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Rayonier, Inc. (NYSE:RYN)

Q2 2012 Earnings Call

July 26, 2012 2:00 PM ET

Executives

Hans Vanden Noort – CFO

Paul Boynton – Chairman, President, CEO

Lynn Wilson – SVP, US Forest Resources

Charlie Margiotta – SVP, Real Esate

Jack Kriesel – SVP, Performance Fibers

Analysts

Chip Dillon – Vertical Research Partners

Joshua Barber – Stifel Nicolaus

Steve Chercover – D.A. Davidson

Mark Wilde – Deutsche Bank North America

Michael Roxland – Bank of America Merrill Lynch

Paul Quinn – RBC Capital Market

Operator

Welcome and thank you for joining Rayonier second quarter 2012 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. I would now like to turn the meeting over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Hans Vanden Noort

Thank you, and good afternoon. Welcome to Rayonier’s investor teleconference covering 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-10Qs and 10K 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’re also referenced on page 2 of our presentation materials.

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

Paul Boynton

Okay, thanks, Hans. Good afternoon, everyone. I’d like to make a few overall comments before turning it back over to Hans to review our financial results. Then I’ll ask Lynn Wilson, Senior Vice President, US Forest Resources, to comment on our timber results. Following our view of Forest Resources, Charlie Margiotta, Senior Vice President of Real Estate will discuss our land sales, then Jack Kriesel, Senior Vice President Performance Fibers will take us through our Cellulose Fibers business.

We had another great quarter and I’m pleased to report earnings per share of $0.54, a 20% increase over the prior-year period, together with solid growth in our year-to-date cash flows. On Monday, we announced a 10% increase in our quarterly dividend from $0.40 to $0.44 effective for the third quarter distribution. This action reflects our strong financial position and continued confidence in our ability to generate increasing cash flows through execution of our strategy.

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

Hans Vanden Noort

Thanks, Paul. Let’s start on page 3 with the overall financial highlights. As Paul noted, the second quarter was very solid, with sales of $372 million, operating income of $99 million, and net income of $69 million or $0.54 per share. On the bottom of page 3, we provided an outline of capital resources and liquidity.

Our year-to-date cash flow was strong with EBITDA of $249 million, cash available for distribution of $141 million. We ended the quarter with approximately $1 billion of debt and $189 million in cash. So on a net debt basis, we finished at $829 million. Overall, we feel very comfortable with our current balance sheet and liquidity.

Let’s now run through variance analyses. On page 4, we prepared our typical sequential quarterly variance analysis. In Forest Resources, second quarter operating income was comparable to the first quarter, as improved pricing in the Gulf States and Northern regions offset higher logging and transportation cost in Washington. In Real Estate, our operating income was comparable.

Moving to Performance Fibers, you can see significant price improvement in cellulose specialties, reflecting the full realization of a 2012 price increases and improved product mix. However, our cost increased, led by higher depreciation and maintenance. Our Wood Products business improved by $3 million, which was all price-driven. Our other operations, which is log trading, also improved primarily due to foreign exchange gains.

Corporate and other expenses were $7 million below last quarter when results were negatively impacted by the timing of stock-based incentive compensation expenses associated with the prior CEO’s retirement. We also benefitted from a $2 million insurance recovery this quarter.

Let’s move now to page 5, in the year-over-year variances. The second quarter and the year-to-date variances compared to last year basically have similar drivers. Our Forest Resources results reflect lower prices in volumes in the Northwest, driven by weaker export demand partially offset by improved prices and volumes in the Atlantic and Gulf State regions in the absence of a fire loss accrual recorded in the second quarter of 2011. Also, logging cost were higher in the Northwest this year.

Real estate results were comparable for both periods. In Performance Fibers, cellulose specialty prices strengthened, offsetting lower absorbent material prices; however, input and labor costs were above last year. Finally, wood products results improved reflecting higher lumber prices.

Turning now to page 6 where we reconciled from cash provided by operating activities, which is a GAAP measure, to our non-GAAP metric of cash available for distribution or CAD. Our year-to-date cash flow was strong with CAD of a $141 million, above last year and well above our dividend payout of $98 million to date.

With that, let me turn the conference over to Lynn Wilson.

Lynn Wilson

Thank you, Hans. Good afternoon. Let’s start with page 8, in the Northern region, which is primarily our Washington State operation. Both price and volume declined in the second quarter compared to the prior-year period, due primarily to softness in Asian export demand. However, prices improved in the second quarter compared to the first quarter and export volume increased from 16% to 27% of our Washington sales.

The recovery and exports to China has been slower than we expected and are now projecting price improvements in the fourth quarter. We are well-positioned to take advantage of both domestic and export demand with a planned harvest volume increase of approximately 10% to 20% in 2012. Overall, we expect delivered log prices in 2012 to be somewhat below 2011.

In the Atlantic and Gulf regions on page 9, pine stumpage prices increased slightly from first quarter levels as we capitalize our markets with strong demand and weather-impacted supply constraints. Prices were higher than the same period last year as fire salvaged wood impacted last year’s overall market pricing. Harvest volumes were in line with the prior quarter and second quarter of the prior year.

For the full year, both pine harvest volume and prices are expected to be approximately 5% higher than 2011. Overall, Forest Resources operating income should be above 2011 due to increased volume and higher pine prices.

Now, let me turn it over to Charlie Margiotta to cover real estate.

Charlie Margiotta

Thanks, Lynn. Real estate results for the second quarter were comparable to the first quarter. While we sold somewhat fewer rural acres, per acre prices were 20% higher due to geographic mix.

Page 10 details rural and development sale. Activity slowed somewhat from the first quarter, but was comparable to the second quarter 2011. There were two sales to note in the second quarter of 2012. First, a 425-acre conservation sale at Washington State at $3,000 per acre, and a 2,500-acre rural recreational sale in Florida for $2,825 per acre.

Page 11 details per acre prices. The $2,677 rural per acre price was driven generally by the previously mentioned transaction. We are pleased with the increased interest in our Florida rural properties. We continue to expect operating income to be below 2011 and weighed it to the second half.

Now, let me turn the teleconference over to Jack Kriesel.

Jack Kriesel

Thank you, Charlie. Cellulose specialties demand in good operating performance continued to drive strong earnings in performance fibers. On page 12, you see net selling prices for our two performance fibers product lines. Compared to the same quarter in the prior year, cellulose specialty prices were up $200 per ton or 12%. Compared to the first quarter, cellulose specialty prices increased $83 per ton or 5% as a result of the full realization of the 2012 price increase and improved mix.

We continue to expect a year-over-year increase in cellulose specialty prices of 12% to 13%. Absorbent material prices, which consist principally of fluff pulp, declined $142 per ton or 17% from the same quarter in the prior year and prices declined $16 a ton, or 2% from the previous quarter. We believe fluff prices will continue to soften throughout the year due to the influence of weak commodity pulp prices coupled with increased global fluff capacity.

Moving on to page 13 and looking at volumes, our second quarter cellulose specialty sales volumes were comparable to the second quarter of 2011. Full sales volumes are also expected to be comparable to 2011. Second quarter 2012 absorbent materials sales volumes were comparable to the prior period. For the full year, we expect volumes to be approximately 5% below prior year.

Overall, we are expecting another record year for performance fibers for cellulose specialty price increases more than offsetting cost increases and lower absorbent material prices.

Our expansion of cellulose specialty capacity at our Jesup mill continues to progress toward a mid-2013 startup. Construction continues on foundations and steel erection as well as installation of some additional process equipment. Having already obtained commitments for approximately 85% of the new production volume, we continue to make good progress firming upper sales for the balance.

Now let me turn it back over to Hans.

Hans Vanden Noort

Thanks, Jack. Now I’d like to update some key statistics to assist you in refining your model. We expect depreciation, depletion and amortization of about $147 million in the non-cash cost basis of land sold of about $6 million, or approximately $153 million consistent with our prior guidance.

Capital expenditures, excluding strategic timberland acquisitions in the cellulose specialties expansion, are expected to range between $155 million and $116 million compared to 2011 spending of $145 million. This increase will primarily occur with Performance Fibers on cost reduction and efficiency and also in civil cultural investments in our newly acquired property. We expect 2012 spending on the cellulose specialties expansion to range between $200 million and $210 million.

Both our interest and income tax expense guidance has changed as a result of how we must record the exchange of the cellulosic biofuel producer credit for the alternative fuel mixture credit. This quarter included a net benefit of $6 million, which was consistent with our prior expectations. However, under the accounting rules, we cannot net the $3 million interest expense associated with this exchange against the $9 million tax benefit, but instead we must record each element on a gross basis.

So for the full year, we expect interest expense net of interest income of about $55 million. This includes a $3 million of interest to the IRS from the exchange, but is net of about $7 million of capitalized interested related to the CSE project.

Finally, our effective tax rate guidance now is a range between 23% and 25%. This is down a percentage point due to the gross up benefit of the exchange. When you put all these elements together, we again anticipate very strong cash flow, we expect EBITDA and operating income to be about 10% to 12% above 2011. CAD should range between $295 million and $310 million. And finally, we are maintaining full-year EPS guidance that’s being comparable to 2011.

Now, I’ll turn it back to Paul for some summary comments.

Paul Boynton

So as we enter the second half, we’re well-positioned for another strong year. In Forest Resources, we will continue to capitalize on local market opportunities in the Southeast and are well-positioned to increase harvest volumes in the Northwest as the Asian markets improve.

As Lynn mentioned, the timing of the Chinese export recovery represents some uncertainty in the second half. However, we remain confident about the positive mid-to-long-term benefits of this market. In Performance Fibers, we anticipate another record year driven by strong cellulose specialty markets. And also as Jack mentioned, we remain on track to complete our cellulose specialties expansion project by mid 2013.

Providing a securing and growing dividend to our shareholders remains a key objective. The dividend increase in the third quarter will be our 8th in the last 10 years. Through the successful execution of our strategy, we have now increased our dividend by nearly 30% over the last three years, and we will continue to invest in timberland and performance fibers to drive dividend growth and total shareholder returns.

So with that, I’d like to close the formal part of our presentation and turn the call back to the operator for questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Chip Dillon of Vertical Research Partners. Your line is open.

Chip Dillon – Vertical Research Partners

Hey, yes, and good afternoon. Looking at the exchange that you talked about, and maybe this was laid out, I just missed it, but basically you had this in both second quarters only this year and last year. And so, maybe I just don’t recall, but this is up, I guess, about $0.08 of the earnings that you reported. I’m sorry. I actually did a stock split. Sorry, it’s probably about $0.05 of the $0.45. Is that the way we should think about it for this year?

Hans Vanden Noort

It’s $0.05.

Chip Dillon – Vertical Research Partners

Or the $0.54, excuse me.

Hans Vanden Noort

That’s right, Chip. It’s about $0.05 of the $0.54 that we recorded this quarter. And yes, basically, you got to go through the analysis each year. And so, last year, we updated the analysis in the second quarter and we did the same thing here. We completed the analysis and came up with this determination.

Chip Dillon – Vertical Research Partners

Got you. But there was nothing in there for either the first quarter of this year or last year. It’s just been recognized only in the two second quarters. Is that right?

Hans Vanden Noort

Last year, we had a little bit more, I think, in the third quarter. But you’re right, the bulk of it came through in the second quarter.

Chip Dillon – Vertical Research Partners

Got you, okay. And then moving on, looking at the project, could you just give us an update on that? And I guess the two questions specifically are, how do you see the $7 million in capitalized interest sort of running off next year. Will you see it go away, I guess, in mid year? And then, is everything pretty much on time for a startup in the middle of next year or I guess September as you had indicated – I’m sorry, second quarter as you had indicated earlier?

Paul Boynton

Hans?

Hans Vanden Noort

Yes. So once we complete the project, we’ll stop capitalizing interest and that will just then run through the depreciation expense as part of the overall cost of the project. But Jack, maybe you want to handle as far as the timing of it?

Jack Kriesel

Yes. As indicated, we’re still looking at a mid 2013 as per our plan and while we’re all underway this year. So we don’t see any issues at this point in time.

Chip Dillon – Vertical Research Partners

Okay. And then the last one is, when you do start that up, I mean, right now, it looks like your depreciation is running somewhere around, well, 260, I guess – or actually, I’m sorry, you mentioned 153 for this year and I’m assuming that won’t change a lot until that starts up.

But upon start up, what do you sort of see the annualized depreciation and I know included basis on that number? What would you see the annualized – so let’s maybe use the 147, what do you see that going to? How much of an impact will the project have?

Charlie Margiotta

Well, [inaudible], I would say roughly would be another $15 million or so a year depreciation roughly.

Chip Dillon – Vertical Research Partners

Got you. Okay. Thank you.

Charlie Margiotta

Well, on the full year. Yes.

Operator

Thank you. And our next question comes from the Joshua Barber of Stifel Nicolaus. Your line is open.

Joshua Barber – Stifel Nicolaus

Thanks. Goof afternoon.

Charlie Margiotta

Hi, Josh.

Paul Boynton

Hi, Josh.

Joshua Barber – Stifel Nicolaus

We’ve seen some pretty weather so far in – remember Gulf South so far third quarter to date, can you talk about some potential impact first on your timber pricing for the third quarter and also on what impact that might be having on the cost for the performance fiber sight?

Paul Boynton

Yes, Josh. Let’s Lynn take the first part and Josh, the second – yes.

Lynn Wilson

Josh, we’ve been very fortunate within the Gulf State and we’ve seen timber prices go up across the board anywhere between 5% to 7% but we expect that to carry through the third quarter because of the extended impact particularly from – in the west. And we’re looking forward to capturing that price in third quarter.

Jack Kriesel

And from a performance fiber standpoint, when you go back and you look at some of the wet periods like 2003, we learn that we needed to carry significant amounts of inventory to try to correct that, prevent from planning out of fiber so we’re in very good position whether procurement [ph] group going into this kind of wet period and we on the Rayonier is we didn’t see much of impact, somewhat of an increase on hardwood prices but nothing too significant.

Joshua Barber – Stifel Nicolaus

Great. That’s helpful. We’ve seen a couple of big timber deals from the last few months. Are you guys still involved actively in some of the larger deals and do you think your cost of capital can be competitive today to where some of those prices seemed to be?

Paul Boynton

Yes, Josh, I think swing at this and then Charlie just want to add to it. Obviously, we’re still out there looking – reported last time kind of our look to hit ratio and we tend to look at a lot bid and a lot less and then actually execute on the very small numbers.

So, Josh, we’re still out there actively but it’s got to make good financial return from us. And we stay very discipline on that and so we don’t have much to report ourselves so far this year.

Charlie, any comments on where you transaction rates add or anything?

Charlie Margiotta

Only that to repeat what you said a bit that we’ve done evaluations, we raid [ph] some offers and basically this year had been now fit. So it’s pretty active out there. We continue to look and there are opportunities but it’s a pretty active market.

Joshua Barber – Stifel Nicolaus

Great. Two quick questions for Hans, first is the $0.5 of the cellulosic and biofield credit, is that included in your guidance of being comparable or would be accounted as a special item?

And second, what’s the total cash spend to date on the Jesup project? Thanks very much.

Hans Vanden Noort

Sure, Josh. Yes. It is dis-included in the overall guidance, the $0.5 and so – and the total cash spend through June 30 is about $116 million on the CSC.

Joshua Barber – Stifel Nicolaus

Great. Thank you very much.

Hans Vanden Noort

Okay.

Paul Boynton

Thanks, Josh.

Operator

Thank you. And our next question comes from Steve Chercover of D.A. Davidson. Your line is open.

Steve Chercover – D.A. Davidson

Thanks. It was interesting to hear that you’re now up to 85% sold that on the cellulose specialty project. Does that include the commodity in viscose that you’re going to start with?

Jack Kriesel

Yes. That’s been fairly consistent what we’ve been reporting is of that 85%, 70% is the high value of CS business and roughly 15% is commodity viscose.

Steve Chercover – D.A. Davidson

And, Jack, how do quickly do you express that you’ll kind of transition out of the commodity viscose?

Jack Kriesel

When we look at – in 2013, the second half of the year is going to be primarily commodity viscose. We use that timeframe to qualified pulps. 2014, the majority of the production will be high value CS so we’ll face that in over a one- or two-year type period.

Steve Chercover – D.A. Davidson

Perfect. And then with respect to land transactions, is still your preference to do kind of smaller deals or full tons [ph] or would you even be interested in kind of a very large transaction?

Paul Boynton

Steve, again, I’ll take a shot. We’re continued to make – interested in anything that we think that we can provide a good return to our shareholders. Last year, we transacted well over $400 million with the property 325,000 acres. And one of those I think was one of the largest ones transacted last year. So we’d say that feasible. It’s not as large as one of the ones that we just approved recently about.

But we keep our eyes open for all sides and in fact we think we may be more competitive at the larger sides.

Steve Chercover – D.A. Davidson

Sure. And final question on wood products which is finally worth mentioning, do you think it’s sustainable?

Jack Kriesel

I’m sorry. Do I think it’s a what?

Steve Chercover – D.A. Davidson

Sustainable or it’s actually be making a contribution of…

Jack Kriesel

Well, I’d like to think that I would never quite know here but the housing market continues to have a little bit of I guess growth in it and so we look favorable in the first half or second half.

Steve Chercover – D.A. Davidson

Sorry. May I have one more in? Along the I-95 quarter, do you think you have opportunities to do some transactions that might be more commercial or industrial the way you’ve done in the past?

Charlie Margiotta

Yes. It’s Charlie. We sure hope so. I mean, we believe that the commercial and industrial will lead the improvement and residential development will follow. And we’ve got several properties entitled and [inaudible] ready to go. So, yes, we think so but nothing more than to have to report a couple really good transactions to you. So we’re working on them but it’s probably going to take a little time.

Steve Chercover – D.A. Davidson

Okay. Thank you all for your answers.

Operator

Thank you. And our next question comes from Mark Wilde. Your line is open.

Mark Wilde – Deutsche Bank North America

Good afternoon and congratulations on a good quarter.

Paul Boynton

Thanks, Mark.

Mark Wilde – Deutsche Bank North America

Just curious is a specialty credulous [ph] producer that’s been talked about in the market quite a bit recently, without asking you to comment on its situation, I’m just curious is there room for you within the TRS to significantly expand the business beyond what you’re doing at Jesup right now under the REIT rules?

Paul Boynton

Yes. Let me take the first part of that and maybe let Hans talk to some of our REIT rules but I’m not too sure exactly what are we talking about it, but maybe a North European one.

Mark Wilde – Deutsche Bank North America

Yes, it is. It is.

Paul Boynton

Yes. You know, we have looked in this, we have for 15 years longer, with any opportunity out there that we think is nice with our business and we will continue to do that. I’m not saying that this one is a particular fit or not but I said we’re always open-minded that way, Mark.

With regard to the REIT rules in acquiring an asset like that, Hans, you…

Hans Vanden Noort

Sure. In a case like that it’s results finance from the TRS really would be – which I’ll assume now that increase in the TRS value per se. But going beyond that, we’ve said before, we have pretty strict oversight of the client with all REIT rules and we have to test in particular and a pretty regressed progress which includes a quarterly review from board going few asset values and so we are currently in full compliance with the test. We’ll say it’s a very technical test.

As you know, it doesn’t go off with GAAP numbers but a fair value. And there’s also a lot of internal structuring opportunities that we’ve done to give us some additional headwind if you will under that and there are some opportunities that we are looking to in the future. So giving all that, we’re in compliance with it.

However, I’d say that we all recognize that the performance fibers growth continues. At some point in future, we may reach a point where we have potentially a little issue. And if that comes to be, we’ll look at all available options that are really shareholder friendly. So just to reiterate, we have a very rigorous process around the test.

Mark Wilde – Deutsche Bank North America

Okay. Question now for Lynn. It sounds like the rebound that you were looking for in China, you mentioned that’s now kind of more like fourth quarter event. I know a couple of months ago, a lot of people that I talked with in the Northwest were thinking about this as a second half event.

So can you update us on what you’re seeing on the ground in China right now and how you read that situation?

Lynn Wilson

Certainly. As you said we’ve experience the near-term softness and we were expecting the second half to rebound and are have now looked out to the fourth quarter.

New construction in China fell and to tackle the slow down, the people think of China lowered the deposit rates and reduced the interest rate. So in the first half of 2012, China’s log imports declined.

But during the same period, the lumber imports dominated by Canada increased. So there has been – even though with the decline in port inventories in February, there has been a modest increase in those port inventories again. But we are hoping that with the changes to the deposit rates and the reduce interest rates so that will –for the new construction which is what we need.

So in the long term, we still have that fundamental 78% growth expansion of their economy and expected that demand will fall through the pipeline and that we’re positioned with our ownership is with the port access to be able to move quickly and the fact that we have invested in roads over the past two years so that we can operate in any quarter and move quickly as soon as the price is at a point where we want to be.

And we’re also seeing some modest uptick with our domestic customer. So we continue to move our volume both to export and domestic customers.

Mark Wilde – Deutsche Bank North America

Okay. And I think, Lynn, in the past you said that kind of New Zealand is often a leading indicator for your in terms of kind Chinese market activities. Is there anything to report on that fund right now?

Paul Boynton

Yes. Again, I think I give this to Lynn and the team in the Northwest a good view of what may be coming because we do have the New Zealand operation. And, Mark, you see that’s why we give the confidence and, again, Charlie can add to this.

But the market can be rolled to be slow going into the back half of this year so I think that’s why we’re saying it’s probably likely going to be fourth quarter and that’s before we see a lift because we see China pretty – or sorry, New Zealand pretty quiet ended China right now.

Mark Wilde – Deutsche Bank North America

Okay. And Paul, the dollar has been rallying against a lot of currencies. I wondered if you could just take kind of two steps back and talk with us briefly about you think this affects all of your businesses?

Paul Boynton

Yes. Primarily, I think we look at the dollar in the currency ratios there. It’s really on the PF side of our business and we’re selling dollars around the world and we treat all of our customers very consistently. So through the years, we see ups and downs and we always take it into our price and considerations come to the New Year.

Obviously, a stronger dollar will have some effect but at the same time, we’ve seen a very weak dollar and our customers will all had a benefit of that over a couple of years now. So there’s nothing really specific. I say it’s going to push us on one year or the other. It’s just the fact that we put into our pricing and particularly in the PF side come the coming year.

Mark Wilde – Deutsche Bank North America

Okay. All right. Sounds good. Thanks and good luck in the second half year.

Paul Boynton

Thanks, Mark.

Operator

Next question comes from Michael Roxland of Bank of America Merrill Lynch. Your line is open.

Michael Roxland – Bank of America Merrill Lynch

Thanks very much, (Michelle). A lot of my questions have been asked but I just had a quick question I think for Lynn on timber pricing.

Obviously, we’ve seen a recovery in lumber pricing and to some of the lumber demand. At what point should we expect that improvement to translate into improved timber pricing?

Lynn Wilson

Michael, we’ve already started to see that both in our wood product business, but also we are – up to this course, we’ve eventually shifted a little bit more saw log this quarter. Our shift before was 75% to 25% and this quarter we’re at about 65% pulpwood to 35% saw logs. So we have started to see, particularly in our goal states where we’ve been able to move more saw logs. But we already start to see that modest price uptick and demand which has been a favorable outcome.

Michael Roxland – Bank of America Merrill Lynch

Yes, but – because you had – you’ve really seen a pretty big significant improvement in lumber. So I mean do you see further price improvement, you know, over the next couple of months particularly for lumber remains at any levels]?

Paul Boynton

You know, Mike, we saw, I think quarter-to-quarter on the wood products business a 16% increase on prices there. And then after its kind of has dropped off a little bit. It’s such a hard one for us to predict and even harder to translate that back to the stump. And so it’s hard for us to go out there and say this is what it’s going to be.

You know, if I had to guess, you know, we’re probably more conservative. Maybe it’s closer back to first quarter numbers but it’s certainly somewhere in between first and second quarter. And again, as Lynn mentioned, it help push a makeshift a bit to the great market versus pulpwood and give us a little bit what lift on price out of the great market as well.

But it’s really hard to say exactly where it’s going to net out here going forward.

Michael Roxland – Bank of America Merrill Lynch

Got you. Thanks very much.

Operator

Thank you. (Operator Instructions) Our next question comes from Paul Quinn of RBC Capital Market. Your line is open.

Paul Quinn – RBC Capital Market

Yes, thanks very much. Good afternoon. Just a couple of questions on performance fibers pricing. I did assume that your fluff realizations were down through $16 quarter to quarter where list prices were, you know, up $35. Is that a lag effect happening? Or what is specifically happening to you versus or maybe list has an [inaudible] of what’s happening on the market place but maybe you could comment.

Jack Kriesel

Yes, if we look back at the first part of the year, we saw a little bit of increase if fluff prices going into the tail end of the first quarter and the first part of the second quarter. And now, what we realized with the MBSK market drop and offered discounts have been fairly significant out there. Also list, on top of a very significant drop in spot prices particularly in China.

So, you know, the drop off from quarter to quarter this year is really just kind of indicative of the drop off we’ve seen a little bit in the market place.

Paul Boynton

And Jack, you said part of the gap between what’s recorded out there list and ours again is just more of timing than anything.

Jack Kriesel

Yes, we have about two months offset. And based on our contractual commitments.

Paul Quinn – RBC Capital Market

Okay, have noticed any difference in sort of the dynamics around fluff pulp pricing as Franklin Mill [ph] rant up?

Jack Kriesel

Yes .

Paul Quinn – RBC Capital Market

Have discounts widen out even more?

Jack Kriesel

Yes, I think, you know, with the combination of the South American Mill [ph] and the Franklin Mill coming on stream – that’s in about another almost 500,000 tons of volume plus the, you know, when the MBS came out it means so soft. Some of the swinged players have swinged more over into fluff.

That does provide more supply into that market. So you’re going to have somewhat of a drop off or a higher discount off the list price.

Paul Quinn – RBC Capital Market

Okay, just sort on the specially DP pricing that $83 quarter to quarter, is that just a rollover of contract that didn’t reset at the beginning of the year but they reset this quarter?

Jack Kriesel

No, if you go back again from the end of 2011 and of 2012, we have less volume rollover into 2012. That would have been at about 2012 or ‘11 prices. So we had, you know, an increase going in from Q1 to Q2 as it now totally reflects all of 2012 volume, none of 2011.

And a little bit on just standard mix.

Paul Boynton

And Paul, if you look at our notes that you’ll see the same kind of pattern the year before. It just kind of took a while for everything to balance out there into the quarter and then, you know, the mix.

Paul Quinn – RBC Capital Market

Okay, great. Thanks guys.

Jack Kriesel

Thanks, Paul.

Operator

And we have no other questions from the phone lines. Speakers, I’ll turn it back over to you.

Hans Vanden Noort

All right. Well great. This is Hans Vanden Noort). We appreciate you joining us this afternoon. And please contact Carol Crowes [ph] with any follow up questions.

Operator

Thank you for participating in today’s conference. You may now disconnect at this time. May you have a wonderful day.

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