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Rayonier, Inc. (NYSE:RYN)

Q2 2011 Earnings Call

July 28, 2011 2:00 pm ET

Executives

Hans E. vanden Noort – Senior Vice President and Chief Financial Officer

Lee M. Thomas – Chairman and Chief Executive Officer

Paul G. Boynton – President and Chief Operating Officer

Jack M. Kriesel – Senior Vice President-Performance Fibers

Lynn Wilson – Vice President-Forest Resources

Charles H. Hood – Vice President-Public Affairs

Analysts

Chip Dillon – Vertical Research Partners

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Steve Chercover – D. A. Davidson & Co.

Mark Wilde – Deutsche Bank

Mark Weintraub – Buckingham Research Group, Inc.

Daniel Cooney – Keefe, Bruyette & Woods, Inc.

Daniel Rohr – Morningstar Research

Peter Ruschmeier – Barclays Capital, Inc.

Collin Mings – Raymond James & Associates

Michael Roxland – Bank of America/Merrill Lynch

Operator

Welcome and thank you for joining Rayonier’s Second Quarter 2011 Teleconference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr. Hans vanden Noort, CFO. Sir, you may begin.

Hans E. vanden Noort

Thank you and good afternoon. Welcome to Rayonier’s investor teleconference covering the second 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 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 and CEO. Lee?

Lee M. Thomas

Thanks, Hans. I’ll make a few overall comments before turning it back over to Hans to review our financial results. Then I’ll ask Paul Boynton, our President and Chief Operating Officer to review the results of each business. When we finish our prepared remarks, we’ll invite Lynn Wilson, our Vice President of U.S. Forest Resources, Charlie Margiotta, Senior Vice President of Real Estate and Jack Kriesel, our Senior Vice President of Performance Fibers to join us in responding to your questions.

We’ve taken significant steps since our last call to execute our strategy of creating attractive returns for shareholders through the generation of strong cash flows, growing our dividend and investing to increase the value of our businesses.

We continue to execute well this quarter, reporting earnings per share of $0.67, a 40% increase over the prior year period with strong cash flow from operations. These results reflect actions we’ve taken in each of our businesses. We capitalized on strong export pricing in our coastal Washington and New Zealand timberlands, adjusting harvest plans to meet increased Asian log demand. In Performance Fibers, we continue to work closely with our cellulose specialty customers to meet their demand for our high-purity products.

Our balanced business mix allows us to manage for the long term. With the slow pace of the housing recovery, we’ve maintained pricing discipline in our land sales program and continue to differ harvest of more valuable saw logs in our Atlantic and Gulf State regions. The actions our businesses are taking not only drove results this quarter, they are also driving performance for the second half of the year, leading us to reaffirm our guidance for the year.

Consistent with our stated capital allocation strategy, we increased our dividend 11%, the second increase in nine months and announced a 3-for-2 stock split at an annualized rate of $2.40 a share on a pre-split basis. Our dividend is now 20% higher than a year ago. Our confidence in our future cash flows, ample liquidity and strong balance sheet were all key considerations in the board’s recent decision to increase the dividend.

Additionally, in the second quarter, the board approved the conversion of the absorbent materials production line at our Jesup, Georgia mill to cellulose specialties adding 190,000 tons in mid-2013 to our current sold out capacity of 485,000 tons. This $300 million investment is a critical part of our strategy to remain the global leader in this high-value segment and is expected to create attractive returns and strong cash flow.

And finally as part of our strategy to grow and upgrade our Timberland portfolio, we have acquired or have contracts pending for nearly 65,000 acres of attractive timberlands, including 50,000 acres of timberlands closed in July.

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

Hans E. vanden Noort

Thanks, Lee. Let’s start on page three with the overall financial highlights. As Lee noted, we had a strong second quarter with sales of $357 million, operating income of $79 million and net income of $56 million, or $0.67 per share on a pre-split basis. We’ve included a pro forma section here to show our EPS on a post-split basis as well, which is $0.45 per share.

We had no special items in the second quarter, or on a year-to-date basis. However, the first quarter of 2010 included a $12 million gain, or $0.14 per share from the sale of a portion of our New Zealand joint venture. This item is excluded to arrive at the year-to-date amounts used for the comparisons throughout this call.

On the bottom of page three, we provided an outline of cash resources and liquidity. Our year-to-date cash flow was strong with adjusted EBITDA up $232 million and cash available for distribution of $134 million. Note that last year’s cash available for distribution of $303 million included receipt of $189 million from the alternative fuel mixture credit.

Our debt-to-capital ratio were below year-end levels and we ended the quarter with approximately $314 million in cash. On a net debt basis, we had a very manageable $383 million.

Let’s now run through the variance analysis. On page four, we’ve prepared a sequential quarterly variance analysis. In Forest Resources, operating income was comparable to the first quarter as stronger pricing and volume in the Northern region was offset by $3 million of losses due to forest fires in our Atlantic and Gulf State regions. Real estate income declined slightly due primarily to the timing of rural land sales.

Moving to Performance Fibers, operating income was $5 million below last quarter. Stronger cellulose specialties pricing, due primarily to a very strong product mix, was offset by lower sales volumes caused by the timing of customer orders. Costs also increased, reflecting higher chemical and maintenance expenditures as we completed the annual shutdown of our Jesup Mill.

Let’s move now to page five and look at the year-over-year variances. The second quarter and year-to-date variances generally have similar drivers. Our Forest Resources results reflects strengthening prices and volumes in the Northwest driven by export demand offset by lower volumes in the Atlantic and Gulf State regions and the fire losses.

The year-to-date real estate variance reflects our planned reduction of non-strategic timberland acres sold, partially offset by higher rural HBU pricing. In Performance Fibers, both cellulose specialties and absorbent materials prices strengthened, somewhat offset by higher input and transportation cost. Finally, wood product results were lower, reflecting weaker lumber prices.

Turning now to page six. This is where we reconcile from the cash provided by operating activities, which is a GAAP measure to our non-GAAP metric of cash available for distribution. As you can see, our cash flow is quite strong with CAD of $134 million, well above our dividend requirement.

With that, let me turn the conference over to Paul Boynton to cover markets and operations.

Paul G. Boynton

Thanks, Hans. Good afternoon, and let’s first cover Forest Resources, and I’ll start with page eight in the Northern region, which is primarily Washington State. Strong export demand continued throughout the quarter primarily from China. We sold 35% of Washington’s volume into the export market and that’s up from 32% in Q1. And even though inventories at China ports and elsewhere in the pipeline are currently high, majority of our third quarter volume has blocked in prices just slightly below the second quarter and we expect to double our 2010 export volume in 2011.

As a result of increased demand, prices for delivered logs rose 12% from the first quarter levels and were up 28% over the prior year period. Overall, we expect delivered log pricing for the full year to be approximately 25% above 2010 levels and 2011 volume to be 15% to 20% above 2010.

In the Atlantic and Gulf regions on page nine, pine stumpage prices decreased from the first quarter levels due to a higher pulpwood spinning harvest as well as the abundance of salvage wood from the recent fires. However, prices were comparable to the second quarter of 2010.

Harvest volumes in the first half of 2011 were significantly lower than in 2010 when we accelerated sales to take advantage of the tight market due to weather related supply constraints.

For the full year 2011, pine harvest volume and price are projected to be slightly below 2010, primarily as a result of salvage operations related to the fires. Overall, Forest Resources’ operating income should be substantially above 2010.

Now, let’s turn to Real Estate. And as expected, the real estate operating income of $5 million in the second quarter was relatively low as 2011 results will be more second half weighted. If you look on page 10, we showed rural and development land sales activity. In our rural markets, demand is steady and we’re achieving solid per acre prices. Rural land sales of approximately 4,000 acres were spread relatively evenly throughout our ownership area. We continued to project rural land sales of 15,000 to 20,000 acres for the year.

Page 11 details per acre prices. Rural prices increased 9% to $2,470 per acre compared to first quarter 2011, primarily due to higher mix of sales in Texas and Florida where unit prices are the highest.

Page 12 highlights non-strategic timberland sales. We expect 2011 sales to be between 10,000 and 15,000 acres and obviously weighted to the second half of this year. Overall, 2011 operating income will be below 2010 as we substantially reduce our non-strategic timberland sales and maintain pricing disciplines in our land sales program.

Now moving to Performance Fibers, we continue to generate strong operating results in the second quarter driven primarily by the increased cellulose specialty prices. On page 13, you see net selling prices for our (inaudible) fibers product line. Cellulose specialty prices increased $105 a ton or 7% from the previous quarter due primarily to improved product mix and first-quarter prices being somewhat muted by 2010 price of shipment that were in transit at year end.

As discussed in our last call, our year-over-year cellulose specialty price increase should average 12% to 14% with pricing in the second half being somewhat below second quarter levels again due to mix.

Absorbent materials prices, which consist principally of fluff pulp decreased $25 or 3% from the previous quarter. However, prices increased $111 a ton or 15% compared to the same quarter in the prior year.

Now let’s move on to page 14 and look at volume. Our second quarter cellulose specialty sales volumes were comparable to the second quarter 2010 and year-to-date sales volumes were 10,000 tons more than the prior year, reflecting the timing of customer shipments and a strong customer demand. Year-to-date absorbent materials volumes are approximately 4,000 tons lower than last year as we maximized production of cellulose specialties. For the full year, we project cellulose specialties and absorbent materials volumes to be somewhat above 2010 levels.

As we look at the balance of the year, we continue to see very strong demand for our cellulose specialty products. However, the absorbent materials market has started to weaken. Production costs, primarily commodity chemicals and energy, have stabilized at levels substantially above 2010. We expect total year cost to increase approximately 6%. Even with these cost increases, we are anticipating another record year of financial results for Performance Fibers.

And with that, let me turn it back over to Hans.

Hans E. vanden Noort

Thanks, Paul. Now I’d like to update some key statistics to assist you in refining your model for Rayonier. We expect depreciation, depletion and amortization of $136 million and a non-cash cost basis of land sold is about $5 million or approximately $141 million in total, which is consistent with our prior guidance.

Capital expenditures, excluding strategic investments for Timberland acquisitions and the C-mill conversion are expected to total about $142 million, slightly below our prior guidance of $145 million. We expect 2011 spending on the C-mill conversion to range between $45 million and $50 million. We expect interest expense, net of interest income to total about $50 million.

Finally, our effective tax rate guidance remains in the range between 20% and 22% excluding special items. When you put all these elements together with the strength of our Performance Fibers and Forest Resources businesses, we anticipate very strong cash flow and are reaffirming our previous guidance for the year.

We still expect adjusted EBITDA to range from $480 million to $510 million. Cash available for distribution is expected in the $285 million to $310 million range. And finally, we expect EPS to be between $2.85 and $3.10 per share on a pre-split basis or $1.90 to $2.07 on a post-split basis. Note that this EPS guidance excludes a $16 million tax benefit we will record in the third quarter related to reversing tax reserves associated with the alternative field mixture credit.

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

Lee M. Thomas

As you’ve heard from Paul and Hans, our actions to create value continue to drive strong results. With our stocks out performance this year, we believe that our strategy of providing an attractive dividends while investing to grow future cash flows of our businesses is paying off to shareholders.

We’ve increased our dividend and are actively evaluating additional opportunities to expand our Timberland Holdings, our top priority for investing strategic capital. And as the world’s leading supplier of cellulose specialties products, we’re investing to meet our customers’ future volume needs and enhance the value of that business.

Our unique business mix, strong balance sheet, and substantial liquidity enable us to take advantage of these opportunities for growth. In short, we remain confident on our ability of our businesses to drive value creation going forward. By the way, I’d like to remind you that we will be hosting an Investor Day at our Performance Fibers’ mill in Jesup, Georgia on Thursday, September the 22. We will be contacting you soon with more information.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from Chip Dillon with Vertical Research Partners. Your line is open.

Chip Dillon – Vertical Research Partners

Yes, thank you very much, good afternoon. Could you just quickly repeat what was the tax benefit that’s left from the black liquor that you’re going to recognize in the third quarter, and is that the last of that?

Hans E. vanden Noort

The tax benefit, Chip, it’s $16 million and this relates back to ‘09 when we first established the credit. There were some issue at the time over taxability and so we established this reserve related to the taxability. And we’ve just gone through the audit, received the final report, so that is the reserve that we will now be reversing in the third quarter. That’s different from the exchange of the alternative credit for the cellulosic biofuel producer credit, which was the $4 million benefit that we recognized in the second quarter.

Chip Dillon – Vertical Research Partners

Got you. And I would imagine there is more to go on that exchange that you did, is that correct? And is there a rough estimate as to what the value of that is?

Hans E. vanden Noort

Well, you’re correct, there is more to go. What we’ve done is just looked at it for 2011 and so we’ve come up with this calculation to maximize the benefit for 2011. You are available basically to make the selection all the way through the first quarter of 2013 that can actually run through 2015. But we’re going to do, basically take it more of a year-by-year basis Chip. So, we think we’re pretty well set for the year. We’ll probably take a look in early 2012 on the various things that we have going on at that time as well as the refund opportunities then and make a decision then whether we do another exchange or not.

Chip Dillon – Vertical Research Partners

Got you. And then just as a quick follow up. Lee you mentioned that it sounds like you’re stepping up a little bit in terms of being an acquirer of Timberland. And I was wondering if you could tell me how that might be broken down versus say within the U.S. versus outside the U.S? And is it fair to say that I guess the values you’re seeing outside the U.S. might carry higher near-term cash returns, but that the – I guess you would see the opportunity in the U.S. to be more down the road given that log prices outside the Northwest are pretty low?

Lee M. Thomas

Chip, first, the acquisitions that we have done have been in the U.S. primarily, although we have done through Matariki in our venture in New Zealand, an acquisition there and potentially we’ll do another that we’re working on now. So we’ve looked at both places.

As far as the second question is concerned, there really is a range in these properties. I think the 65,000 acres I’ve talked about is across five or six different tracks that we’ve acquired, some of which had strong stocking and actually would be available soon. Others were relatively young and would be down the road. So it’s a range, and the properties really range from kind of across the southeast. So it’s not easy to generalize on them. I’d say as far as all of them are concerned, we were pleased with them. We think we’ll get a good return on them, but they are all quite different.

Chip Dillon – Vertical Research Partners

Got you. And at least you haven’t closed on these yet, have you?

Lee M. Thomas

Some of them we’ve closed on, yes. As matter of fact, of the 65,000, I think we closed on all of those.

Chip Dillon – Vertical Research Partners

Got you. Thank you.

Operator

The next question comes from Joshua Barber with Stifel Nicolaus. Your line is open.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Hi, good afternoon. I was wondering if you could talk a little bit more about the specialty prices. It looks like you got to almost $1,700 a ton, which based on your prior guidance would mean that prices for the second half would be about 5% or 6% lower than that. And can you talk a little bit about the margins in this quarter and where you expect them to go? They were probably a little lower than, I think, I would have expected given the very high selling prices, was that due more to maintenance downtime and the fluff pulp business or is that a good proxy to look at for the second half of the year especially if prices are lower?

Hans E. vanden Noort

Josh, let me let Jack respond to that. But remember as far as that second quarter pricing and then looking at the second half, some of that has to do with the mix in the second quarter. We had a very strong mix in the second quarter that will probably be different from the second half. But, Jack, do you want to talk about pricing and margins and...?

Jack M. Kriesel

Well, just, I guess, reemphasizing that. As you know Josh, we have a wide variety of products that demand different pricing, so the timing of that mix really led to the second quarter pricing. And as stated earlier, we’ll see that dampen out for the balance of the year and then we could have 12% to 14% that we’ve been given guidance to.

Hans E. vanden Noort

And I think on the cost side of things Jack, I mean we have (inaudible).

Jack M. Kriesel

On the cost side, we’ve seen some increase in our chemicals and energy pricing throughout the year continue in the second quarter. Particularly when we look at on the chemical side, cost continues to go up and we’ve also seen fuel oil, our No. 6 fuel oil very significantly higher in the second quarter.

Lee M. Thomas

And the other point that you made Josh is correct, we did have the maintenance shutdown at Jesup mill, which caused a good bit of cost as far maintenance is concerned during the second quarter.

Hans E. vanden Noort

Yeah, if you look at, Josh, our cost per ton in the second quarter was a bit above the first quarter. And as Lee mentioned, that’s mainly shutdown related there. So the margins overall for the quarter were a little stronger than first quarter as that pricing mix helps overcome some of these costs, but we expect those to come – both the price and cost per ton to come down in the back half of the year.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Okay, that’s very helpful. Paul, you’ve made some comments before about pricing for the third quarter mostly being locked in out of Washington States, but for the export log pricing still remaining pretty strong, especially given that there has been a recent backup to China. What would you say the spot market price difference is from that, if any?

Paul G. Boynton

Let me – Josh, good question, let me turn that over to Lynn on the spot price. We do see the continued strength, and again, and mainly that’s because how we structured our contract, our business. Most of that, as we comment last time, has been sold already and we’re just moving the volume out. So we’re able to come and lock those prices third quarter up higher than maybe others. But on the spot markets, Lynn, what do you think of that?

Lynn Wilson

Well, right now, what we’ve seen is that in second quarter, we achieved pricing about 12% higher than first quarter. And what we are looking at in third quarter just because of the seasonal nature of summer logging, those prices have settled out closer to that first quarter pricing in third quarter. And really that spot market is being driven by still that strong China pull, even though there is additional volume on the market and the stronger domestic market as they sell lumber for Chinese exports.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Okay.

Lee M. Thomas

Yeah, I just got a little more flavor on that. We do think we’ll see the kind of strengthening back that we saw last year. We’ve seen the kind of a seasonal slowdown. Again, and part of it is kind of increased activity out of Russia, seasonal slowdown in China. But our anticipation is that we’ll see (inaudible) fourth quarter and we hope to see those prices stabilize a bit.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Got it. That’s helpful. One last question. You’d mentioned the Timberland acquisitions, would there be some details I guess forthcoming in the next month as those assets close about locations and price breakers, stocking levels and such similar to what Chip was asking before?

Lee M. Thomas

Yeah. I think we can provide more detail as we get all that together. Probably at the Investor Day, we will give a good bit of information about that. I would say overall when I look across all of those acres, the average price would be about $1,600 an acre for those in the U.S.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

Okay. And last question, I apologize, but is most of that going to be funded out of cash on hand or debt or some combination thereof?

Hans E. vanden Noort

Most of that will be funded with cash, Josh.

Joshua Barber – Stifel, Nicolaus & Co., Inc.

All right. Thanks very much guys.

Operator

The next question comes from Steve Chercover with D.A. Davidson. Your line is open.

Steve Chercover – D. A. Davidson & Co.

Thank you. I won’t keep asking about what you just purchased, but I did hear that you sold about 6,000 acres in Washington for $4,000 to one of the other REITs that’s not in Spokane or Seattle. So could you confirm that? And is there any HBU in that value if that’s accurate or are they particularly well stocked lands?

Lee M. Thomas

Charlie, you want to take that?

Charles H. Hood

Sure. Well, if you heard that, we did have a sale and it was in that range. I can’t disclose who the buyer was. We don’t intend to do that. It was an excellent sale. It was a competitive bid, tight bidding, and we got several bids, so we’re quite pleased with the results.

Steve Chercover – D. A. Davidson & Co.

And that appear like – so from your perspective, you didn’t sell it as HBU but as non-core?

Charles H. Hood

Absolutely. It was a – just one, little more background. It was the last parcel we owned in Lewis County, Washington. We might have a few odds and ends, but that area was being non-strategic to us a year or two ago and it was really the last parcel we had.

Steve Chercover – D. A. Davidson & Co.

Yeah, that’s the one I’m referring to. But we shouldn’t just say $4,000 for all of Washington or should we?

Charles H. Hood

I think that’s your job.

Steve Chercover – D. A. Davidson & Co.

Okay. That is my job, I suppose. And then switching gears to the Cellulose, beyond the C-line conversion, did you guys do any debottlenecking in the Cellulose business that will have some benefits over the next 12 or 18 months?

Lee M. Thomas

One thing we have worked on is debottlenecking project at our Fernandina mill and has to do with our ability to increase production rates there. And Jack, I think it – we’ve generally looked at 155,000 tons currently and I think when we finish that up, we will be able to take it to 170,000.

Jack M. Kriesel

170,000 tons, actually a little bit higher by permit, and then we will gradually move up to that with some other debottlenecking project, so.

Lee M. Thomas

That would be the primary.

Steve Chercover – D. A. Davidson & Co.

Great. A final question also on the Cellulose side. Dissolving pulp prices are falling pretty hard now, and I believe you will be involved in that business once the C-line first ramps up. Was a price correction reflected in your business plan? Maybe I’ll just leave it at that. Are you indifferent so long as dissolving prices stay north of fluff?

Lee M. Thomas

I think first you’re right as we bringing that C-mill up in 2013, we will sell some of the dissolving viscose, depending on the range of commitments we already have for our specialty – and by the way we’re getting great reception from our customers on that. And it largely will depend on probably how long it takes us basically to qualify our specialty on that line.

The second point I’d make and I’ll let Jack add to this, he’s been in this business a lot longer than I have. But just in the last couple of years and even the last year, we’ve seen that viscose go through the kind of commodity cycle typically it does ranging from...

Jack M. Kriesel

The last two cycles, and you guys are probably well aware of it, I mean, we have gone through some $700 a ton up to the peak here just recently of $2,600 a ton.

Lee M. Thomas

So it may well go through another cycle or two by 2013, but we would anticipate overall that demand for that product has been good and continues to be good and grow. And we anticipated in our planning, but indeed we may well see cycles when we bring this up. And I’ll tell you the truth, I’m not particularly concerned about the cycle at that point of time.

Steve Chercover – D. A. Davidson & Co.

Well, that’s great. And to be honest, I don’t think any of us could even spell viscose about a year or so. Okay, thank you.

Operator

And the next question comes from Mark Wilde with Deutsche Bank. Your line is open.

Mark Wilde – Deutsche Bank

Thanks, good afternoon.

Lee M. Thomas

Hi, Mark.

Charles H. Hood

Hi, Mark.

Mark Wilde – Deutsche Bank

Lee, just on the Timberland side, I think you said you’ve bought 65,000 acres recently, but I think you also said that you’re seeing more timber come into the markets. And I just wondered if you would expand on that. The only big block that I had known about was 50,000 acres in Louisiana. I didn’t realize there was much else on the market right now, so maybe if you can give us a little color on that?

Lee M. Thomas

Yeah. I guess, what I was referring to more, Mark, is the fact that we seem to be hearing a little bit more about people who are interested in talking about selling Timberland, not necessarily people who put it out on bid. But I would say over the course of the last six months as opposed to the 18 months before that, we’ve had – I guess because we’ve been doing more outreach, I don’t know, we certainly had more discussions and more opportunities to participate in looking at acquisitions. And as I said, some of them are small, some of them are large, but we certainly have had more opportunities in the last six months by far than we had in the 18 before that.

Mark Wilde – Deutsche Bank

Okay. Do you have any idea, any sense, Lee, for sort of what your competition is like for commercial Timberland right now?

Lee M. Thomas

I think it’s the same competitive set we faced over the last number of years. I think it’s the TIMOs. I think it is the other REITs. I mean, I think that’s who is primarily out there looking to buy Timberland, same group.

Mark Wilde – Deutsche Bank

Yeah, I guess, I was just wondering if you think there is more money sloshing around in the TIMO community right now?

Lee M. Thomas

Well, Mark, we probably hear the same kind of numbers that you do, how many billion dollars may be available. I mean I’ve talked to individuals directly who talk about the amount of money they have to invest and those are guys who run TIMOs. So I think there is money there and they are looking to invest and that’s who we seem to run into is the same group of people, which is the TIMOs and to some extent now, I think, I read recently of one the REITs who has purchased property. So I think that’s the active group.

Mark Wilde – Deutsche Bank

Okay. I just wanted to turn to the Cellulose business, a couple of questions. One, can you give us a sense of where you see the fluff market right now relative to where we were at in the second quarter average?

Paul G. Boynton

Jack, can you take it?

Jack M. Kriesel

Yeah. The contract fluff market is relatively flat to the first and it’s the spot market that has dropped off, particularly in China and in the Middle East, that has dropped off somewhere in the neighborhood of $100 a ton. But again the contract market, which is the majority of our business is still relatively flat.

Mark Wilde – Deutsche Bank

Okay. And then the other question I had in this business was in the Specialty Cellulose market just as we look forward into 2012, is this kind of a hard business for I think most of us on the outside to sort of read in terms of what are the dynamics, which are going to determine what kind of pricing you’re going to realize next year. Can you provide us with some kind of just guidance for metrics that we might be looking at, indicators?

Jack M. Kriesel

Well, the key for us is overall demand on our product. And as stated earlier, our demand continues to be very strong. We have a hard time right now meeting that demand. So assuming that continues, it looks good. Your costs are the obvious thing. Another thing that you look at as you go into your pricing, but – and also I think we’ve shared with you, we do this on an annual basis, which we’ll kind of share that actual information with you late this year, early next year.

Lee M. Thomas

I think, Mark, overall as far as demand is concerned, we typically think about 40,000 to 45,000 tons of additional demand for this product on an annual basis. It’s driven by a 3% to 4% growth in the overall market for specialties, and that’s very different in different segments. And as you know, we supply a number of different segments. But overall the market is growing, it’s a steady market, it’s not like a commodity market, it’s a steady market with steady growth. And we look at both the demand and it’s very strong for our products and we also look at our cost when we look at pricing, and we’ll do that as we head toward the next year.

Mark Wilde – Deutsche Bank

Okay, that’s helpful. And I guess we’ll hear more about that once we get into early 2012.

Lee M. Thomas

That’s correct.

Mark Wilde – Deutsche Bank

All right. Thanks, guys.

Operator

Mark Weintraub with Buckingham Research. Your line is open.

Mark Weintraub – Buckingham Research Group, Inc.

Thank you. Firstly, just the 65,000 acres that you acquired, where they all the in the U.S. South?

Lee M. Thomas

There were. They range from Florida to Texas.

Mark Weintraub – Buckingham Research Group, Inc.

Okay. And so at about 16,000 an acre that would just about 100 million or so in total? And thinking about the next couple of years, you’re obviously spending a fair bit of money on the Jesup conversion project. Would you anticipate that the dollars that would get put to work in timberland acquisitions would at least match or be more than the amount of money you’re spending at Jesup, obviously depending on your ability to find appropriate transactions?

Lee M. Thomas

Well with that last caveat, I would say, it would be more of that.

Mark Weintraub – Buckingham Research Group, Inc.

Okay, that’s helpful. Thank you.

Lee M. Thomas

You bet.

Operator

Next question comes from Dan Cooney with KBW. Your line is open.

Daniel Cooney – Keefe, Bruyette & Woods, Inc.

Hi, guys. Good afternoon.

Lee M. Thomas

Hi.

Daniel Cooney – Keefe, Bruyette & Woods, Inc.

If we could just talk about I guess the pricing in absorbent materials, do you think that’s a little bit kind of somewhat reflective of some of the incremental supply that’s coming into that market or maybe just a little bit more color on what’s driving that kind of downward sequential trend in pricing?

Jack M. Kriesel

Yeah, I think you’re right there that there is some incremental supply. We got the IP Franklin mill that we talked about converting, Domtar’s come on, the Alabama Pine facility. So there is some incremental capacity, but you got to remember that market is growing very strong, also roughly about a 4% growth or about couple hundred thousand tons of demand each year. The spot drop-off we believe is primarily due to the Chinese stockpiling and managing their inventories. And at the current time, it’s – the paper market drives that big way. And so paper market drops off, the pulp market tends to follow a little bit lagging.

Daniel Cooney – Keefe, Bruyette & Woods, Inc.

Okay, great. And then moving into the kind of the timber business, I guess it looks like the operating expenses in the Atlantic region jumped up about $1 million year-over-year, which kind of despite a 12% reduction in volume. Was there something kind of going on there or any more detail on that?

Lee M. Thomas

Lynn.

Lynn Wilson

We had significant expense related to our fire suppression, so that’s the direct correlation there with the Atlantic region where primarily our fires were will in Georgia and Florida.

Daniel Cooney – Keefe, Bruyette & Woods, Inc.

Okay, great. Thanks a lot guys.

Lee M. Thomas

Thanks.

Operator

Our next question comes from Daniel Rohr with Morningstar. Your line is open.

Daniel Rohr – Morningstar Research

Thanks a lot. Just trying to get a better sense of where you all see the log export volumes going in the back half of 2011. I think back of the envelope sounds like you might have done around 300,000 tons out of Washington in the first half. You mentioned on the call that you are looking to double export volumes in full year 2011. So just for a sense of scale, where were export volumes in 2010?

Lee M. Thomas

Lynn, do have that?

Lynn Wilson

I do. In 2010, we exported in total for the year about 17% out of our $164 million board feet.

Lee M. Thomas

Tons.

Lynn Wilson

In tons last year we did 1.6 million tons – excuse me 1.4 million tons and this year we will do closer to 1.7 million tons. And this year 35% of our total tonnage will be export at this current pace.

Daniel Rohr – Morningstar Research

Thank you very much.

Operator

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

Peter Ruschmeier – Barclays Capital, Inc.

Thank you, and good afternoon. I wanted to ask on the 65,000 acres, again roughly 1,600 per acre. Any high level qualitative guidance you can provide on whether the productivity of those acres in aggregate or the inventory or age of those acres is greater than, equal to or less than your average holdings in the South?

Lee M. Thomas

That is a hard one. The reason I say that’s a hard one, I’m going to let Lynn take a shot at it, but the fact that it really is a range there. Some of that property for instance, we acquired from a distressed seller, and it had HBU value, so a lot of it was driven by that. Although the price was quite low, some of it was very well stocked timberland with a great sight index and very good timber, so the value largely driven by that. But Charlie, you or Lynn, want to take a short at it.

Lynn Wilson

Charlie, why don’t you...

Charles H. Hood

Yeah, I’d say the – we’re trying not to be specific on a property-by-property basis, but I’d say the biggest influence of price was the superior stocking and age on some of the properties particularly on larger ones. And that property had a much older age class than our legacy timber and much higher stocking and volume. And so we basically paid for a lot of volume. And it’s very high quality side, so excellent property. It really is hard to just compare price track-to-track. It’s so much driven by the attribute to the property.

Peter Ruschmeier – Barclays Capital, Inc.

Okay.

Lynn Wilson

In addition, Peter, there was several opportunities for us to improve through silviculture and investment to not only take the superior stocking that we purchased but also improve the site index over time, so that we have both of those opportunities with these properties.

Peter Ruschmeier – Barclays Capital, Inc.

Okay. And recognizing, timber acres are different, every asset is different, it seems that the sale you mentioned in Washington State is also important because we haven’t seen a lot of transactions there. And so is there anything qualitatively you can offer up as to whether those acres that you sold were similar to the acres that you own, or were they unusual in their age class or their species or site index, anything unusual about those acres, positive or negative?

Hans E. vanden Noort

I wouldn’t say there was anything unusual. Most of our acres are of high quality. The reason that property was non-strategic to us was because it was isolated from the rest of our property and we find that some of our non-strategic properties are quite strategic to others and they are willing to pay for it. So this is a highly competitive property, but it had really no HBU, it was just good quality industrial timberland out by itself.

Peter Ruschmeier – Barclays Capital, Inc.

Okay. That is helpful. And then back on the export situation to China, I’m curious if we try to triangulate what you’re seeing from China, not only the Northwest, but out of New Zealand. How much of your New Zealand volume is going now into China? And if you were to compare and contrast what you’re seeing in terms of buyer behavior, is there anything noteworthy as to what you’re seeing in New Zealand relative to what you’re seeing in the Northwest?

Paul G. Boynton

Hi, Pete. It’s Paul. I don’t have a specific number percentage on our volume off the top of my head, but let me just comment, we are seeing very parallel situation that we see here in the Northwest and we have ongoing dialogue of course between our teams there and our team here. And what we’re seeing is a slowdown because the ports are full, the infrastructure is full, again there is plenty of Russian logs that come on through the summer. The Chinese kind of back off a little bit in the production of the summer months as well. Our anticipation there is the same as it is here that we will see that come back around again. But we have seen folks, competitors kind of backing off a little bit during these downtimes. And as prices soften and again we would expect that and therefore we would expect opportunities to move back in when the demand picks up again here, and the opportunities – and the supply lessens.

Peter Ruschmeier – Barclays Capital, Inc.

Okay. And then just lastly if I could on the C mill, you indicated you’ll spend $45 million to $50 million this year. Can you remind us what the plan is for 2012 and then the remainder in 2013 on capital? And then also, I know this is preliminary, but if you plan to start up the 190,000 tons annual in mid 2013, what’s a preliminary expectation for your learning curve? And how much of that product – how quickly that product can be sold into specialty cellulose as opposed to how much of that product would be viscose?

Lee M. Thomas

Jack, why don’t you take that.

Jack M. Kriesel

Yeah. I’ll take the last question, and then Hans will address the first question. The start up in 2013, we’re going to quickly qualify as much of the product as we can because again, our customers have put a lot of commitment into volumes and we want to get it to qualified quickly. So there certainly will be a period of time it could be, three months, it could be six to nine months for some of the more demanding grades to get qualified, but we anticipate a real strong ramp up there to fill up that 190,000 tons maybe upwards of two years.

Lee M. Thomas

I’ll tell you that the mill itself, the C mill itself will be a duplicate of our B mill. So it is not like it is a new product line or a new set of products. And so the people, we’ve got people who have run a duplicate product line in our B mill that will be right there with our C mill. So we are anticipating as Jack said that we will work hard to qualify grades on this new mill for our customers as quickly as we can, which will then dictate largely what that start up curve looks like.

Peter Ruschmeier – Barclays Capital, Inc.

But given the nature of the gradual demand increase that I think you mentioned, call it 40,000 tons a year or so globally of specialty cellulose, is there the ability out there for your customers to have more of a step change in their demand for the product such that you can fairly quickly sell those tons into the market you want, or are we literally talking about a multi, multi-year period where you sell commodity viscose and you just slowly bleed those tons into the specialty markets until you’re full up?

Jack M. Kriesel

I can just pause and weigh in on that. If you look at our plan now which is already having a conversation with the customers in getting that commitment. So I wouldn’t say it’s a slow bleed and right now it’s going to be a planned step in, customer-by-customer of that volume and they are planning that now because – and we’ve been talking to them for sometime about this. And that 40,000 tons doesn’t start today. We’ve been sold out for some time. And so there has been some anticipation of this volume coming on. So In some cases you will see it come on quite, frequently depending on the customer and others. And overall, it will look like a bit of a feathering, but I would not say a slow bleed-in.

Lee M. Thomas

And I would say another point, I’d make on this is it’s given us the opportunity for the first time in a long time to respond to a number of new customers, people who have wanted to do business with us, and frankly we couldn’t respond to. And it’s also given us the ability to begin to talk to customers in product lines that we want to expand in, we hadn’t had the ability. But I know Jack, you are already getting commitments from customers for a substantial expansion and new customers.

Jack M. Kriesel

As Stated earlier, well received and we’re well within, along the way to get 190,000 tons of commitments.

Lee M. Thomas

Pete, one of our plans on the September 22 is to take you through all this in some detail including the capital layout, customer layout, more and more specificity to the commitment level. So, we will do that all on the 22nd.

Peter Ruschmeier – Barclays Capital, Inc.

Very good. Thanks very much, guys.

Operator

The next question I’m showing comes from Collin Mings with Raymond James. Your line is open.

Collin Mings – Raymond James & Associates

Thanks, good morning or good afternoon rather. In terms of customer response to the C mill conversion, are there any particular segments? I mean, you guys kind of talked about this a little bit – but that are – they have the most interest in, whether it be the acetate, the ethers? Is there a particular segment that’s just really gotten a lot of interest from end users?

Jack M. Kriesel

Well, you hit to the main ones that are acetate and ethers, but it’s broad, I mean it also includes the high-tenacity rayon type end users for tire cord, sausage casings, the specialty end uses for filtration. Again it’s across all segments of this CS business.

Collin Mings – Raymond James & Associates

The full Spectrum, not really one area in particular. Is there a particular area that you’re working harder on trying to secure commitments for, or is it just in general?

Jack M. Kriesel

Well, I think it’s in general. But I mean obviously the two big ones are acetate and ethers. And so that’s going to take a large amount of the volume, but again it’s not limited to them by any stretch.

Collin Mings – Raymond James & Associates

Okay. And then just back to the Timberland acquisition environment. With regards to the new – you mentioned New Zealand as well, is that just kind of a potential play on just the Asian demand or is there kind of a special situation that you are pursuing?

Jack M. Kriesel

No, it’s the same play on Asia demand, just continued tightness across our Pacific Basin that we see not only today but an ongoing long-term opportunity there that we tend to like property in New Zealand, and it’s a good expansion point for us.

Collin Mings – Raymond James & Associates

Okay, great. Thanks, guys.

Jack M. Kriesel

Thanks, Collin.

Operator

Michael Roxland with Merrill Lynch. Your line is open.

Michael Roxland – Bank of America/Merrill Lynch

Thanks very much. Good afternoon, folks.

Hans E. vanden Noort

Hi. Mike.

Michael Roxland – Bank of America/Merrill Lynch

Over the last couple of months, we’ve had a number of dissolving pulp capacity announcements aimed to start not only in China, but here domestically. And obviously, you are well entrenched in the market, but any concern that these proposed capacity additions eventually erode your market share? And practically giving the amount of capacity that’s targeted to come online, I think somewhere in excess of 2 million tons over the next year-and-a-half?

Lee M. Thomas

I think a couple of things, Mike. I think one, our product line is dissimilar from the capacity announcements that have been made. There haven’t really been any capacity announcements in our specialty categories. What I have seen has all been in the commodity viscose area and that’s really unrelated to the demand for our products. The second thing is just as an aside, I’d be surprised if all of that capacity came home. I have seen a lot of the announcements. I have gone to see a little bit about people who postpone the announcements, I mean, postpone the implementation. So I think both of those things, the big one from our point of view is it is not in the product categories that we produce.

Michael Roxland – Bank of America/Merrill Lynch

But in terms of let’s assume, for the sake of argument that you are right and that not all of that capacity comes on, but let’s assume that a certain amount does and just targeting the commodity viscose. Any concerns that as you start to ramp up your C mill in 2013 and start selling initially into commodity viscose that your margins get, I wouldn’t say get crushed, but certainly get impacted by the capacity that’s come on earlier?

Lee M. Thomas

We are really not concerned about that. And we’re not concerned for a couple of reasons. One, the discussion we had about bringing on our Specialty Cellulose as quickly as we can qualify customer orders. But the second reason is as we’ve done our work around commodity viscose and the demand for that, we think there will be strong demand for rayon on fabric for the long-term. We see – and we spend a lot of time looking at the growth and where that’s going, how it relates to cotton and cotton availability, so we actually think that commodity viscose will go through it up-and-down cycles, but throughout the process we think, you are going to have good steady demand for rayon.

Paul G. Boynton

In fact, Mike, if you track the announced expansion for the viscose customers through the same period, you’d see matching if not more planned demand for that other than these 2 million tons you have announced here. Our thought of course is all that’s going to retreat for a little bit and they come back on just as we have seen in the past. So I think history is a good teller here before we had prices of viscose pulp down in the $700 to $800 range, it went up to 13 to 14 at one peak there, a lot of announcements of capacity coming on, and then it dropped back down to $800, $700 a ton. A lot of those announcements went away and those people went away. And then it went back up to 26 and everybody said okay, well, we’re on it again. I think we will see the same thing. A lot of folks kind of change their mind.

And so it’s a very commoditized business. And one thing that we do is we stay focused on our business and our customers know that. And I think they appreciate it. So even the small number of players that can kind of flow in and out on the fringe of our business, our customers recognize that we stay with them even when prices on the commodity side are much higher. They know we don’t chase that and therefore I think that keeps us pretty solid in the marketplace.

Michael Roxland – Bank of America/Merrill Lynch

Thanks for that, Paul. Two final questions. Can you give us a sense of how your pricing is shaping up thus far for 2012? I believe you’re beginning to approach your customers now. Should we expect a similar type of increase in 2012 as you have had or is that you expect for this year?

Lee M. Thomas

I don’t really think we’ll give any kind of guidance on pricing, Mike, until probably right in the beginning of 2012.

Michael Roxland – Bank of America/Merrill Lynch

Got you. Okay, final question. Just in terms of capital allocation and going forward, how would you think – have us think about how you’re prioritizing your allocation of excess capital, particularly after the recent dividend increase announcement in the C-mill conversion. Is your primary focus still going to be on the dividend and then followed by Timberland acquisitions? Just if you could remind us how you look at that going forward?

Lee M. Thomas

We do think about it in that order. As far as strategic capital is concerned, we have had a strategy for the last couple of years. At first, we take a hard look at our dividend. We always keep our debt in mind. We also wanted to assure that we continue the leader in Specialty Cellulose and thereby the expansion there and then Timberland acquisition. And so I think you can expect that we will stay with that strategy. We always pay attention to a good competitive dividend, but at the same time we want to grow our businesses and we really think growing Timberland business is something that will be a major priority for our strategic capital going forward.

Michael Roxland – Bank of America/Merrill Lynch

Thanks very much. Good luck in the quarter.

Lee M. Thomas

Thank you.

Operator

The last question that I am showing comes from Mark Wilde with Deutsche Bank. Your line is open.

Mark Wilde – Deutsche Bank

Yeah, just a couple of kind of final follow-ups. One is, is there any kind of acceleration in your costs that you expect in the second half of the year or into next year? I don’t know whether you’ve been protected at all by kind of contracts on some of your chemicals or anything?

Lee M. Thomas

In fact, I don’t know of anything both (inaudible) kind of changes, there. Do you?

Hans E. vanden Noort

No, commodities change very quickly. But right now, things look fairly stable and then we are hedged somewhat on our energy as we go forward.

Mark Wilde – Deutsche Bank

Okay. And I know down in Southeast Georgia, there was a big pellet plant that started up, I don’t know, six, nine months ago. I just wondered if you’d comment on how that’s affected the fiber market down there and also whether you’re hearing about any more biofuel projects in any of your markets?

Lee M. Thomas

Lynn?

Lynn Wilson

Right now, Mark, we are delivering to the facility in Georgia, Georgia Biomass, also known as RWE. So we have a contract with them for 300,000 tons and they are running and accepting deliveries. And then we have seen a few other announcements that we really are focusing on only those facilities that are within our footprint that we think are viable. So there is a potential for one in Alabama and a potential for one is Eastern Texas. But as of right now, they are still going through permitting processes and getting their business plan taken care of. So right now we’re just focused on that one facility. As well as one of the things that we are continuing to do is really recruit new capacity into our region in the pellet because of the European market. It’s really the place where we see our most viable future customers and we continue to focus on those ones that really uplift our pricing in our region.

Mark Wilde – Deutsche Bank

What have you seen in that particular basket, as far as pricing is concerned, have you seen an effect from that pellet plant?

Lynn Wilson

Yes. The range right now within that footprint is $2 to $3 per ton uplift in that basket for this year compared to last year.

Mark Wilde – Deutsche Bank

And that’s on a base of approximately what, Lynn?

Lynn Wilson

It’s a 10% change.

Mark Wilde – Deutsche Bank

Okay, all right. That’s helpful. Thank you very much.

Operator

I am showing no further questions.

Hans E. vanden Noort

All right, this is Hans vanden, I’d like to thank everybody for joining us and please contact Carl Kraus with your follow-up questions.

Lee M. Thomas

Thank you.

Operator

Thank you. This does conclude the conference you may disconnect at this time.

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