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Rayonier, Inc. (NYSE:RYN)

Q1 FY08 Earnings Call

April 22, 2008, 02:00 PM ET

Executives

Hans E. Vanden Noort - Sr. VP and CFO

Lee M. Thomas - Chairman, President and CEO

Timothy H. Brannon - Sr. VP, Forest Resources

Charles Margiotta - Sr. VP, Business Development and President, TerraPointe Services Inc.

Paul G. Boynton - Sr. VP, Performance Fibers & Wood Products

Carl E. Kraus - Sr. VP, Finance, Rayonier Acting President, TerraPointe LLC

Analysts

Ross Gilardi - Merrill Lynch

Chip Dillon - Citigroup

Steve Chercover - D.A. Davidson

Peter Ruschmeier - Lehman Brothers

Hamzah Mazari - Credit Suisse

Christopher Churn - Deutsche Bank Securities

Operator

Good day everyone, and welcome to the Rayonier First Quarter Earnings Release Conference Call. Today's call is being recorded by Rayonier and is copywrited material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President Mr. Hans Vanden Noort. Please go ahead sir.

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Thank you and good afternoon. Welcome to Rayonier's investor teleconference covering first quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our website at rayonier.com. I would like to remind you that in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

Our earnings release, as well as our Form 10-K filed with the SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our supplemental material, please familiarize yourselves with them. Also this conference is being webcast and can be accessed through our homepage.

With that, let's start our teleconference, with opening comments from Lee Thomas, Chairman, President, CEO. Lee?

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

Thanks, Hans. I am going to make a few overall comments now for the first quarter of 2008, compared to the first quarter of last year. Hans will then take you through the financials, after which Tim Brannon, our Senior Vice President for Forest Resources; Charlie Margiotta, our Senior Vice President and Head of our Real Estate Business; and Paul Boynton, our Senior Vice President of Performance Fibers & Wood Products will review those business segments.

Overall, we are quite pleased with our first quarter results. Softness in the timber market was offset by strengthened Performance Fibers pricing and HBU rural real estate demand. Timber results reflect the impact of weak housing market on saw log pricing, as well as our decision to reduce plant harvest levels.

However, our real estate business benefited from strong rural land prices and volumes, as well as non-strategic timberland sales. In addition, Performance Fibers results were driven by strong pricing, which more than offset high raw material costs and lower volume resulting from unplanned downtime, as I described last quarter.

Now, during the quarter, we made progress executing the strategy I communicated last quarter. First, in timber. We furthered our strategy to grow and upgrade our portfolio through our recent acquisitions of approximately 110,000 acres of timberland in Washington and New York. Our Washington property is very well stocked. We'll substantially increase our holdings of merchantable Douglas-fir and western hemlock.

The New York property is convenient to markets with solid demand and increases our overall species diversity with high-value hardwoods. In both the West and the East, we are reducing our saw timber harvest by approximately 20% due to the impact of the weak housing market on saw log demand, thus preserving our high-value grade timber until markets improve.

In real estate, we continue to see interest for our rural HBU lands. In addition, as part of our strategy to upgrade our timberland portfolio, we successfully completed two non-strategic timberland sales. And finally, we are pleased to announce that we formed a strategic alliance with Cousins Properties, a major Southeast developer for our Three Lakes Property in Flagler County, Florida.

In Performance Fibers, market conditions are excellent for both cellulose specialties and absorbent materials. This resulted in increased prices during the quarter. We will continue to manage this high-value business with a focus on product differentiation and managing the impact of increasing raw material costs.

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

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Okay, let's start on page three with our overall financial highlights. As Lee noted, our first quarter was above our guidance driven mainly by the timing of rural land sales. Overall sales totaled $284 million, resulting in operating income of $61 million, and net income of $41 million or $0.51 per share well above both comparable quarters results.

On the bottom of page three, we provide an outline of cash resources and liquidity. The overall message here is strong cash flows as adjusted EBITDA of $97 million, and cash available for distribution of $61 million remain comparable to last year. Our debt and debt-to-capital ratio declined from year end, reflecting repayment of $55 million of debt at the REIT. We ended the quarter with approximately $147 million in cash. So, on a net-debt basis we finished about $548 million, $21 million below year end. Most of this cash was then subsequently applied toward the Western timber acquisition that closed on April 3rd.

Let's turn now to page four, where we prepared a sequential quarterly variance analysis; and looking at this roll forward, the major driver here is a significant increase in real estate operating income due to timing of transactions within the year.

Turning now, on to page five now, we will briefly review the year-over-year variances. Here, we begin with last year's first quarter earnings of $0.45 per share. Our timber income was $14 million below last year mainly due to lower saw log prices and reduced harvest volume. Next, our real estate results were $7 million above the first quarter last year, reflecting improved rural price per acre and volumes, as well as the sale of about 4000 acres of non-strategic timberland.

Performance Fibers' results reflect improved prices in both cellulose specialties and absorbent materials, costs for unfavorable driven by higher raw materials and maintenance costs partially mitigated by a lower depreciation expense. These amounts bring us to the current quarter's results of $0.51 per share.

Turning now to page six, to review cash available for distribution; on this page, 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, the standard line items that we include in here, our cash flow remain strong totaling $61 million in line with last year's first quarter.

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

Timothy H. Brannon - Senior Vice President, Forest Resources

Thanks, Hans. For the West, on page eight, as expected volumes up sequentially, reflecting the seasonally low fourth quarter volume. However, volumes declined when compared to the first quarter of 2007, due to weak saw timber demand. Prices declined compared to fourth quarter and first quarter of last year, due to the soft housing market and the abundant supply of timber available for harvest due to storm damage.

For the second quarter, volumes are expected to be up slightly on a sequential basis, but well below second quarter 2007 levels due primarily to the soft housing market. Prices are expected to be 10% to 15% weaker sequentially. Of course, the Northwest is primarily a soft timber market, with a current softness in lumber, stumpage prices on average for 2008 are expected to be lower by 30% to 35%, compared to 2007, impacted by not only the weak housing market, but also an abundance of wind thrown wood being salvaged from the December 2007 storm event that heavily impacted the Pacific Northwest.

As a result of the weak demand, we are reducing our 2008 harvest by 20% to 25% from 2007 levels, excluding the recent Washington State acquisition. Based on conservative harvest assumptions, the acquisition is expected to be slightly cash accretive in 2008 and 2009. However, earnings dilution of $0.04 to $0.06 per share is expected in 2008, primarily due to non-cash depletion expense.

Moving on to the East on page nine; volumes were down sequentially as well as compared to first quarter 2007. Prices held when compared to fourth quarter, excluding the impact of fire salvage. Compared to first quarter 2007, prices were lower reflecting our shift in product mix in response to the strong demand for lower value pulpwood. We continue to experience strong pulpwood demand, due to favorable global pulp markets and the lack of residual chips from saw mills.

Great markets remain depressed due to lumber mill curtailments driven by the weak housing market. As a result, we have shifted our product focus towards pulpwood and our harvest volume to areas of greatest market strength. Our larger operating area provides us with flexibility to shift into markets that are more favorable and reduces the need to sell wood into poor markets.

For the second quarter of 2008, pine volumes in the East are expected to be up sequentially and compared to second quarter of 2007. However, prices are expected to be below first quarter 2008 and second quarter of last year as we continue to focus on the strong pulpwood markets.

For the year, volumes are expected to be down 3% to 5% following last year's surge of fire damaged wood. While we have ramped up thinnings and pulpwood sales, we have deferred the harvest of approximately 20% of our normal saw timber volume. Average prices for the year are expected to be down slightly, reflecting the poor saw timber market and strong pulpwood mix.

With that, let me turn it over to Charlie to review the real estate business. Charlie?

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

Thanks, Tim. Real estate markets in which we operate have remained principally unchanged from the second half of 2007. The Southeast coastal corridor development sales continue to consist sales of small parcels to specialized end users. Our focused [ph] development area has been on planning, entitlements and partner analysis.

As Lee mentioned in his opening remarks, we are pleased to announce that we have formed a strategic alliance with Cousins Properties, where together we will master plan and entitle our 6300-acre Flagler Three Lakes property. Cousins will be onsite in Flagler County within 60 days.

Turning to chart ten, we had a strong first quarter in rural sales. The first quarter is a prime example of the broad range of transactions that drive this segment. Sales range from a 2500-acre very well [ph] property in Alabama to be used for recreation and hunting for $1900 an acre, a 1400-acre conservation sale in Florida at $3400 an acre, and a 525-acre rural Florida property to be used as a power plant site for $15,000 per acre. Overall, as can be seen in chart 11, the average rural property price was nearly $3700 per acre, which is generally in line with prior quarters.

Chart 12, shows the activity of our non-strategic timberland sales. First quarter activity consisted of sales of two very low-value properties, one was called Big Swamp Creek in Alabama. We expect the bulk of the '08 activity to occur in the second half of the year and plan to sell in the range of $25 million to $30 million for the year. Lastly, we have identified rural HBU opportunities on both of the recently announced timberland acquisitions in Washington and New York State.

With that, let me turn it over to Paul.

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

Thanks, Charlie. Performance Fibers had a solid first quarter, despite rising raw material costs and unplanned downtime as reported to you in January. For the year, strong market demand for our high-value cellulose specialties fibers and the overall strength of the absorbent materials market will continue to drive improved earnings despite increased costs.

On page 13, you see net selling prices for our two Performance Fibers product lines. Let's first look at the cellulose specialties, which represents 65% of our volume. Note the 70% [ph] improvement over prior quarter as annual price increases within our long-term contracts took effect January 1. We expect the full impact of the price increases to yield an 8% to 10% gain year-to-year.

Looking at absorbent materials which consist principally of fluff pulp, global demand combined with currency evaluation and higher raw material costs have pushed prices for this commodity-like product to improve levels over 2007. First quarter prices averaged 2% above prior quarter and 13% above first quarter 2007. We expect prices to remain flat to slightly up for the second quarter, before softening in the latter half of 2008.

Moving on to page 14 and looking at sales volumes; in Q1 2008, you can see the drop of both cellulose specialties and absorbent materials volumes, due to both planned and unplanned downtime that we commented upon in January, issues that continued until our planned maintenance outages at both mills.

For cellulose specialties, second quarter volumes should be above second quarter 2007 and we expect full year volume for these products with high-value applications at 3% to 5% above 2007. Looking at absorbent materials, we expect a similar second quarter as first quarter and full-year volumes slightly above prior year.

Not reflected in these charts that should be commented upon, is the rise in raw material and other costs we have seen in 2008 and expect to bear throughout the remainder of the year. For example, we've experienced a surge in the price of commodity chemicals such as ammonia and sulfur due to their demand in agricultural applications.

Increases in softwood pine prices due to reduced availability of residual saw mill chips and outbound freight rates due to limited shipping container space at increased fuel costs. However, we'll continue to work hard to mitigate both the price and usage of these input components.

In summary, we expect to see better results in 2008 and 2007. First quarter operating income improved 37%, compared to first quarter 2007. We would expect slightly improved second quarter, compared to first quarter and significantly better latter half of the year as we saw in 2007 due to both increased volume and having the maintenance outages behind us.

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

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Thanks, Paul. With that, let's turn to page 15 to review earnings trends. Based on current market conditions, we expect full year 2008 earnings to be below our 2007 pro forma EPS of $2.35 per share with lower timber in the real estate results somewhat offset by stronger Performance Fibers earnings. We expect second quarter earnings to be below first quarter earnings of $0.51 per share, due to the timing of real estate transactions and lower timber prices, partially offset by slightly improved Performance Fibers results.

Before I close, I would like to share a few key statistics to assist you in maintaining your model for Rayonier. First of all for 2008, we now expect depreciation, depletion in amortization of $145 million and the non-cash cost basis of land sold of $12 million or approximately $157 million in total. This will be a net $6 million decrease from 2007, but $10 million above previous guidance, driven by increased depletion resulting from our Northwest acquisition and additional pulp harvest levels in the Southeast.

Capital expenditures excluding acquisitions are expected to range between $105 million to $110 million, $8 million to $13 million above 2007, with this increased focus in Performance Fibers on operational reliability and environmental-related projects. With respect to our investment in New Zealand, we expect 2008 equity income of about $2 million and cash flow in the $6 million to $8 million range. We expect interest expense, net of interest income of $42 million to $44 million.

Finally, our first quarter effective tax rate was slightly above 20%, which is also our expectation of the full year rate. This is above previous guidance, as it now reflects our decision to hold more timber off of the market this year, thereby reducing our REIT income and increasing the proportion of TRS income to total income.

When you put all these elements together, we anticipate another strong cash flow year although CAD will be below last year, primarily due to higher capital expenditures and slightly lower EBITDA. Overall, we expect CAD to be well above our forecast 2008 dividend requirements.

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

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

Thanks Hans. Let me conclude here by saying that we'll continue to benefit from the diversity, the strength, and the balance of our three core businesses in 2008. We had a good quarter and we expect a good year. With our strong balance sheet, tax efficient REIT structure, we'll continue to focus on building shareholder value for the long term.

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

Question And Answer

Operator

Thank you sir. Ladies and gentlemen the question-and-answer session will be conducted electronically. [Operator Instructions]. And we will take our first question from Ross Gilardi, Merrill Lynch.

Ross Gilardi - Merrill Lynch

Good afternoon and thank you. Just had a couple of questions; just comment about the level of harvest discipline you are seeing across the different regions of the U.S realizing that you guys are gone cut your harvest by about 20% this year, but it certainly seems that prices have had another sharp move downward recently particularly in the Northwest

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

I am going to let Tim comment on that, I think one of the things Ross you have to take into account is the comment Tim made about the storm damage in the Northwest, particularly in Washington and Oregon that's having a significant impact in that particular marketplace that you probably don't see in some other places. So that in addition to weak housing is impacting that saw timber prices out there. But Tim why don't you comment on what you are seeing overall?

Timothy H. Brannon - Senior Vice President, Forest Resources

I think just in addition to what you said Lee, I think in the Southeast for example, we are seeing other folks that have pulled their... some timber off of the market which is not unexpected with the pricing the way it is. Of course in the South, we generally have mixed stands where you get a certain percentage of pulp and a certain percentage of grade material and people want to protect that grade volume. So we are seeing many other people are pulling timber off the market as well is to say with the exception what Lee pointed out in the Northwest with the storm damage people are feel compelled to put that on the market as they should over probably the next I would say 16 to 18 months kind of time frame.

Ross Gilardi - Merrill Lynch

Do you think the improvement that you have seen in pulpwood prices is sustainable if others are also rotating more of their harvest mix towards pulpwood?

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

Well certainly at this point we have not seen any slackening of demand other than that typical the pulp mill maintenance outages that you see same as Southeast for example. But other than that pulpwood demand remains quite strong and so, as a result, as we have said we are shifting our volume there. In the Northwest the problem is exacerbated there because virtually all of the typical dependence has been on saw mills for our residual ships and they are just not seeing it. So as a result people have put in some shipping operations and actually that's been beneficial to some folks who have ended up with some storm damage, because there is an outlet for some of that smaller wood that can go to pulp, but the pulp demand out there remains quite strong as well.

Ross Gilardi - Merrill Lynch

Okay, thank you Paul. And then Charlie if I could just ask one more I mean you couldn't move down a fair amount of acreage this quarter, at some pretty good prices can you comment on the level of land inventory that's on the market in Florida and Georgia relative to three to six months ago and are you having to reduce prices to move land?

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

Ross,we get really focused on price and certainly try not to give up price just to move land. I am saying that and I say the weakest market right now for us is Georgia, Texas, Washington and Alabama really steady and I don't see over supply of land there and Florida real market for us is sort of turned into a specialized niche market. The Florida market is quite different. A little over supply in Georgia, but frankly our other markets seems to be pretty steady.

Timothy H. Brannon - Senior Vice President, Forest Resources

I think one thing too, Ross, that we see is a good bit of our land goes at its unsolicited offers that come into us since its in the REIT, and I think as Charlie said in those markets like Florida and Texas and Washington and others, we continue to see good steady inquiries.

Ross Gilardi - Merrill Lynch

Okay. Thanks very much guys.

Operator

And next we'll go to Chip Dillon of Citi.

Chip Dillon - Citigroup

Hi, good afternoon.

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

Hello Chip.

Chip Dillon - Citigroup

Just first question is on the Performance Fiber area. Just want to make sure I understood, I think you said you expect the second half to be substantially better income wise without the down time. Is that correct? That was a comment versus the first half or versus the year-ago second half or both?

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

Hey Chip, it's Paul. The answer is yes to both of those. So it's going to be stronger compared to the first half and stronger compared to the same period the second half 2007.

Chip Dillon - Citigroup

Okay. And I think you mentioned that you saw prices backing off and was that for both specialties and fluff or just for one of them?

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

Yes, that was just for absorbent materials. Our specialty is really stable throughout the year and right now we are just anticipating some fall off at the year end on the absorbent material side of the business.

Chip Dillon - Citigroup

And is that tied to some of the new supply coming on or just conservative, because if you look at the price of your pulp, its actually down year-over-year in just about every buyer currency but the U.S dollar?

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

And that could be true and it is true. But I think overall, we are looking out there and just basing it on analysts comments that they see in the overall market and again the absorbent material market is largely driven by the broader paper pulp market. And so that's what a lot of folks are watching, a fluff pulp is a little bit separate from that, but it tends to reflect it so we just have put that into our model and think of it just drop off towards the year end.

Chip Dillon - Citigroup

Okay, and then on the REIT situation and I am sure you guys are watching this everyday, but as the Performance Fibers numbers come up and I know you put most the debt down in that area. What is the roll out, I thought there was a 75% roll is that, something that's spread over years or is it because it looks like that could be for with the harvest reduction that could be breached in 2008?

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

Chip, it's Thomas no there is two areas that we have to look at, we have to look at an income test over 75% comes from good reap sources of income. But recall that's on first of all that's on a tax basis not necessarily a GAAP basis of income. But secondly and very more importantly that is calculated on a separate re-tax payer basis and that's only driven by the amount of dividend that comes from your TRS, which of course is at our discussion. So we can basically manage that dividend always coming below the requirement and still stay above the 75% requirement, so we don't anticipate any problem on the income test. Now, on the asset test that's a quarterly test and the value of your TRS can exceed 20% as you mentioned. You're right, it's calculated on a net asset basis for TRS. So we are able to take benefit of the data of TRS to compare that to the gross assets of the REIT. And so while the value of the Performance Fibers is obviously increasing, we still have headwind there and I can tell from the recent transactions in the timberland market certainly the value of timberlands are not declining. So at this point we really don't see any pressure there.

Chip Dillon - Citigroup

Okay, makes total sense. Last question, just to clarify, I think you said you saw Northwest pricing down, I think you said 10% to 15% in the second quarter versus the first and 30% to 35% for the full year you could verify that. And then just, again repeat what your volume expectations are 2Q versus 1Q end and for the full year versus last year?

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

Tim why don't you --

Timothy H. Brannon - Senior Vice President, Forest Resources

I think that the comment that we made earlier was that pricing for 2008 is expected to be 30% to 35% below 2007

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

For the Northwest.

Timothy H. Brannon - Senior Vice President, Forest Resources

For the Northwest right.

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

And 10% to 15% in the second quarter over first quarter.

Chip Dillon - Citigroup

That's enough and the volume expectation for a second quarter versus first and full year versus last year?

Timothy H. Brannon - Senior Vice President, Forest Resources

The volume expectation for, again you are talking about the Northwest?

Chip Dillon - Citigroup

Just the Northwest, yes.

Timothy H. Brannon - Senior Vice President, Forest Resources

We are down 20% to 25% in volume year-over-year.

Chip Dillon - Citigroup

Okay and you don't have a second quarter versus first quarter guidance, do you?

Timothy H. Brannon - Senior Vice President, Forest Resources

Yes just a SEC. We will be just slightly up in second quarter versus first quarter.

Chip Dillon - Citigroup

Okay. Slightly up, and then a last question in the second quarter here. And the last question is we are seeing... you are talking about pretty substantial price declines which shouldn't be a surprise given the demand trends and yet we are seeing timberland value stay at record levels. In fact you were,,, you all stepped up and bought some lands when you bought the lands Northwest were you is this sort of a view that you have toward how fast prices rebound and you are modeling to show that to be an accretive deal overtime. And so how do you see that unfolding?

Timothy H. Brannon - Senior Vice President, Forest Resources

We do obviously make assumptions about pricing for the timber and that is a part of our model. We also take into account the tax advantages we have, as far as the ability, to move property into our real estate sub on a tax efficient basis and both of those things were taken into account both in the Northwest and the New York State property and in both cases they met our hurdle rates as far as investment is concerned.

Chip Dillon - Citigroup

Got you.Thank you very much.

Operator

And next is Steve Chercover D.A. Davidson.

Steve Chercover - D.A. Davidson

Thank you. First of all I am sure that the energy project you guys did in Fernandina Beach has exceeded your expectations. Is there any chance to duplicate that?

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

Yes hi Steve, it's Paul. It has exceeded our expectations at Fernandina and we are looking at a very similar type of project at a much larger scale for Jessop. These just take quite a while to plan and to find the right pieces of equipment and to put in. So we are working hard on that, we have nothing to talk about at this time. But we hope to come forward at some point within the next 6 to 12 months to talk about. It will take a while to put together and a while to implement.

Timothy H. Brannon - Senior Vice President, Forest Resources

Yes I actually think that as far as fewer [ph] is concerned number probably be fairly comfortable wouldn't it, in terms of what we would be able to displace. But we do think there is a good opportunity there Steve.

Steve Chercover - D.A. Davidson

Great thanks. And there is another REIT-based in Spokane has decided to split off their manufacturing, I guess this is kind of corollary to Chips question. Any thought given to that?

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

I did see that and one of the things I think you have to bear in mind is our manufacturing business is very different than theirs. We have as you know a very high-value niche business. I think also it's we view it is very much one of our three core businesses. It's a part of what we consider a very tax efficient structure for the company. So I think that we are probably in a very different situation than they are in terms of thinking about our businesses overall.

Steve Chercover - D.A. Davidson

Great, thank you for that response. And then finally and perhaps I should know the answers to these but the revenues from your other business which I believe is trading has fallen more than 50% year-over-year. Is that just number pricing or is there something else happening there?

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

No Steve, we actually closed our Portland-based trading operation late first quarter last year.

Steve Chercover - D.A. Davidson

And secondly, and again maybe I should know this but, the lower depreciation Performance Fibers, can you explain what happened there?

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

Yes that was just a situation of a number of large pools that had been depreciated over the years. They kept basically becoming fully depreciated.

Steve Chercover - D.A. Davidson

Okay great. Thank you very much

Operator

And next is Peter Ruschmeier, Lehman Brothers.

Peter Ruschmeier - Lehman Brothers

Thank you and good afternoon.

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

Hi Peter.

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

Good afternoon Peter.

Peter Ruschmeier - Lehman Brothers

I wanted to ask a question if I could have of Charlie coming back to the Cousins JV; anymore color you can offer on the structure of that JV? The kind of capital commitments that might be considered the profit sharing maybe in status on entitlements, entitlements in flag or county, expectations of how we should think about this going forward?

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

Sure Peter and I hope that you misspeak. We don't have a joint venture, what we have is an agreement with Cousins a strategic alliance with Cousins to work together to plan, entitle and just work through that property over the next couple of years and they are going to move on site with the team and that we are just going to work through it together and potentially it will lead to a joint venture. But we decided and they decided, we all agreed that it was just too early to form a joint venture until the property is actually entitled. So, we are really excited about it. They are really a first class company, Atlanta based public company with a lot of development experience. It's a really good step for us. But the joint venture is yet to come.

Peter Ruschmeier - Lehman Brothers

Okay. And in the past I think you said that the entitlement process, that will it be a matter of years still, I think three years plus. Is that still the case in terms of your expectation?

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

May lead to regret this, but we are pretty optimistic down Flagler County, that... I would be disappointed if it took three years. I think we will drive that process. Its not a six-month process by any means, but two to three years I think is a reasonable expectation. I hope it doesn't go beyond that.

Peter Ruschmeier - Lehman Brothers

Okay. That's helpful. And I want to come back if I could to Paul on the pulp business and better understand if we could some of the cost pressures, I mean it looks like the revenues per unit were up in the range of $65 a ton, but the EBITDA per unit was barely up and I assume it that's the combination of your outages and then the expenses related to the physical expenses of the outages and then also chemical cost. But anymore color you can offer, it just seems like given the revenue jump, I was expecting '08 is still a bit more of profit jump in the first quarter.

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

Peter, l I think your observation is correct. Certainly raw material cost as we stated in and the unplanned outages as well as the planned outages took away some of that potential gain that we had in on the price side. I think you will see some of that comeback in the second part of the year as we run full out without any outages, mainly getting what we can on the rising of raw material costs. As far as well flavor we are seeing in a cash cost basis about 8% up from 2007 and I think where some potential downside to that.

Peter Ruschmeier - Lehman Brothers

Okay and that's cash costs overall, but not always at just chemicals?

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

No it's just cash cost overall.

Peter Ruschmeier - Lehman Brothers

Okay helpful. Okay and then just lastly, maybe Hans can you tell us help us just to adjust the $548 million of net debt pro forma for the April 3rd closings as to what the presuming the net debt balance is a lot higher today?

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Yes it's around $775 million right now.

Peter Ruschmeier - Lehman Brothers

Okay.

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

I would expect by the end of the year, it will trending down after some of the other acquisitions $710 million get retake.

Peter Ruschmeier - Lehman Brothers

Okay and the interest expense presumably would be kind of similar cost of debt on that I think step up relative to what you have been running at?

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

No the interest rate in how we are we funded the acquisition be our revolver and so right now that's at liable and so it's roughly 3.1%, 3.2%.

Peter Ruschmeier - Lehman Brothers

Well Okay.

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

That was a range I gave interest expense for the year, net of interest income of $42 million to $44 million.

Peter Ruschmeier - Lehman Brothers

Super. Very good. Thanks guys.

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

Okay.

Operator

[Operator Instructions]. We will go next to Hamzah Mazari, Credit Suisse.

Hamzah Mazari - Credit Suisse

Just a couple of questions; just curious, if lot of pricing does back off a bit, how much of an ability do you guys have to swing production from filament to Cellulose Specialties?

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

We actually have a limited ability to do that. Carl you might want to talk about kind of the range?

Carl E. Kraus - Senior Vice President, Finance, Rayonier Acting President, TerraPointe LLC

Yes, the fluff pulp is produced for mob cars [ph] are sea mill and Jessop and it really is dedicated to fluff pulp. We have some ability maybe in the range of 15,000 to 30,000 tons potentially to make a lower valued type of dissolving pulp. But for the most part and we have done this in the past just have dedicated a two fluff pulp.

Hamzah Mazari - Credit Suisse

Also, the cash that you are not sending up to your REIT from the Performance Fibers TRS, the cash that is staying at the TRS level, how much of that are you using for section 1031s or how much of that cash are you investing back into the pulp business versus what is just sitting there right now?

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

Well right now we are in a net debt potion on this. So as cash comes available, and we are looking any of those items that you mentioned, we certainly would have specially funding the increase in Performance Fibers capital expenditures this year. We come across Timberland acquisition opportunities we would likely again use it there and do some more 1031 exchange.

Hamzah Mazari - Credit Suisse

Okay.Alright, thank you very much.

Operator

And we'll go to Christopher Chun, Deutsche Bank.

Christopher Churn - Deutsche Bank Securities

Thanks, good afternoon guys.

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

Hi.

Christopher Churn - Deutsche Bank Securities

I noticed that your '08 EPS guidance has changed slightly from last quarter, gone from slightly below to just below. Should we be reading into that or not really?

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Well, it certainly has come down a little bit, Chris. I mean one other things we had mentioned on the acquisition of the Western Timberland is we expect $0.04 to $0.06 dilution just from the pulling of depletions. So that's certainly what I have taken into account and I think the second item as we're pulling off a little more timber, saw logs particularly out of the Northwest and what we have previously indicated in the January call.

Christopher Churn - Deutsche Bank Securities

Okay, that's fair. And then speaking of timber volumes, I was just wondering from a strategic standpoint I appreciate that you guys are pulling back volumes by 20% I think you said, but would it make some sense on some level to pull that volumes even more?

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

Let me juts comment on it. One of the issues you have particularly in the East is basically a number of spans, you sell a mixed spans. So there is certain limits on how much you actually can back off in order to meet your pulpwood demand. Now we do that by trying to select those tracks that we have that are younger and have less timber on them. We also do it by increasing the amount of spinning we do on tracks. But Tim you may want to comment all in there.

Timothy H. Brannon - Senior Vice President, Forest Resources

Right.That's exactly the case and of course as Lee talked about staying with the Southeast for just a minute, we do see a good strong demand for pulpwood which enables us and to look stents and that our may near maturity but just putting on additional volume. And so there is a great opportunity for us to go in and take a stand like that out and re-plan get going again, so there is an opportunity also the thinning program which some years ago we didn't do a great deal of thinning this gives us an opportunity to do that which we believe is an appropriate sort of cultural regime.

So we have that opportunity now and that again is a reason for us keeping some of these volumes up so it's working out well for us in the Southeast and then in the Northwest as we mentioned with the timber damage that's out there on our property as well as others all the way down into Oregon there is the need to get in and harvest that timber because otherwise you are gone lose value overtime. So I think we are at a good balance right now in the Northeast and in the Southeast, as Northwest and the Southeast as well.

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

Right I just haven't said that Tim we say that I think our overall harvest volume in the Northwest we said it will be down 20% to 25% and majority of that is sole timber.

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

That's right

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

Because that's what the Northwest is all about whereas in the East our volumes are down from 3% but much heavier mix towards fluff wood than we have had historically.

Christopher Churn - Deutsche Bank Securities

Exactly. All right that was okay. I mean that's fair but I guess I was just thinking that particularly in the Northwest, certainly you need to go and salvage the damage would before that opportunity stands but in terms of the standing timber, I was just wondering if there was even more opportunity to cut back or maybe even cut back completely on your marketing of understanding timber in the Pacific Northwest.

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

Not really from where we stand at this point as we say we have... there is some timber in the course that we had that was some carry over volumes and volumes that we sold earlier on. We got a contractual obligation of volume that we need to supply to one of the major saw mills out there and then we have the blow down. So we have hold it back basically about as far as we think is prudent.

Christopher Churn - Deutsche Bank Securities

Okay and then another strategic question if I might; it seems like you guys are taking the capital or the proceeds from land sales and putting it into additional Timberland acquisitions. But I was wondering if you guys saw any opportunity to rather than do that given the fact that Timberland valuations are still extremely robust and development land values have probably come off dramatically recently, whether you have any thoughts to potentially invest in some of those proceeds and additional development land?

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

Well we have talked about that internally, we have gotten that question before. I think as far as our raw strategy is concerned we are a timber REIT. We see growing the value of our timber assets. We do that through really upgrading that portfolio. I have looked at and we have talked about whether in fact there was land that may be adjacent to or part of land we are thinking about developing if that came available, we would probably consider it. But really beyond that just going out and looking for development land is really not a part of our strategy. I mean our strategy is to really work on the land we have got. We have got quite a bit of land that's available for development we got lot of good value to be added by developing that land and so that's primarily what we focused on.

Christopher Churn - Deutsche Bank Securities

Okay. Thanks for your help.

Operator

We will go to Claudia Houston [ph], JPMorgan.

Unidentified Analyst

Hi. Thanks very much. Most of my questions have been answered but just a couple of little things; one I think you said land bases for the Europe you have got $12 million. Do you have lot more land bases was for the quarter?

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

Hang on Claudia I think I have that. We have about $1.6 million.

Unidentified Analyst

Okay thanks. And then just looking at the acquisition environment, I just wondered if you have seen any real change n the last couple of months particularly given sort of the changing credit market. Are there sort of more willing sellers or has the appetite for land may be from some of the alternative investors changed at all?

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

I don't think we've seen the demand change. I think we have seen and continue to see a good better discussion about land on the market. I mean my impression is I am hearing about people putting land on the market or putting it on the market, because we take a hard look at property on a fairly continuing basis. But in terms of the demand side anything that would suggest a weakening there I have not seen that. Tim you see anything?

Timothy H. Brannon - Senior Vice President, Forest Resources

No I have not.

Unidentified Analyst

Okay thanks very much.

Operator

[Operating Instructions]. And we have a follow up from Chip Dillon, Citi.

Chip Dillon - Citigroup

Hi. I know with the non-strategic timberland sales they were big in this last quarter. What is the acreage at this point that you consider to be in this category and how much time over what period of time would you guess it would be sold?

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

I'll take it. Well we have a prospectus out if you would like to bid in Alabama for approximately 13,000 acres and three parcels got a little out West but the majority of it is in the south and it just so happens this year. What we identified is non-strategic happened to be in Alabama. That doesn't necessarily mean way it goes forward. So we're hoping to get some or all of that sold... executed and sold in and around the third quarter.

Chip Dillon - Citigroup

And not radically different or not dramatically different from the kind of levels you saw in the first quarter or would that be better land or not quite as --?

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

The properties are sold in the first quarter and you have to remember we have to sell this, so I don't want to drive it down. But the properties that are around the market now are better. They are certainly not our prime properties, non-strategic is just the opposite, but on average they are better properties.

Chip Dillon - Citigroup

Than what you sold in the first quarter.

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

Correct.

Chip Dillon - Citigroup

Okay. Well, if I can run a bank that's lending money these days, I might take you up on the prospectus.

Charles Margiotta - Senior Vice President, Business Development and President, TerraPointe Services Inc.

Well, just give me your address and we'll get a prospectus out.

Chip Dillon - Citigroup

And then the second question I had was, its just for you first and I am sort of sticking to my model. You gave us a basis for land sales for this year, are you still looking for something in the neighborhood of $75 million to $85 million for that number? You might have mentioned that, I just missed it. What sort of the gross land sales, you said $12 million would be the basis? What do you think sort of the gross revenue that you would see?

Timothy H. Brannon - Senior Vice President, Forest Resources

Well, we didn't really give a range on that one.

Chip Dillon - Citigroup

Okay.

Timothy H. Brannon - Senior Vice President, Forest Resources

No we have... that's just the basis that we expect to see.

Chip Dillon - Citigroup

Okay. And so you have any view as to how that... I guess you mentioned this is mostly back-end loaded.

Timothy H. Brannon - Senior Vice President, Forest Resources

Correct, right.

Chip Dillon - Citigroup

Thank you.

Operator

And we have a follow-up from Ross Gilardi, Merrill Lynch.

Ross Gilardi - Merrill Lynch

Thanks guys, I just have one more, I think there has been some capacity in the cellulose acetate market that's come on over the last several months and maybe some more that's coming on now outside of the U.S. Can you comment and if those projects have actually come on and if they are having any impact on the supply demand balance, realizing obviously your prices locked in for 2008?

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

Project we are aware of ones in both in southern hemisphere and the one in South America. We understand is coming on this quarter, maybe June some timeframe is what we are hearing and the one in Africa is coming on in the third quarter, from what we hear. So right now we haven't seen any impact from that. We don't expect to see any in this year and I don't know that we will see much as... a lot of that is going to be focused we believe towards the lower value West Coast market which we don't play in. So at some point it has a push or a pull on overall market, but we won't see that directly.

Ross Gilardi - Merrill Lynch

And have there been any additional new capacity announcements in the last couple of months in the cellulose acetate market?

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

I think the sale... has been the announced sale of the Cosmopolis Mill by a Weyerhauser.

Ross Gilardi - Merrill Lynch

Right.

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

As you remember, it was a mill that was closed by a Weyerhauser and I think Evergreen as well as the utility district out there have announced a joint effort buying that mill. That's the only other one I'm aware of.

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

That's right. And I imagine that could come on in the back half of this year at some point.

Ross Gilardi - Merrill Lynch

Okay. Thanks very much guys.

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

Sure.

Operator

And Mr. Vanden Noort, at this time we don't have any further questions in the queue. I'd like to turn it back to you for any additional or closing remarks.

Hans E. Vanden Noort - Senior Vice President and Chief Financial Officer

Okay, thanks. I'd just like to thank everybody for joining us and then please contact Carl with any follow-up questions. Thanks.

Operator

Ladies and gentlemen that concludes today's conference. You may now disconnect.

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Source: Rayonier, Inc. Q1 2008 Earnings Call Transcript

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