Rayonier Inc (RYN) 2003 Q2 法說會逐字稿

Please stand by; we're about to begin. Welcome to the Rayonier second quarter release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission.

Your participation on this call constitutes consent. Please hang up now if you do not consents being reordered. At this time, for open remarks and introductions, I'd like turn the call over to SVP and Chief Financial Officer, Mr. Gerald Pollack. Please go ahead, sir.

Thank you, and good afternoon. I would like to once again welcome everyone to Rayonier's analyst teleconference, this time covering earnings for second quarter 2003. Our earnings statement was released just this morning and supplemental materials soon thereafter. If you have not received this material, please call our investor relations department at 904 357- 9177 and we'll add you to the mailing list.

This conference is being broadcast over the interpret and is open to share holders and interested investors. Instructions in accessing the live webcast were given in our press release. Simply go to our web site at Rayonier.com and link to the conference.

With me today is Lee Nutter, Chairman, president and CEO. We will follow typical routine with Lee open formal presentation followed by my review of the financial highlights of the quarter. Lee will cover markets and operations and I will close our presentation with a discussion of earnings per share trends.

As usual in these presentations we include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Our 10-K, and press release list some of the factors which may cause actual results to differ from those projected and which do change from time to time. Please familiarize yourselves with them. With that let's start with the program with opening comments from Lee Nutter. Lee?

Thank you, Gerry. Let me just take a few moments to make a couple comments on the second quarter and then some general remarks on our earn earnings announcement and our outlook for the balance of what's been and will be over a very challenging year.

Overall I have to say our second quarter results were disappointing. While earnings of 74 cents were strong due to a major contribution from ongoing land sales program and the Matanzas sale in particular which contributed 59 cents a quarter. Results from Operation does not near our expectations. Excluding the Matanzas transaction will not quite an apples to apples comparison because we always have some land sales results were below first quarter and last year's second quarter.

Business conditions remain difficult, particularly in performance fiber where, while we saw sequential improvement, results are far below the earnings power of this business. In timber and land, our other major business, timber markets remain relatively weak here in the U.S., but have held up reasonably well in New Zealand. Meanwhile, our land sales initiative continues to be strong with the second quarter seeing benefit and impact of the quarter to quarter volatility inherent in this business. We continue to see very strong interest in our southeast properties, particularly those here in north Florida.

During the quarter, we reduced debt slightly dropping our debt to total capital ratio below 46% reflecting an improvement over the first quarter of 1.2 percentage points. As we've noted in the past and while we'll continue to pay down some debt, it's not likely to be the pace we've seen over the last few years where we paid down over $500m from the 1999 level of slightly over 1 .1b. Obviously, these reductions significantly strengthened our balance sheet.

In summary, the second half of 2003 remains a challenge. However, given our unique mix of businesses, you should continue to see, as you have in the past, high quality and consistently strong financial performance. The 12. 5% dividend increase that we announced on may 21st is a testament not only to our strong earnings but our focus on optimizing cash allocation strategies in order to maximize shareholder value. Gerry?

Thanks, Lee. As Lee noted, the Matanzas sale dominated financial results for the quarter, contributing 59 cents per share on economic basis to this quarter's and this year's basis. For reference purposes on the transaction's impact on our key financial metrics we have included the highlights of the Matanzas sale on page 15 of our supplemental handout, the first page of the appendix. With that referral,

let me begin with our financial highlights on chart 2. Sales of $296m in the second quarter represented a $30m improvement over the first quarter, with all the net improvement basically come from the Matanzas transaction. However, we did see sales strength and performance fibers and wood products while experiencing revenue shortfalls in timber resources and trading. Net income $32m or 74 cents per share of which Matanzas contributed $25m or as I said, 59 cents per share.

Operating cash flow remained strong in the quarter with or without the Matanzas transaction. Cash provided by operating activities of $70m, GAAP measure and EBITDA of $95m, non-GAAP measure helped generate $45m of free cash flow. Cash available to reduce debt was reduced by approximately $16m in tax deposits that we made this quarter relating to prior years' open tax audits.

We mentioned before and Lee mentioned we have basically paid down all of our short-term bank borrowings and are deciding whether or not to further pay down some low coupon debt we have. So for the quarter we paid down $6m of debt, and had $41m of cash invested at quarter end.

Let's now turn to chart 3 and look at our sequential quarterly trend variance and analysis. In this chart we start with the first quarter net income $8m or 20 cents per share, and build and subtract to reach 2nd quarter reported EPS of 44 cents per share. On top you can see the favorable contribution of our performance fibers business, notwithstanding some severe operational issues as Lee mentioned.

Hardwood shortages inhibited our ability to produce and sell our high value acetate products and as a result the average price for cellulose specialties dropped as the mix shifted to second and third tier value products. On the other hand, fluff pulp prices increased from first to second quarter on a typical lab basis as we began to realize some corollary benefit from the previous run-up in NBSK, and other market pulps that had occurred in prior months.

Absorbent price increased 10.4% from the first quarter end ending up approximately 3. 2% over prior year. Notwithstanding four-day outage at Jesup Mill due to equipment failure, production and sales for the quarter exceeded that of the first quarter and contributed another 2 cents per share in volume and cost variances. Overall, notwithstanding the operational issues, the performance fibers group contributed 6 cents per share favorably to the quarter to quarter trend.

In timberland, as Lee mentioned, timber resource markets in both the southeast and northwest U.S. remain depressed. Unit volumes in both regions were below the first quarter and prior year as was pricing. The only timber region showing positive results was in New Zealand where volume was up and prices flat compared to the first quarter.

Overall, the 58 cent per share improvement in land sales more than offset the timber group's 7 cents per share shortfall. Wood product lumber pricing quarter to quarter was up about 2% as was volume, contributing a $1m improvement over first quarter results.

Corporate administrative expenses were higher than the first quarter primarily as a result of a larger proportion of the company's annual incentive compensation cost being accrued into the second quarter based upon its prorated level of earnings. Interest expenses were basically flat.

As I mentioned we're at the point where paying down debt further becomes somewhat inefficient. And taxes were favorable as a greater proportion of increased foreign and other tax credits for the year mainly due to the strength of the New Zealand dollar was allocated to the second quarter. As a result, our overall annual effective tax rate was 24.6% in the quarter.

The aggregate of the variances resulted in a 58 or 59 cent per share improvement as a result of the Matanzas transaction with approximately 5 cent per share decline quarter to quarter in our main operating businesses .

Let me just briefly cover year over year highlights as shown on chart 4. We focus on the second quarter again in this chart start starting out with last year's 38 cents per share in EPS and bringing it to this year's 74 cents.

With the Matanzas transaction contributed 59 cents per share to the overall 36% increase we obviously had shortfall in almost all of our other business activities. Although pricing in both sales specialties and absorbent materials year over yeaar showed slight improvement,hardwood fiber shortages and the outage at Jesup impacted both production and sales year over year.

Wood cost were also up 18% from this year's second quarter -- from last year's second quarter to this year. Timber and land, southeast and northwest timber prices this quarter approximately 11 to 12% below prior year respectively with volume shortfalls year over year of approximately 16% in the northwest and approximately 4% in the southeast.

Year over year only bright spots other than closing the important M. transaction with interest expense declined approximately $3m contributing 4 cents per share and taxes driven largly by foreign foreign and other tax credits contributed another 9 cents per share. The summary of the variances then brings to us our reported results for the second quarter of this year, a 74 cents.

Before I pass the speakerphone over to Lee as is typical at this time and to ensure full FD disclosure, let me give you two financial metrics often used in modeling. Projected depreciation, depletion and amortization and a non cash cost basis of land sold should approximate $160m for this year.

With capital expenditures still forecast at approximately $90m to $95m this year, although our six- month run rate as you can see from the cash flowchart is well below that level. With that, let me turn the conference over to Lee who will

cover a review of our markets and operations by segments. Lee?

I'll review the specific operations and markets of our businesses and for each I will make a few comments about the second quarter and then give you some sense of how we see the third quarter and the remainder of the year.

Beginning with performance fibers on pages 6 and 7, let me say as I did last quarter, that the hardwood chip shortage continues to be a drain on this business.

It is the key raw material required across a broad spectrum of our cellulose specialty products. As you would expect, we've certainly expanded our procurement base but also have seen significant increases in our cost. And in addition, chemical cost remained high in the quarter and while energy cost have come down somewhat, they remain almost 48% above year ago levels. Obviously negatively impacting our manufacturing costs.

For the quarter , Page 6, prices were down slightly in cellulose specialties due to mix while in fluff prices were up about 5% versus the first quarter. As we move into second half of the year, prices in cellulose specialties should remain steady, they are generally set for a 12-month period so we should see little change there for the balance of the year.

Demand for cellulose specialties products remains strong, and the outlook very positive with the closure of a key competitor competitor's plant last week. While we'll begin to see some minor effects later this year the real impact on cellulose specialties should come through next year.

Fluff, on the other hand, given the commodity nature of that business, is somewhat uncertain, but despite the strong demand we've probably lost the opportunity for further price increase in the near term. Maybe I should remind you on pages 6 and 7, pricing and volume information reflects sales data as we noted in the first quarter you may recall in the past we used to show shipment date, and the difference between the two is foreign sales timing.

Volume on Page 7, was significant impacted by the unscheduled outage Gerry mentioned earlier at our Jesup Mill. Our strategy here remains to enhance the mix. Obviously continuing the shift to the high value sales specialties side of the business, as we have been doing over the last several years.

As I've noted before, our portfolio products and performance fibers is certainly quite different from the pure commodity producers. On Page 7, you can see the impact of the Jesup production loss, and the major maintenance shutdown we took in March at our Fernandina mill which obviously impacted second quarter sales.

As we said before, and as you see the real point to take away from Page 7 is our continued push to shift our product mix more and more to the higher margin, more stable cellulose specialties business. This quarter we pushed cellulose specialties up to 61%, and as a result fluff stood at 39% of the mix.

Timber and land, pages 8, 9 and 10, the land sales side, which we noted before, this is not a very smooth flowing business on a quarter to quarter basis, but over a longer period is predictable. It's a strong compliment to the timber harvest side, and land sales are likely to remain an important contributor in the foreseeable future for this overall segment's strong financial performance and cash flow.

Page 8, our northwest timber volumes and prices. As we typically see, 2002 was an exception, second quarter volumes were down from the first quarter and while they were lower than second quarter last year, first half volumes are basically flat year over year. Prices remain soft in the quarter. For the third quarter, we expect to see the usual seasonal drop in sequential volume but it should be in line with last year's third quarter and sequential prices are expected to be down about 5%. For the year, as we've noted in the past, volume will probably be down in the 2% range. We do, however, expect pricing to pick up modestly later this year due to a somewhat better specie mix.

Moving on to Page 9 and our southeast timber operations, volume, as expected, was down slightly compared to the first quarter, but essentially flat to second quarter last year. Year to date volumes are also basically flat year over year. Prices in the second quarter eased slightly however they seem to have stabilized and are expected to be at least hold for rest of the year.

Southeast timber could well benefit from the very wet weather we've seen in the southeast and the constraint it put on available for harvest pine Timberland. Our holdings relatively speaking are on higher ground, which should yield a modest volume and ultimately price benefit. Without a worsening weather impact, third quarter volumes

are expected to be down sequentially by about 10 to 15 %, and the volumes for the full year expected to be down about 10%. New Zealand timber, on page 10 , where you can see the usual buildup in volume from the first quarter, and while second quarter volumes were lower compared to last year, prices remain strong and even slightly above first quarter, mainly due to mix.

Going forward, volumes should continue to ramp up in the usual fashion, however, as we've noted before, volumes are expected to be down in the 20% range year over year. On the flip side, average prices for the year are likely to be up around 20% versus last year's level some of which is mix, on the other I think quite obviously is exchange rate.

Wood products, pages 11 and 12, then we'll go back to Gerry. On page 11, as you see, lumber volumes were up slightly as we prices. But the market remains difficult and looking ahead our production will depend on lumber prices and log cost. As we did last quarter, we have and will continue to a necessary take market downtime to log cost and tightly manage our lumber inventories.

One thing that could possibly positively impact the business is on going strength in chip prices for the weather and market related issues I mentioned earlier. Moving on to the MDF business on Page 12, both volumes and prices were relatively flat sequentially. The third quarter volume should pick up while prices could slip.

The plant continues to operate very well and the full year volume should should be up about 10% from last year. As this business is export based, the strong New Zealand dollar is obviously had a negative impact. With that, let's go back to Gerry for a minute.

Thank you, Lee. On chart 13 we show a typical earnings per share trend for last year and year to date this year. For the second quarter we reflected our results at 15 cents per share, basically excluding the effect of the Matanzas March transaction, and base our perspective on third quarter at that level. Or from that level.

Last year's third quarter results were 37 cents per share and given that we are still facing some uphill battles in getting hardwood fiber to our mills and no sense of upward direction on timber pricing, we expect that third quarter results will be below prior year. As far as the sequential trend is concerned, it is not a typical when we are near the bottom of the cycle that one particular land transaction or one or more land transactions could swing the trend one way or the other.

Depending upon whether they will or will not close prior to the quarter's fiscal close. There is one transaction we have our eye on, which we feel as a reasonably good chance of closing in the quarter and if it does we should be able to beat the 15 cents per share second quarter benchmark.

If that transaction, however, or another substantive transaction does not close, then our third quarter results could be substantially below the 15 cents per share level. At this point we are reluctant to address the full year expectation, as weather-related fiber shortages are somewhat out of our control and overall market pulp inventory statistics are not very good.

However, we still see strong demand for developmental properties within our land base and low interest rates are inching upwards. Only the normal time take survey parcels get appropriate permits, complete a contractor sale and proceed to closings prevent the higher level of land sale income being anticipated than what we want to conservatively project at this time. Before we close the formal part of the presentation and turn conference over to the conference operator, I would like to turn it back to Lee to make one additional comment. Lee?

Before we move into the question and answer section of today's teleconference, let me anticipate the question, or questions related to the on going study we commented on in both today 's earnings announcement and more generally in the may 21st announcement of the stock split and dividend increase.

I think it's suffices to say that we've said as much as we feel prudent at this juncture and if or when there are further developments we'll obviously make further announcements. With that, let's go back to the conference operator and open it up for questions.

Thank you. Our question-and-answer session is conducted electronically. If you would like to signal to answer a question, it's star-1 on your Touch-Tone phone. Please make sure you're not muted that will block the small signal. Again, star -1. We'll pause for a moment.

Our first question comes from Steven Chercover at D.A. Davidson.

Good afternoon, I guess I won't ask what the potential restructuring. Can you give us a sense of what your tax rate will for the rest of this year and into 2004, please.

Steve, Gerry Pollack. At this point, we're probably in the low 20s. Once again a lot is heavily dependent on the New Zealand dollar /U.S. dollar relationship and its impact on pre and post tax results. But I would probably think in terms of low 20s for the time being.

for both this year and next, okay.

No, I would say for this year. I think, typically, we run in the 28 to 31% range effective tax rate based upon our standard allowance, I'll say it that way. And correspondence change can move. For longer term planning perspective, I think 28 to 31 is probably a better rate for our ongoing business.

Great, that's what I was using. And with respect to the shelf debt offering that you also mentioned today, if you were to do it in the short-term, would it be -- would it bring down your overall interest expense? I noticed you said that you do have some very cheap, for lack of better words, financing also already in place.

We have got some tax exempts in place right now. We have no intention at this point in time to move to replace debt. And we have swapped out some fixed rate debt, so I don't know that right now if we had, if we had an opportunity for some reason, or wanted to, that we would be able to lower our effective interest costs.

Some of our long-term notes that we issued when we acquired the timber lands in 1999, are fixed coupon with make-hold provisions I think it's indicated in our disclosures. So we don't have an opportunity, really, to replace that debt. We have swapped out some of it, so overall, with today's interest rates and we're already borrowing on floating rate basis when we do borrow, I'm not sure that it would have a material impact right now in the short-term on our effective interest rate.

So should we look at the shelf offering as perhaps dry powder for an acquisition if something really compelling were to present itself?

I think you should look at it just as updating our 1998 shelf that we had that a little stale right now, our advisor suggested we replace it, bring it more modern with typical universal shelf version which allows us flexibility to finance opportunities that could develop over the next several years. It does replace the old one.

I just say it's no more a moth ball version updating a new one. No further implication . updating what we have outstanding.

Okay. And perhaps one more, if I could. The Natchez closures is clearly very good for you, and yet you've got the dome mill, I believe in Port Alice, which only coming upruns only sporadically. Will that have some impact to neutralize some benefit of the Natchez closure.

Steve, I think obviously it's an attractive business, and in some sense, and it's going to be attractive for other entrants, I'm not sure about that mill as you probably are not aware at one time Rayonier owned that mill. I think it was probably some serious question on the part of the

potential customers as to the viability and quality of product coming out of it. You know, I think it is -- it may look attractive for some people. I think if you're not real good in that business, you could perhaps end up in the same position that the facility that closed last week. So let's just leave it there.

Okay, thank you very much.

and once again, that is star -1 if you would like to signal to ask a question. And please make sure you're not muted. We'll go to Frank Janell (ph) at Adage Capital.

I have a question, just back to the Natchez mill. I guess there's talk that the employees want to buy and start it up, or keep running it. I don't know if the Justice Department would allow that but have you thought about buying Natchez to avoid the possibility that somebody starts it up and competes against with you?

We've looked at a lot of alternatives that including others. I think the issue was the market -- that market had surplus capacity, obviously pricing became very competitive. I think anybody that -- it's a very different kind of business than a commodity business whether you're in paper or some other commodity where you can jump into the market and assume a position.

I think when that mill closed, and they announced in January that in fact they were going to close, a lot of business moved to us, some business moved to some other suppliers, I think to start that business back up in the specialty niche that they were in, would be extremely difficult and would take a long time to get back in. They had contracts, as we now do, for suppliers over multiple year periods. To try and move back in after pulling back, especially if it were questionably financed, I think they'd have a very difficult time going to the customers and convincing them that they were long-term viable suppliers, and that those customers should start to bet their future on it.

All right. And the -- the prior shelf, was that also 500m?

It was 150, Frank.

So other than, if you ran a file on file -- might as well file a big numbers, any reason why went from 150 to 500?

the prior shelf was 300 -- 200, of which we used some for MTMs so we have 150 left. We looked at a whole series of shelves out there based on market cap and that was the number popped out.

Good of it. 500 relative year capitalization is not insignificant amount.

I think it statistically shows it is right in line with what people have out there and provides multi year protection so that's how it was arrived at.

All right, thanks.

Next question is from Chip Dillon at Smith Barney.

Hi, guys, this is actually Tim, I work with chip. One question I had was on the log front where we've really seen lumber prices kind of hold steady, or you know, almost roll over, they certainly haven't seen the kind of gains that structural panels side has. Has that brought upon any concern or any questions by some of your customers in terms of where -- their uncertainty and how that would affect the log market?

I'm not sure, Tim, I quite understood the question.

Just, you know, is there any concern -- I guess, where is your outlook in terms of where you guys see log prices if going if we get this continued kind of flat market in the lumber market.

Well, I think as we indicated, in my comments in the balance of the year, weather issues aside down here, we see log prices, timber prices which obvious obviously backed up from log prices, are remaining pleat pretty flat. Fundamental being do we see increased consumption? Not a lot.

Okay. All right, thank you.

Our next question will come from Bob Bridges. He is with Sterling Capital Management.

on your variances scenarios it shows that versus second quarter last year on the performance fiber section, volume and other contributed 15 cents negative. How much of that variance is either directly or indirectly related to the hardwood chip shortage that you talked about last quarter as well as this quarter? Are you able to quantify that for us?

Well, not right now. I don't want to pull a number oust air. A substantial part is hardwood cost is chemical cost, energy as Lee mentioned, and I could estimate something but I'd rather get back to you on that. A substantial part is related to those three items.

A small amount relates to the Jesup outage that occurred this quarter which obviously we didn't have last quarter. It's mostly the highest costs that have impacted us this year.

Confluence of all four of those things.

Correct.

When would it be reasonable to assume that the effects of the shortage are going to abate? Does this take several months to work through, or what would you expect to get back to normalized procurement trend there?

I would say, Bob, that you're probably look looking at several quarters, to get back to what we've considered more of a realistic trend over time, people need to rebuild inventories and the market come back into balance. We've had a lot of rain, people's inventories have gotten very low, I think until everybody has more than enough prices will continue to stay pretty high.

Have you noticed any meaningful change in your sell cellulose specialties and absorbent materials demand patterns the six months this year versus the six months of the end of last year?

I would say in performance fibers, the absorbent side of it, we have seen some increased demand, I think it's in the whole market has, that why you saw the price second quarter price up about 5% from not only first quarter but perhaps even a little bit more from the end of last year.

We certainly have seen an increase in demand and interest, if you will, and we have gone into some longer term contracts on the cellulose specialties business, as I think I indicated it tends to be annual pricing.

So our next real opportunity is next year, and we've had some preliminary discussions with customers, which we typically do, as to what pricing would be next year, it gives them a chance to deal with their customers and give some -- gives them a little bit of indication of where we see things going.

and then last question, I think lee, you said on Page 8 on the northwest timber, that perhaps you're seeing late '03 price recovery from where it might go in Q3. Do I hear you correctly on that? And if so, would there be a magnitude and what might be some of the drivers behind that?

I would think we're looking in the third quarter, pretty flat prices, I think, in the fourth quarter you'll see some impact but mostly due to fix, both species mix and the other component is geographic mix and more of our volume will be coming from an area that's closer to the markets.

Great, thanks a lot.

Our next question comes from Bryon Korutz. at Standard & Poor's.

Hi, how you doing today?

Hello?

Yes.

Yes. The question regarding the hardwood shifts that's been answered, you see that pretty much staying elevated in the near term. How about energy costs, where do you see those going in the future?

Well, I guess as some people have said past if I was really good predicting the costs I probably wouldn't be in a conference year.

Do you see them up year overyear?

I think we're certainly, we don't see at least in our internal forecasts a lot of relief in the near term, and it's not only are we user of oil as well as electrical energy, in some sense also natural gas plays a factor both directly because we do use it in some cases but also indirectly, it is a major component in the production of caustic and chlorine.

Right.

So, you know, we see a lot of fronts.

We're not expecting much in the way of relief for the balance of the year.

Okay. How about, do I hear correctly that medium density fiber board you could see prices come down in the fourth quarter? Is that correct?

I think we could see the market is fairly flat, I don't think we see any reason out there, even in the markets we see today, any reason to expect we're going to see any upside in MDF, it is a worldwide products and it moves pretty freely. And I just don't see a reason for upside.

Okay. Thank you very much.

We'll now go to Mike Weintraub at Buckingham.

Yes, thank you. Lee, I think you mentioned something about seeing some of the benefit from the Natchez closure next year. What exactly were you thinking of in that? Was that volume, pricing, a combination of both?

Yes.

Can you help us in any way try to quantify what type of potential there might be for you?

Well, I think Mark and I appreciate your interest, but I think it would be pretty difficult, we're in the midst of discussions and negotiations with virtually everybody out there in that business.

We're the largest supplier to four of the five and now we're going to become the largest supplier to five of five.

Supply, certainty and quality is very important to those customers. Obviously, the closure of that mill last week has put into question the reliability of not only that supplier but also other potential suppliers. So we will see some modest increase in volume. We don't have a lot more flexibility in strengthening them, pushing the mix more into the cellulose specialties. We have a little and we are in negotiations now to do some of that.

We are also discussing with customers that do have some modest alternatives to go to other suppliers, as we discuss with them our pricing opportunities as we look at 2004. So there is just to summarize, we are looking at some price increase s at least reflective of our cost increases that we've experienced the first six months of this year, if not earlier. We're look at some mix improvements within a cellulose specialties business. With that Mark,

I'm afraid I'm going to have to leave you without quantifying an answer but I hopefully gave you a little bit of direction in how we see things.

That's helpful. Do you know when you might have concluded a lot of these discussions?

Well, typically, we have, and I think our customers are as interested as we are in getting things re resolved. I would expect by certainly I would expect them to have them concluded by the end of October, and they could certainly be sooner.

Okay, thank you.

and gentlemen, we have no other questions, so what we do now highlight -- I had a question pop up. This is Peter Rieschmeyer in the Lehman Brothers.

Thanks. Good afternoon, I wanted to follow back up on the energy question. I was curious if you could give us any kind of rough guidance on what percent of your cost of sales are energy, whether it's the quarter just ended or trailing trestle 12 months?

Total energy, Peter, in the cost of producing a ton of pulp, total cost is about 10%.

Okay. And of your gross energy needs, any indication as to roughly how much you self-generate?

Oh, I think let me think with about it that way. Probably two-thirds to -- I'll say two-thirds.

Okay. And is it possible to give us sensitivity -- I know obviously you buy natural gas, oil, electricity. Is it skewed to natural gas?

No, no. I mean, it isn't on a direct basis. Obviously we're significant users of caustic and chlorine and that is gas. That's the basic raw material as you know.

Okay and coming back to the chip question, with relatively weak paper volumes in general in the industry, you know, understanding there's some impact from weather, is there anything else that's impacting the chip supplies in your timber baskets you deal with, or do you attribute it entirely to weather?

Well, chip supply is impacted certainly by lumber markets, you know, it is a byproduct from the lumber business. It is the cheapest source of fiber purchased residual trips chips I think for virtually any pulp or paper mill out there. It is the first thing, with lumber markets drop, that a pulp or paper mill could lose.

So those lumber markets rise and fall you see some impact and I suspect it's perhaps accentuated a little bit because of the wet weather at least here in the southeast quadrant of the United States.

and for the foreseeable future and perhaps a quarter or two down the road that clears up, is that fair?

I think, we're talking about soft wood here, not hardwood. Soft wood, yes, I think lumber markets were to come back pretty strongly, I think you'd see chip prices level off from where they are today.

If lumber prices fall off or continue weak, the supply of chips in light of the wet weather down here, you can see certainly more upside in chip prices than you do -- than we've seen recently.

Okay, great. Helpful. Thanks, very much, guys.

We have a couple more questions. Do we have time for these also?

Yes.

Very good. We'll go to David Summers at Polygon.

Just a quick question, please. I just -- could you give us a little more color about the strategic study that you're doing and trying to have done by the third quarter, and what may be different between that and what you did at the end of 2000 in.

Well, David, I think, as I said in my comments before we got to the Q & A, I think we said, I think what was appropriate for us to say, in that announcement, was out this morning and I think it's just best if we leave it there.

Okay. Do you expect to give people more information -- I mean, when do you expect it will have more information about that?

Well, I think as I said in my comments, when we do have -- if and when we do have more to say, when we do have more to say, we will certainly make another announcement. As we indicated, we expect to have the study concluded by the end of this quarter. So we'll leave it there.

Okay.

and we have another question from Joshua Zerek. He is with Oppenheimer.

Thank you. Lee, are you or any of your people aware of any efforts by some of your timber owning colleagues to start a lobbying effort for the reinstatement of preferential timber gains for corporations and if so does it have a better chance of ever getting any kind of momentum.

You chose the words. I have been aware in the past, Josh, of people that have tried. In fact, oh, I guess six months ago, I guess when I was up in D.C., and talked to a couple of Congressmen and pleaded the case, I got a sympathetic ear, but not lot of encouragement.

They said with the deficit being what it is, and the priority of the tax relief at that time the administration was going for, we had very little chance of getting some relief. So, you probably chose the word, but while I think certainly in title, assets, we, the industry have held for 50 years or longer in pay ordinary income tax is unfair but I don't think we're going to get any relief in the near term.

Do you think we'll see some momentum going forward with this issue?

Well, --

from your end, from the end of the corporations.

Well, you know, I think perhaps, as all of us who so many political chips we can play, I think you may get some precursory, if you will, effort in that direction but I doubt that anybody is really going to go to the mat and try to win it, because I just don't think it's winnable right now.

Okay, thank you.

and gentlemen, we have no other questions. I'll turn it back to you nor any closing comments.

Thank you. I don't think there's much more to add at this time. Our basic markets are facing tough times with cost pressures moving upward and product pricing flat to down in the near term. Nonetheless due to our land sale program and very tight conservation of capital we're able to continue to generate cash, providing capital structure flexibility and opportunity going forward. With that let me close the conference and thank everybody for joining us.

Thank you, that does conclude our call. We thank you for your participation. At this time you may disconnect. Thank you.