Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rayonier Inc. (NYSE:RYN)

Q1 2010 Earnings Call Transcript

May 6, 2010 11:00 am ET

Executives

Hans Vander Noort – SVP and CFO

Lee Thomas – Chairman, President and CEO

Paul Boynton – EVP, Forest Resources and Real Estate

Charlie Margiotta – SVP, Real Estate and President, TerraPointe Services Inc.

Jack Kriesel – SVP, Performance Fibers

Analysts

Mike Roxland – Banc of America/Merrill Lynch

Steven Chercover – D.A. Davidson

Christopher Chun – Deutsche Bank

James Amine – Credit Suisse

Peter Ruschmeier – Barclays Capital

Mark Masters – JP Morgan

Operator

Welcome and thank you for joining Rayonier's first quarter 2010 conference call. (Operator Instructions) Today's conference is being recorded. If anyone has any objections, you may disconnect at this time. Now I turn the meeting over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Hans Vander Noort

Thank and good morning. Welcome to Rayonier's investor teleconference covering first quarter earnings. Our earnings statements and presentation materials were released this morning and are available on our website at www.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 of federal securities laws of federal securities laws of federal securities laws of federal securities laws of federal securities laws of federal securities laws. Our earnings release as well as our Form 10K 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’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 Thomas

Thanks, Hans. I'll make a few overall comments before turning it back over to Hans to review our financial results. Then, we’ll ask Paul Boynton, Executive Vice President from Forest Resources and Real Estate to comment on our timber results. Following our review with timber, Charlie Margiotta, our Senior Vice President for Real Estate will discuss the results of that segment and Jack Kriesel, Senior Vice President for Performance Fibers will take us through the results of that business.

We were pleased to report pro forma earnings of $0.56 in the first quarter, the highest level since the third quarter of 2007 with solid results from each of our three core businesses. Importantly, strong operating cash flows drove cash available for distribution to $0.96 a share significantly above our dividend of $0.50. These results reflect actions we've taken to create value in an economy that’s beginning to show signs of a broadening recovery. In timber, we accelerated our planned harvest levels to take advantage of higher prices created by supply demand imbalances.

We believe the markets will come back into balance in the next few months, but we look for prices to moderate well above levels of a year ago. While these difficult harvest conditions force some pulp mills to import fiber on a curtail production, we were able to continue the source the wood we needed to run our performance fibers mills at full capacity.

We see increasing strength in our global markets, driving demand for both our cellulose specialist products and absorbent materials. In real estate, we sold nearly 24,000 acres of non-strategic timberland at attractive returns. We’re seeing steady interest today and recently heard reports of TIMOs raising new capital to invest.

Our results demonstrate the ongoing benefits of our balanced business mix and disciplined approach to creating value. We are encouraged by these results and expect to exceed our previous guidance as we'll describe in more detail during the call.

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

Hans Vander Noort

Okay. Let's start on page three with the overall financial highlights. As Lee noted, we had a good first quarter. Sales totaled $310 million while operating income totaled $77 million and net income was $57 million or $0.71 per share. Note that these results include a gain on sale of portion of our New Zealand joint-venture which increased first quarter operating income and net income by about $12 million or $0.15 per share.

Without this benefit, operating income was about $65 million and net income was $46 million or $0.56 per share. These pro forma amounts will be used for these comparisons throughout the call.

On the bottom of page three, we provide an outline of capital resources and liquidity. Our cash flow was strong with adjustment EBITDA of $110 million and cash available for distribution of $77 million. In March, we borrowed $75 million under a five-year term note from a group of banks, so our debt is now $762 million versus $702 million at year end. We ended the quarter with approximately $153 million in cash, so on a net basis, we finish at $609 million.

I'll also comment here on a couple of notable events which occurred after quarter end. First, Moody’s upgraded our debt rating to Baa2 stable. Second, with the receipt of $189 million for the Alternative Fuel Mixture Tax Credit from IRS, our cash balance is over $340 million and our net debt is down to about $420 million. So overall, we feel comfortable with our balance sheet.

Let’s now run through the variance analysis. On page four, we prepare a typical sequential quarterly analysis. In timber, operating income increased, driven by price improvement in both the western and eastern regions. Paul will cover the details in his presentation. The negative variance primary results from lower recreational licenses which are largely recognized in the fourth quarter.

In real estate, income increased $13 million, due primarily to higher non-strategic acres sold. Moving down to performance fibers, you can see price improvement which occurred in both cellulose specialties and fluff, however this improvement was offset by lower specialty volume due to timing of customer shipments and scheduled for RGUM [ph] maintenance shutdown. Input costs were unfavorable due to higher wood and chemical processing. Corporate net expenses were $5 million below fourth quarter, reflecting better results from our trading operations and the receipt of an insurance settlement.

Let’s move now to page five in the year-over-year variances. In timber, $11 million year-over-year improvement was driven by stronger pricing in both regions as well as lower logging and transportation costs. The real estate results in the first quarter improved $3 million, primarily due to non strategic sales.

In performance fibers, while operating income increased $4 million overall, both cellulose specialties and fluff prices declined. The cellulose specialties decline reflects the removal rate last year of a cost-based $95 a ton surcharge. Our cost decline has indicated here compared to the first quarter of last year.

Now if we turn to page six, reconcile from cash provided operating activities, which is the GAAP measure to our non-GAAP metric of cash available for distribution. Our first quarter cash flow was quite strong with CAD of $76.6 million well above last year and our dividend payout of $40 million.

With that, let me turn the conference over to Paul Boynton, to cover forest resources.

Paul Boynton

Thanks, Hans. Overall, we are pleased to report operating income of $8.2 million for the first quarter compared to $2.3 million loss for the same period in 2008. On page eight, you will notice that our prices for western timber sales has increased 15% in the first quarter over fourth quarter and 31% over a year ago.

Since a substantial portion of our volume is currently generated from delivered logs, we have also included the corresponding price trend. Our market supply has tightened due to reduced availability of assessable timber and continued strong export demand driven mainly by China.

In response, we pulled volume forward into the first quarter. With our coastal Washington timberland locations, which are readily accessible for harvesting, we will continue to capitalize on solid export demand and tight domestic markets by increasing our 2010 volume by approximately 5% to 10% above 2009. However, with 2010 prices well below historical levels, we will also continue to defer approximately 30% of our future planned harvest levels to preserve value.

In the east, as shown on page nine, pine prices improved 30% in the first quarter over the prior year's fourth quarter. This was due to extremely wet weather conditions in the south, combined with strong pulpwood demand and strengthening saw log markets due to inventory restocking.

Again, in response we pulled volume forward into the first quarter and also pre-sold the majority of our 2010 stumpage volume at today's higher prices. 2010 pine harvest volumes forecasted to be somewhat below that of 2009 as thinning return to more normal levels. Overall, operating income should be substantially above 2009.

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

Charlie Margiotta

Thanks, Paul. The real estate business is off to a good start with a solid first quarter. Interesting land throughout all our operating areas has improved from one year ago and our expectations are for slow but steady demand side gains.

Chart 10 details the rural and development acreage sold. Rural sales were completed in every state where we have ownership. Overall, rural markets were strongest in Alabama and Texas. While rural land sale closings tend to be lumpy, we expect 2010 acres to be above 2009 for this value-added business and weighted to the second half of the year.

Chart 11 highlights per acre prices. Rural land prices when you account for geographic mix have been essentially flat for the last four or five quarters. We have seen some improvement in demand and expected to translate into better per-acre prices.

Non-strategic timberland sales are shown on chart 12. First quarter sales were predominantly properties located in Georgia at prices consistent with what we achieved in 2009. We believe there continues to be amble institutional capital available to keep this market competitive. However, we expect to sell somewhat less acres in 2010 as we continue to maintain price discipline.

With that, let me turn it over to Jack Kriesel to review our performance fibers business.

Jack Kriesel

Thanks, Charlie. Performance fibers started 2010 was solid first quarter results driven primarily by the strong demand for cellulose specialties and absorbent material products and continued improvement in absorbent material pricing. This is partially offset by higher manufacturing costs during the quarter.

On page 13, you see net selling prices for two performance fibers product lines. Cellulose specialties prices increased $60 a ton, or 4% from the previous quarter due to 2010 price increases and mix. Compared to the same quarter prior year, quarter one prices down $29 a ton or 2%. However, as Hans stated, this is due to the removal of our cost surcharge late last year.

Excluding this surcharge, prices up $66 a ton or 5%. Absorbent material prices, which consist principally of fluff pulp increased from previous quarter $35 a ton or 6% as market conditions continue to improve from late last year. However, prices decreased $42 a ton or 6% compared to the same quarter in the prior year.

Moving on to page 14 and looking at volumes, our first quarter cellulose specialties sales volume was slightly favorable compared to the same quarter in the prior year and absorbent material volume of 61,000 tons was slightly unfavorable from the same quarter in the prior year. These volume shifts were largely due to mix optimization to demands.

During the last teleconference, I mentioned the abnormally wet weather could affect fiber costs particularly hardwoods in the first half of the year. Indeed, we did experience roughly $7 million of higher wood costs in the first quarter compared to the fourth quarter of 2009. However, manufacturing costs are expected to moderate in the second half of the year.

As we look into the second quarter and the balance of the year, we see continued solid demand for our cellulose specialty products. Global demand for our fluff pulp continues to be strong and based upon previously announced price increases, we expect absorbent material prices to be significantly higher in the second quarter. In summary, performance fibers is off to a great start with strong market demand and operational performance and we are anticipating another record year of financial results.

Now let me turn it back over to Hans.

Hans Vander Noort

Thanks, Jack. Now I'd like to update some of the key statistics to assist you in refining your 2010 model. First of all, we expect depreciation, depletion and amortization of $41 million and the non cash basis of the land sold of $9 million, or approximately $150 million in total. This is $6 million below our prior guidance, that's driven primarily by lower depletion in the real estate sales due to mix.

Capital expenditures, excluding acquisitions are expected to total about $140 million versus $92 million in 2009 and a more normalized run rate of $100 million to$110 million. This significant increase will primarily occur in performance fibers on cost reduction and efficiency projects as well as a couple of additional environmental projects.

Expected interest expense, we expect that to total about $51 million for the year. Our pension expense for the year should be about $11 million. Also, we expect to contribute a significant amount to our pension plans and potentially up to the $40 million to $50 million range.

Finally, our effective tax rate is expected to range between 16% to 18%, which is below our prior guidance. This decrease reflects our expectations of an increase in the mix of income from our REIT businesses. When you put all of these elements together with the AFMC refund, we anticipate very strong cash flow despite continuing to defer the harvest of our higher value saw timber. We expect adjusted EBITDA to be above 2009. CAD should be well above 2009 and in the $330 million to $350 million range reflecting the AFMC refund, net of the higher CapEx and pension contributions.

Finally, we expect pro forma EPS now be between $1.80 and $2 per share, excluding the gain on the New Zealand joint-venture transaction. As was the case last year, we expect second quarter EPS to be the lowest quarter of the year due to plant related shutdown, timing of real estate sales and shift of timber volume to the first quarter as previously mentioned. Accordingly, we expect second quarter EPS to be comparable to last quarter second quarter.

I’ll turn it back to Lee now for some summary comments.

Lee Thomas

As you heard, we see clear signs of fundamental strengthening in our markets and increasing our guidance for the full year. We are in optimistic with the economic recovery is broadening. The housing market is gradually improving. Although, we believe it remaining fragile and will take several years to fully recover. We see tremendous value in our timberland based on improving near-term markets and fundamentals. The relatively modest decline of around 15% in timberland prices in the downturn provides evidence that investors have looked through this cyclical downturn, continue to value timberland for its unique attributes.

Our timberland portfolio is further enhanced by the value we capture through rural conservation and development sales. In addition to our extensive timberland and HBU real estate properties, we remain the global leader in cellulose specialties products. We anticipate continued demand for these products and for absorbent materials, contributing to another record year of performance fibers.

We are investing in high return projects to assure reliability and cost competitiveness of our mills and meeting our customer's exact needs. Our unique business mix, our conservative balance sheet and substantial liquidity provide the operating flexibility to remain through any remaining economic challenges, while taking advantage of attracting opportunities for growth.

We are actively seeking acquisitions that meet our strategic and financial criteria, while remaining discipline sellers of non-strategic timberland. We are committed to our strategy of providing attractive dividend through strong operating cash flows and creating long-term value for our shareholders by growing our timberland holdings over time.

With that, I'd like to close the formal part of the presentation and turn the call back to the operator for questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Roxland from Banc of America/Merrill Lynch. Your line is open.

Mike Roxland – Banc of America/Merrill Lynch

Thanks very much. Congrats guys, on a really good quarter.

Lee Thomas

Thank you, Mike.

Mike Roxland – Banc of America/Merrill Lynch

Just a couple of quick questions for you. Any additional color with respect to log debt and how quickly you think inventories are being rebuilt there?

Lee Thomas

Our sense is particularly as we hear from our own, look at our own saw mills as well as here from the market place is that they have built up fairly quickly. We feel like that most of the inventories are in fairly good shape as far as saw mills are concerned, particularly in the east. The one thing I would say is we continue to see good demand as far as export off the west coast and out of New Zealand. But overall, I think we're beginning to see a leveling off as far as pricing is concerned.

Mike Roxland – Banc of America/Merrill Lynch

Got you. And then just on timberland itself, can you talk about what you are seeing with respect to institutional buyers, most specifically the CIMOs, I know you mentioned in your call that CIMOs are, you heard some chatter they are raising funds, can you provide any more color on the type money, on the amount of money that’s being raised and whether it is being invested?

Lee Thomas

We’ve heard of reports of additional money that being invested through TIMOs and, Charlie, you might want to comment on a couple of things that you have heard reported.

Charlie Margiotta

Yeah. I agree. We certainly have heard some specific names and some specific amounts, which are relatively large amounts and we are getting calls from TIMOs expressing interest in buying, which is a shift from, say 12 months ago. So we believe the capital is out there and we believe there sort of in a buying mode.

Mike Roxland – Banc of America/Merrill Lynch

Got you. One quick question, on performance fibers business, either Lee or Jack, there seems to be some additional competitors entering the market and a really challenging Rayonier's leadership. I know you mentioned that the Kamiah Mill [ph] but it seems more recently that you have the first sawmill which is going to be converted into specialty pulp, you have the Chinese investment in new cells, Port Alice, British Columbia mill which is going to focus on specialty assistant, so I want to grab your thoughts on those projects and the potential threats they pose to your performance fibers business.

Lee Thomas

I think a lot of that capacity at least as we see it is probably geared more toward the commodity Viscose market more than it is the acetate market that we participate so actively in. Additionally, as we've talked all along in the specialty market, it is a business that really values long-term relationships between customers and suppliers. So at least in this point in time we have not seen an impact as far as those kinds of announcements are concerned. But, Jack, do you have anything, you want to add to that?

Jack Kriesel

The only thing I will add is the overall commodity Viscose market continues to be strong and see that this continuing this year and ongoing. So, with that we see these competitors starting at different mills or converting mills, they will continue their focus in that commodity Viscose market.

Mike Roxland – Banc of America/Merrill Lynch

Great. Thanks very much. Good luck in the quarter.

Jack Kriesel

Thank you.

Operator

Your next question comes from Steven Chercover of D.A. Davidson. Your line is open.

Steven Chercover – D.A. Davidson

Thank you. Good morning. My first question, your prior guidance if I recall was going to be better than 150 or did you have something more specific?

Lee Thomas

We were more specific, Steve, we had said, basically up 10-20% from '09, which effectively would translate to a $1.65 to a $1.08

Steven Chercover – D.A. Davidson

Thank you, for that. Because I just wanted to engage how big of a bump this was. And then with respect to the CapEx that you are doing on the specialty cellulose business, can you give us a sense of the kind of returns you are going to get from that, either cost per ton or payback period?

Lee Thomas

Well, there are really two types of projects. We've got good return projects. I'll let Jack comment on that. We also have environmental projects and some of those environmental projects are very low returns, but a part of a long-term upgrade that we are doing, particularly at our Jessup mill related to environmental commitments that we've made there. But Jack, you want to give specifics?

Jack Kriesel

On the return projects, most of the focus has been in the boiler areas at both facilities. And the types of returns we look at on our projects are 20 plus percentage.

Steven Chercover – D.A. Davidson

Will they have any impact on volume at the end of the day?

Jack Kriesel

Ultimately, you see some incremental debottlenecking, so there is some gradual increase in production but no significant step changes.

Steven Chercover – D.A. Davidson

Thank you. Final question from me would be, when it comes to buying timber you indicated you're actively looking, what's your snack bracket, $100 million transactions, couple $100 million? Can you give us a sense?

Lee Thomas

No, not really. We're in the market and we're looking at – and actively looking at as we have over the last year, of a variety of tracks of land. Some are relatively small, some are larger than that. Frankly there is not a lot of timber on the market, but we're actively looking at timber that could range from 10,000-acres up to timber that could range to 75,000-acres. So it's a broad range and we take a look at a number of tracks over time.

Steven Chercover – D.A. Davidson

Thank you, Lee.

Operator

Your next question comes from Christopher Chun, Deutsche Bank. Your line is open.

Christopher Chun – Deutsche Bank

Yeah. Thanks. Good morning, guys. I just wanted to ask a few questions on performance fibers, is it possible? First of all on the cost side, what's going on with caustic soda, these days?

Lee Thomas

Actually, it's back to what I would call historical trends. We've seen a little increase this quarter over last quarter, I think, Jack. Haven't we?

Jack Kriesel

If you look at market pricing as recorded from (inaudible), the prices jump from $270 to $360 quarter-over-quarter, but really in line with historical levels. Certainly not at the levels we saw a year or so back when it was upwards of $1,000 a short time.

Christopher Chun – Deutsche Bank

And did you have visibility what it's going to be like in the second half?

Jack Kriesel

The expectation is that it's going to be flat compared to second quarter, here.

Christopher Chun – Deutsche Bank

Okay. And then you've already talked about things moderating on the fiber side. Are there any other cost elements that would represent a significant change year over year?

Jack Kriesel

I think overall, the big driver certainly has been fiber in Q1 and Q2 and for the most part that's what makes up the majority of the change.

Lee Thomas

We have seen a little bit of an uptick in freight year-over-year, somewhere in the range of $10 or so a ton.

Christopher Chun – Deutsche Bank

Okay. And then, what about in terms of volume on any of the specialties or the plus side, how do you expect those to trend compared to last year?

Jack Kriesel

No real significant change in terms of volume year-over-year.

Christopher Chun – Deutsche Bank

Okay. And then do you have good visibility into what specialty prices are going to be this year compare to last year?

Jack Kriesel

Our specialty pulp prices are set on an annual basis. And we had roughly a 3% increase in our specialty pulp price at the beginning of the year. Going into 2011, we expect to see significant improvements.

Christopher Chun – Deutsche Bank

Okay. Very good. And turning to the real estate side, how do you guys expect the volume, the acreage and mix of land sold to compare to last year?

Lee Thomas

Non strategic acres will be down year-over-year and rural acres are likely to be up year-over-year.

Christopher Chun – Deutsche Bank

Okay. So balancing those two, would you say it's going to be roughly flat or will one change or dominate over the other?

Charlie Margiotta

Net-net. I mean we still have eight months to go. I would think net-net, our acres might be down a bit.

Lee Thomas

They should be down 10%.

Charlie Margiotta

Yes. Net-net acres.

Christopher Chun – Deutsche Bank

Okay. And then on the acquisition side, we do have a sense it's going to be any harder to get deals done in light of what you mentioned earlier about TIMOs being increasingly interested in buying as well.

Lee Thomas

Chris. We haven't seen a lot of timber coming on the market. And so that has been a part of what I consider a challenge. And now I think there is a very good likelihood that it's going to be more competitive, at least based on what we are hearing in reported of money that's available to be invested. And so when you put all that together, yeah, I think it's going to continue to be a challenging market as far as acquisitions are concerned. On the other hand, I think we are well positioned to be a buyer. So I think that we're going to be in the market and we're going to be competitive in the market.

Christopher Chun – Deutsche Bank

Okay. Thanks for your help, guys

Lee Thomas

Sure.

Operator

Your next question from James Amine [ph] of Credit Suisse. Your line is open.

James Amine – Credit Suisse

Good morning, gentleman. Just a quick question about puff pricing out there, remind us again about pricing increase announced in the market?

Jack Kriesel

The latest increase that we've seen from May 1st, that's been announced, is roughly about $40 a ton bringing puff prices up to 1,010, 1,020 depending on the region of the world.

James Amine – Credit Suisse

And that's effective for April?

Jack Kriesel

May 1st.

James Amine – Credit Suisse

And then, given with the pricing announcements in the market, what would happen to your realizations and how long does specialty chemical usually lag?

Jack Kriesel

Not specialty chemical, specialty pulp, sorry.

James Amine – Credit Suisse

Yeah.

Lee Thomas

Okay. The specialty pulp really doesn't lag. Its pricing, as Jack indicated is set on an annual basis. So those price improvements that Jack talked about, I think 3% are effective this year. And we would anticipate – well we would anticipate that whole for the year. As far as fluff is concerned, there is often a lag effect there depending on the contract that we've got with each individual customer.

Hans Vanden Noort

About two to three months, Jack?

Jack Kriesel

Right. Two to three months.

James Amine – Credit Suisse

You would expect to see the full implementation by the third quarter?

Jack Kriesel

Correct.

Lee Thomas

Correct.

James Amine – Credit Suisse

Thank you.

Operator

Your next question comes from Peter Ruschmeier, Barclays Capital. Your line is open.

Peter Ruschmeier – Barclays Capital

Thank you and good morning.

Lee Thomas

Okay. Peter.

Peter Ruschmeier – Barclays Capital

Just as a follow-up to that previous question considering the lag effect of fluff pulp prices. If the fluff pulp prices fully implemented to '10, '20 realization level, what does that imply about your realized pulp prices in the third quarter relative to what you did in the first quarter?

Lee Thomas

I think what you achieve roughly a 10 to 15% change in overall pricing from Q1 to Q2, Q3. We don't know what Q3 really will be in terms of nominal, but in terms of that lag effect that's what you would see?

Hans Vanden Noort

15%.

Peter Ruschmeier – Barclays Capital

Okay. And if I heard you correctly, Jack, I think you said specialty cellulose, obviously it's fixed for this year. But I think you said potentially significant improvement in '11. I'm curious if you could elaborate on that and what gives you confidence at this early juncture about that. And what would be driving that?

Lee Thomas

Peter, the confidence that you hear from Jack is based on demand level, we see our in the marketplace today and it looks like it's good sustainable demand. I think that in terms of further guidance and what Jack gave you, we probably should wait until later in the year.

Peter Ruschmeier – Barclays Capital

Okay. That's helpful. And on the non-strategic land sales, I guess almost 24,000 acres. How does those acres can you help us understand qualitatively how they compare to the quality of what you have on the ground?

Lee Thomas

Charlie?

Charlie Margiotta

Yeah. We go through a process, we layout the attributes of non-strategic, which is generally lower than average quality land maybe a higher percentage of wetlands, whatever. We go through that. And so what we sell is clearly less than average, as it relates to our core timberland. Obviously has to be in a sellable package. So I mean it's hard to quantify it exactly but clearly below average.

Lee Thomas

A couple of other criteria, I think we also use is location...

Jack Kriesel

Location.

Lee Thomas

And whether it's consolidated or fragmented.

Jack Kriesel

Right. What sometimes happens is what we like to have happen is non-strategic to us becomes very strategic to somebody else. And we can achieve a really good price for something in our basket just doesn't create that kind of value.

Peter Ruschmeier – Barclays Capital

Okay. And just lastly and I'll turn it over, Lee, can you remind us what your dividend policy has been over time, it certainly looks like the high class problem of rising CAD and declining debt level. And I guess you would have to weigh this against opportunities to grow through against acquisition. But what has been your historic policy of dividend versus CAD?

Lee Thomas

Well, that weighing of utilization of cash, as you indicated, is an important factor that our board takes into account. However, having said that, they view an attractive dividend as an important part of the value proposition for our shareholders. They look at the dividend and typically they look at it closely as we go through our long range planning process, which we do each year looking at a five year outlook.

And they do that because it's not only that cash flows of today but it's anticipating the future that's an important part of setting that dividend. And clearly, they'll take a hard look at it this year as they do each year. And typically, we do that in the July, October timeframe.

Peter Ruschmeier – Barclays Capital

Very good. Great quarter. Thanks, guys.

Lee Thomas

Thank you.

Operator

(Operator Instructions) Your next question from Mark Masters of JP Morgan. Your line is open.

Mark Masters – JP Morgan

All right. Thank you. Good morning, guys.

Lee Thomas

Good morning, Mark.

Mark Masters – JP Morgan

First question, I was wondering if you could get more color on the increased export demand in 1Q and what is driving that strength and maybe what percent of your log volumes are in the export market?

Lee Thomas

Paul, why don't you take that? Because it's not only have the northwest but it's what we've seen out of New Zealand as well.

Paul Boynton

Yeah. Right. Mark, there is a couple of different factors there. Mainly the export demand is being driven out of Asia and particularly China. And it's going on – we see the product mainly into concrete formation type of applications in China. And so the Chinese overall domestic activity is driving a lot of that, but it's also coupled by a decline in the amount of volume available out of Russia.

And what we've seen and what we estimate is that perhaps is that a 50% level of flow of Russian logs coming into China versus kind of a historical level if you looking back a few years. So those combination of things kind of a strong driver in the Asian and particularly Chinese economy and kind of a lack of flow out of Russia is picking up overall demand into that region not only out of the northwest including Canada, U.S. But also out of other places such as our New Zealand operations.

Mark Masters – JP Morgan

Okay. That's helpful. Thanks. And just in wood products, what is your take on the rally in the wood products pricing recently? Do you think it's largely been supply driven or that you seen pickup in demand that would sustain current prices?

Lee Thomas

Well, I think it was primarily on the supply side. And I think it had to do with a couple of things. And it had to do with wet weather and availability of log inventory and log decks and how quickly saw mills were able to recover. I also think a number of saw mills, as you know, had either taken downtime had laid off shifts, had closed all together and I think they were reluctant to bring significant capacity back online, because they didn't really see this as a sustainable recovery.

But I would say, we were going into a typical spring building season. So we did see some improvement as far as demand. We always do that part of the year. And I think a number of customers had really depleted inventory and very low on inventory. So as a result, they were pushing to put product back into their stores.

One final factor, I'd say is trucking, particularly in the east, was very tight to move product. And that had some impact just from a supply point of view and the ready availability of supply from customers. So I think it put all of that together and you had a rapid run up in pricing for lumber.

But frankly, I think that was not based on some strong underlying strength of demand. We are gradually seeing improvement in-housing, but still at a very, very low level, as you know. So our view is lumber pricing has probably plateaued, is softening. We don't really see it strengthening on a sustainable basis until we see that fundamental housing recovery that we keep looking for.

Mark Masters – JP Morgan

Okay. Have you seen your customers? I mean ramp-up capacity given improvement in prices. Are they kind of still running very lean at this point?

Lee Thomas

As far as customers are concerned who buying lumber.

Mark Masters – JP Morgan

Yeah.

Lee Thomas

I think they've built their inventories up to a good level now. As far as demand for our timber, we continue to see good demand for our timber, but particularly demand for pulp wood. The pulp market has been continued to be very strong. And so the pulp mills, who had a difficult time getting wood in the winter weather have continued to put strong demand for pulp wood and rebuilt a lot of their chip inventories.

So and then the sawmills did put additional demand. We saw that particularly, as Paul indicated, out west in addition to export, we saw increased demand for saw timber in the west and saw some increases as far as the east is concerned as well. But my sense is a lot of the mills have gotten their log decks back in fairly good shape. I think the pricing on timber, clearly moved up well. Still well below historical highs, but we don't think it's going to drop back to where it was last year.

Mark Masters – JP Morgan

Okay. That's helpful. And just lastly, did you get any benefit from this program in 1Q and gives your outlook for 2010 include any earnings from that program?

Lee Thomas

We got very little benefit.

Jack Kriesel

We got maybe $300,000 or $400,000, so...

Mark Masters – JP Morgan

All right.

Lee Thomas

Yeah. And we're not planning on any additional benefit in any of our estimates for the year.

Mark Masters – JP Morgan

Okay. Great. Thank you, guys.

Lee Thomas

You bet.

Operator

At this time, there are no further questions. I will now turn the call back to Mr. Vanden Noort for closing comments.

Hans Vanden Noort

We'd like to thank everybody for your participation and please contact Carl Krause with any questions, thanks a lot.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rayonier Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts