viscose, are there any steps that you could take to minimize the amount of extra supply in the market and would it be fair to say also that if at all, excess capacity does come on and commodity viscose is excess capacitized and the high alpha pulp remains excess capacitized and no steps are taken by producers in the high alpha pulp to reduce capacity, you could see cellulose specialty prices decline again in 2015?

Paul Boynton

I think, Mike, first of all, probably, it is very soon to even talk about 2015 pricing in anyway. We’ve said all along, we are going to feather in this capacity and that has been our plan. We’re doing that in 2014. We will be very disciplined. It’s always been the challenge of bringing this new capacity on and that’s why it took us so long, even with many conversations over the years with our customers to expand, we were very deliberate and very patient to bring this new expansion on board. And we will just be very disciplined in feathering that out into the market. I think that’s the prudent thing to do and that’s what our team will follow.

Mike Roxland - Bank of America Merrill Lynch

Got it. Good luck with the transactions.

Paul Boynton

Thanks, Mike, appreciate it.

Operator

Next question, Chip Dillon, Vertical Research Partners.

Chip Dillon - Vertical Research Partners

Yes, good morning and congratulations. My first question is just a small one on the tax issue with the spin-off. I understand from other situations that one thing you need to protect, I guess, the tax deduct, the tax-free nature of the spin, is that you’ve obviously haven't looked to sell, for example, either of the two components. And my question is once the deal is completed, is there a certain period of time with which either side couldn’t pursue a merger if it made sense? And then I would say that in terms of it being either part being acquired by someone else?

Hans Vanden Noort

Chip, there is really no prohibition on the timeframe. I mean, there is certain rules about it. We’ve had a prior discussion already that comes into play then how you have a two year period and other than that, no.

Chip Dillon - Vertical Research Partners

And so assuming you -- is it safe to assume you haven’t had those prior discussions so that technically if in hypothetical sense someone did try or pursue or wanted to, and it made sense for you to sell, when I say you, either company to sell, then they would be free to do so and it would protect the tax-free nature of the spin?

Paul Boynton

Yeah. Chip, this is Paul. We obviously -- we’re not going to say can’t reveal - wouldn’t reveal any discussions we’ve had with any parties. But as Han said, post separation both entities will be obviously enabled to do whatever they would like to do to pursue the greatest value for their shareholders and we will go down that path.

Chip Dillon - Vertical Research Partners

Got you. And then it would be very helpful, you all on the slide sort of gave us some indications on where you saw operating income going in 2014 for each component. And it looks like to me, all the increase in the remain co will be -- all the increase would be in the timberlands segment if I heard right because Real Estate is expected to be flat, is that correct?

Hans Vanden Noort

Chip, yeah that’s correct. As Lynn mentioned, she’s off to a very strong start and seeing pretty good pricing across the board.

Chip Dillon - Vertical Research Partners

Okay. And then when you look at the, I guess the key question is and I'm not sure how you consider corporate expense given the components of it, but how do you see that number for the year in ’13? And how would that be allocated and would it change much as we go into the post spin scenario? I mean, on one hand you could argue it might be higher because you have to have two of everything where you now have one. But then there may be some offsetting savings that we don't know about.

Hans Vanden Noort

Yeah, what I would say, Chip, is certainly we’re going to need to have two sets obviously with two public companies. Our corporate has typically been around $30 million. However we’ve had -- we probably have had the most complicated REIT structure in America.

So go forward, two business separating, we don’t think it’s going to be two times each company having $30 million. So we’re still working it. I would say roughly we would expect incrementally perhaps another $10 million to $15 million. So maybe $40 million to $45 million in total between the two companies that’s -- but we’re still working through that.

Chip Dillon - Vertical Research Partners

And would it be roughly split evenly or would it tilt toward one or the other?

Hans Vanden Noort

It would tilt towards Performance Fibers, that’s clearly where the bulk of the headcount is.

Chip Dillon - Vertical Research Partners

Got it. And then a last question is, it’s pretty obvious, I guess, to a number of us in the paper, forest products packaging world, what your comps would be for a competitive dividend for the remaining company but are there, I know, that my understanding is that specialty chemical companies don’t necessarily -- some of them pay out more than others, I guess. But could you just steer us toward a range of what you consider competitive or maybe a group of companies that would help us sort of make a guess with that?

And then secondly, you mentioned that the primary purpose of the free cash flow was to pay down debt in Performance Fibers. Would that mean that the dividend might take a while to be declared or would that be something you would expect to do right out the box?

Hans Vanden Noort

We’d expect to likely would come out of the box with a dividend Chip and it would - right now we’re looking at yields roughly, just give you a flavor of about 1.5%. So certainly there’s some variation amongst other specialty companies here but that’s roughly what we’re looking at.

Chip Dillon - Vertical Research Partners

That’s very helpful. Thank you.

Paul Boynton

Thank you.

Operator

Next question, Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning. And I'd like to echo my congratulations. I’m glad to see this. Paul, I wondered if you could give us some sense of when you expect the kind to have complete management teams and board announcements for us?

Paul Boynton

Yeah, Mark had witnessed now being public. We’re all poised and ready to go in that process on both the board side as well as the management process. We will certainly have our target obviously to have everything in place, priority separation. So as we put in place and we have the information to share, we will make sure we get it out to everybody.

Mark Wilde - Deutsche Bank

So have you actually started to do anything in terms of a CEO search for the timberland base?

Paul Boynton

No, not yet but we will begin that process.

Mark Wilde - Deutsche Bank

Okay and I think you are going to be staying with the Performance Fibers business. I’m just kind of curious on that. Capital spending target you put out there for ‘14 of $75 million to $80 million a year. Is that a kind of a go forward number, do you think in that business so could it be lower?

Paul Boynton

Well that’s probably not a bad go forward, Mark. I think I had -- we mentioned before, we’re going to have some boiler Mack spending we’re going to have to do that’s going to come through in ‘15 but on the run rate that’s probably had a bad number.

Mark Wilde - Deutsche Bank

Okay. And then, well, I just wanted if you could run through those comments you made and sort of where your expectations are for kind of Southern Timberland or timber pricing in 2014?

Lynn Wilson

Sure Mark, I can do that. We anticipate the pine prices in the Atlantic region will be 8% to 12% above our 2013 reflecting our saw log demand. And then in our both region, we expect the pine saw log will be up 10% to 12% and that overall our pine prices in the Gulf will be up 3% to 5% above 2013 because we’re going to have -- well we have the higher saw log prices in the Gulf. We do have it partly offset by geographic mix in our Southwest resource unit.

Mark Wilde - Deutsche Bank

Okay. And I was kind of surprised in the fourth quarter. It seem like your kind of your overall southern volumes were little lower than I would have expected. Can you address that?

Lynn Wilson

We had some wet weather and we had some fallover -- into first quarter and some of our operations were cancelled before of load accessibility from standing water. We had very strong pricing but we just had to move some of that into first quarter.

Mark Wilde - Deutsche Bank

Okay. It sounds good. Listen good luck with the spend.

Paul Boynton

Thank you, Mark.

Operator

Okay. Next question comes from Mark Weintraub, Buckingham Research. Your line is open. Please check your mute button. Mark Weintraub, your line is open.

Mark Weintraub - Buckingham Research

Hi. Can you hear me?

Paul Boynton

Yeah.

Hans Vanden Noort

Yes.

Paul Boynton

Good morning, Mark.

Mark Weintraub – Buckingham Research

Sorry about that. Good morning. Just quick follow-up on that the boiler Mack spend in 2015? Can you ballpark that for us.

Hans Vanden Noort

Yeah. I think the total boiler Mack spend was $40 million to $50 million back, again, those -- I don’t recall spilt that exist, if you.

Paul Boynton

I don’t have those numbers exactly.

Hans Vanden Noort

Yeah. We will get on back that and we will be able to share those with you guys.

Mark Weintraub – Buckingham Research

Okay. Great. So that be in 2015 and 2016 and so that would, probably be somewhat incremental to the 75-ish number which you have in 2014, is that the way to think of it?

Hans Vanden Noort

That’s exactly the way you think of it.

Mark Weintraub – Buckingham Research

Okay. Then is it possible to get a bracket on your expectations on what the cost of that for the Performance Fibers business might be, I recognize can't give anything specific but kind of order of magnitude?

Hans Vanden Noort

Yeah. Tough right now, Mark, but still growth in mix and duration and so forth, but that’s credit rating average gives upon average around 6% that would be a straight number.

Mark Weintraub – Buckingham Research

Okay. And what would your longer term capital structure goals where the Performance Fibers business be, I mean, you are going to come out of the gate obviously with about a $1 billion, how might my one think about what your longer term target would be?

Paul Boynton

Yeah. Hans can jump in as well, obviously we’re going to bring that down, that’s our first focus, as Hans made in his comment, is to bring that debt level down to what we think is to more in range of our peers in the industry in terms of the multiple. But then beyond that, we have a lot of different opportunities there whether again its adjacent type of opportunities for growth. Again all uses of cash whether it becomes share buyback, dividend. So we have a lot of option out there for us. But the first priority, certainly, is to bring that debt level down at $1 billion down to what would we consider kind of appropriate range with our peers.

Mark Weintraub – Buckingham Research

And so would that be like a 2 to 1 debt to EBITDA or what type?

Hans Vanden Noort

That’s not that, I mean what you are seeing right now is relatively lower leverage on the number of the peer groups so that 1.5, 2 times is more or less kind of the ballpark right now that we are seeing.

Mark Weintraub – Buckingham Research

Okay. Then one last and if I could, when you were having your pricing negotiations for 2014, obviously that was the focus? Was there any color? Was there any metrics that were being put in place for 2015 that can give some comfort to there being most stability for 2015 or really was it just focus on 2015?

Hans Vanden Noort

Yeah. The discussions, Mark, were clearly focused on 2014 as stated earlier. It’s just too early for 2015 to give any indications.

Mark Weintraub – Buckingham Research

Fair enough. Thank your.

Paul Boynton

Thanks, Mark.

Operator

Next question from Steve Chercover, D. A. Davidson. Your line is open.

Steve Chercover - D. A. Davidson

Good morning, everyone. Thanks for taking my questions. First one is, maybe this is just rounding but if the current net debt is $1.4 billion and the projected debt is $1.3 billion, is that due to free cash flow or?

Hans Vanden Noort

Yeah. That’s what we expect to generate from year end until when we do the deal.

Steve Chercover - D. A. Davidson

Got it. Okay. You indicated that you’d looked to some logical adjacent products for Performance Fibers? Do you have any ideas on that front and would they have similar margins to what you are currently generating?

Paul Boynton

Yeah. Steve, we will be more forth sight of this as we move forward and obviously, our priority again is to bring down that debt level. We do a lot of things very well in the business and if you think about, we’ve got almost every chemical process that’s out there, we do in our operations, we got some expertise in biochemistry and biopolymers and basically we’re making a natural polymers.

So we think that the range of options is pretty wide, but we have not gone down that path to the point where we want to explore and extent any knowledge of that right now. We'll continue to work on that and we'll share with you as we go along in that exercise.

Steve Chercover - D. A. Davidson

Okay. So my last question might be kind of redundant, but in terms of peers for valuation purposes. Can you share us you think you'd look like?

Paul Boynton

I don't hope we could exactly who we look like. But, I mean, when we look at this, obviously some of our customers, although larger or specialty chemical companies, so like Eastman, (inaudible), F&C and then certainly others that we look at with our advisors are people like Aromor, International Flavors & Fragrances, Valspar and just a smaller once like Flamingo and Amco.

Steve Chercover - D. A. Davidson

Great. I want to appreciate that. Okay. Congratulations. Good luck.

Paul Boynton

Thank you.

Paul Boynton

Thank you.

Hans Vanden Noort

Thanks Steve.

Operator

(Operator Instructions) Paul Quinn, RBC Capital Markets. Your line is open.

Paul Quinn - RBC Capital Markets

Yeah. Thanks very much and congratulations on the spent. Just a follow-up question for Lynn on four, three-year just on the U.S., so if we’ve seen Independent report, seen a pickup in prices and it sounds like you're pretty bullish on the future? Do you I think this is a sustainable run in log price appreciation over the next number of years as the housing recovery unfolds?

Lynn Wilson

Yes. We do Paul. We're in the position now where we're seeing consistent either extension of hours or restart within our region and consistent business plan by our key customers. So we feel like this is sustainable growth pattern and we haven’t seen in this other regions indicate otherwise at this point in time.

Paul Quinn - RBC Capital Markets

Okay. And then just flipping over to Performance Fibers and just trying to understand what’s the line at Jesup is the expected mixes in '14 between commodity, DT, fluff and paper pulps?

Jack Kriesel

This is Jack. Paul, the next item I see is, it’s to separate it totally, but from a commodity perspective, we're looking at both the sales and loss on some paper and that will be determine purely on the margin of those opportunities. We will be producing a relatively significant amount of volume of acetate on that line and as indicated earlier our total CS is going up 30,000 to 50,000 tons across the Board.

Paul Quinn - RBC Capital Markets

Okay. And then maybe you could just help me, Jack, I understand the margin difference between the each of those commodity grades, I mean especially with the Chinese duties in places. Is there a margin in that commodity DT grade?

Jack Kriesel

Paul, here is something we just don't care is what we -- our margins on any specific grade line.

Paul Quinn - RBC Capital Markets

Okay. Fair enough. That's all I had. Best of luck.

Paul Boynton

Thanks Paul.

Operator

Collin Mings, Raymond James & Associates. Your line is open.

Collin Mings - Raymond James & Associates

Hey. Good morning and congratulations on the transaction guys. A couple of quick follow-up question. Just we haven't really talk about in Q&A but there was a lot of really positive momentum on the real-estate front really over the last six months or so, the deal fell fast siding, I know builders are taking that plan to take down some lots in the second half of 2014 in the Jacksonville area. Can Chris maybe talk a little bit more about the momentum you're seeing on that front?

Chris Corr

Yeah. Hi, Collin. Thanks. Sure. If, I think there is way to think about the sell pass sale is -- it's encourage because it came under a year after we secured our entitlements and our side went out in a very competitive process, economic development, officials in the State of Georgia tell us that Caesar stone look at 12 states before look at Georgia and another dozen or sites before it get the bell fast.

So that's a good thing. Our site will only show better there next time because Caesar stone will be under construction, open early 2015 265,000 square foot building with energy and bodies we've got infrastructure under development there now that will serve another 500 acre. So, which will just be even more strategically position as we continue forward.

And then your comment on residential, we do see that activity around our lands, preliminary in St. Johns County. It's an active residential market, interest is there in a number of partials and we see that is good news over the coming months as well.

Collin Mings - Raymond James & Associates

Okay. Great. And then, Hans, I mean, you talked a little bit just about the capital allocation priorities going forward of kind of Rayonier’s a pure-play timberland REIT. Can you just maybe talk a little bit more about how you think about the growth profile going forward? I mean, obviously, the balance sheet is going to be attractive out of the gate? But what are you seeing in terms of acquisition opportunities and maybe talk a little bit about just a decision to go ahead and exit New York at this point too?

Hans Vanden Noort

Sure, Collin. So we are still actively looking for timberland properties, you’ve seen over the years our has been somewhat lumpy, we have a very discipline bidding process and so a lot of work goes through and very few the once that we look at actually make it through the process, but the ones that we do acquire as you can see our top quality.

So we fully expect to continue that process. There is some things in the works now. We have the regions targeted that we're really most focused on, most interested in and so that will continue and we'll have plenty of fire power to be able to execute on that.

The decision to exit New York, if you think back a little bit, the first part of that was acquired as far as larger acquisitions and the second part we acquired six, seven years ago just to give us some math and at the end of day we weren’t getting the returns there that we think we can get when we redeploy that some of the other regions.

Our expertise is really in pine plantation and using all the silver culture expertise that we have here to really optimize yields. And we just couldn't bring that to bear in those New York land and so we're pretty excited about exiting there and being able to redeploy that in our strategic regions.

Collin Mings - Raymond James & Associates

Okay. Great. And then, Paul, just one bigger picture question here. Obviously, you kind of acknowledged earlier why you think now it makes sense for the announcement. But thinking about just is -- I think it's fair to say, there are some diverging trend at least kind of the near to intermediate term of your different businesses. I mean is that really -- was there any sort of acceleration, I know in prior conversations we have had it seem like it was more of about process of the kind of stabilized Performance Fibers business, is how you were thinking about a potential spin-off and obviously, kind of a bit accelerate a little bit. So is that factors as you and the Board were kind of trying to think about the timeline for this?

Paul Boynton

No. I don't think so, Collin. I wouldn't -- we look at again just we spend a couple of years with our advisors thinking this thing through. We've given a great deliberation and has -- again in great compensation around it.

There is nothing in the timing of that relative to anything immediate one market or the other, in fact that we think overall again with the CSE completion, with the rising and return of the housing market driving both the Performance side as well as Real Estate side. We just thought it was great and go ahead and do that.

So there is nothing else in there as far as timing, as far as, right now versus six months ago or six months forward. Again, overall you think you have got to step back and say long-term is just a right thing to do for our shareholders and I think the answer is absolutely, yes, it is and so, we said, we are just going to keeping moving forward.

Collin Mings - Raymond James & Associates

Okay. No. Great one. I think we've greatest to deposits for shareholder as well. So thank you and good luck getting everything tie together on the transaction.

Paul Boynton

Thanks Collin.

Hans Vanden Noort

Thanks Collin.

Operator

Mark Wilde, Deutsche Bank. Your line is open.

Mark Wilde - Deutsche Bank

Yeah. Just a few more odds and ends on the Performance fibers. I wondered, Jack, going from the information in your slide deck, it looks like about 66% or 67% of your volume is going into cigarette tow. Is that a good number?

Jack Kriesel

It's close, yeah.

Mark Wilde - Deutsche Bank

Okay. And then I wondered just kind of going forward strategically is one of the imperatives for you guys going to be to diversify the mix a bit away from that heavy exposure to tow?

Jack Kriesel

Yeah. We intend to grow the other CS market, the ethers market, the [hydroacid rayon], the filtration type application. So that has been our strategy there to grow those businesses.

Mark Wilde - Deutsche Bank

Yeah. Okay. And then finally, you just -- in past we’ve talked about how difficult it is that get qualified in some of these applications, including tow and I’m just, hearing from some friends that maybe some additional players are close to being qualified in tow? Can you comment on that just generally?

Paul Boynton

Well, we don’t have specific knowledge about progress with any given -- competitor, but we certainly believe that our competitors make good product and we’ll be working with the various customers to move forward with that.

But you look at overall Performance Fibers has about a third of the CS market and all others they are down in the single-digit type levels. So they are going to be inching up and the markets growing about 50,000 tons a year, so there is room there for people to grow.

Hans Vanden Noort

Yeah. And Mark, remember also that there really isn’t any new entrants into this high-end market, there is certainly folks we continue to move up on their curve in terms of making these products. But last entrant has been probably six or seven years ago, so they continue to work on it.

So nothing sudden coming at us, but as Jack, we have always expected our competitors make a good product and we will continue to work on that. Our challenge is how do we make a better progress -- product and how do we keep driving that gap between everything that we offer, not only just consistency and quality but also the service we provide with it.

Mark Wilde - Deutsche Bank

Okay. That’s very helpful. Thanks Paul and good luck.

Paul Boynton

All right. Thanks Mark.

Operator

Chip Dillon, Vertical Research Partners. Your line is open.

Chip Dillon - Vertical Research Partners

Yes. Just had a quick follow-up. Thank you. I know you obviously will maintain some flexibility on how you sell your non-high end viscose grade at Performance Fibers? But could just tell us what is a rough range of the total tons? It looks like last year you sold between fluff and viscose. I think if I have this right 157,000 tons, but of course that was before the conversion? And if you look at the fourth quarter, you were at or even the second half you were somewhere to 35,000, 40,000 ton rate of those non-high end grade per quarter and I just was wondering and I guess with the downtime could we see, that total be around 100,000 ton or so?

Paul Boynton

Chip, we are looking 2014, roughly 100,000 to 125,000 tons of commodity grades whether that’s viscose fluff or paper type applications.

Chris Corr

Right. To help you back in that range, right. We’ve already communicated that our CS reserve 30,000 to 50,000 ton and then Jack talked about expanded shutdown which we’ve said it will take this year at the 35,000 to 40,000. So, you net those out and at least that range as Jack mentioned 100 to 120 -- 25.

Chip Dillon - Vertical Research Partners

Perfect. Thank you very much.

Operator

Thank you. At this time I have no further questions.

Paul Boynton

Great. Well, thanks everybody for joining us and as always please contact Ed Kincaid with your follow-up questions.

Operator

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

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