Rayonier Inc (RYN) 2003 Q4 法說會逐字稿

Welcome to this Rayonier fourth-quarter earnings release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express provision. Your participation on this call constitutes supplied 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 the Senior Vice President and Chief Financial Officer, Mr. Gerald Pollack. Please go ahead sir.

Thank you and good afternoon. I would like to once again welcome everybody to Rayonier's investors teleconference this time covering our earnings for the fourth-quarter and full year of 2003. Our earning statements were released yesterday and supplemental materials soon thereafter. If you have not received this material please go to our website at Rayonier.com, or if you would like to be added to the distribution going forward, call our Investor Relations Department at 904-357-9177.

As a reminder this conference is being broadcast live over the Internet and is open to all shareholders and interested investors. Instructions on accessing the live web cast was given in our press release. Simply go to our website, link to the conference. With me today is Lee Nutter, Chairman, President and CEO. We will be following our typical routine with Lee opening with formal presentation followed by my review of the financial highlights of the quarter and the year.

We will then cover markets and operations and I will close our presentation with a discussion of earnings per share trends. 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/A and press release lists some of those factors which may cause actual results to differ materially from the statements we may make. They are repeated on page two of our supplemental material, so please familiarize yourself with them. With that, let's start the program with opening comments from Lee Nutter. Lee.

Thank you, Jerry. Before we get into some of the fourth-quarter details, let me make a few comments to update you regarding our January 1 conversion to a REIT. Obviously we're very enthused with this new corporate structure and the related opportunities it provides to increase shareholder value and grow the company. As you have probably seen, our market cap of about 1.5 billion the week before the August 19 conversion announcement, today it's about 2 billion, and we think there will be additional increases as we move further into this year.

Let me now make a few comments to review the fourth-quarter and then make some comments regarding 2004 and more particularly the first quarter. The fourth-quarter, as expected, was challenging and our financial results were very disappointing, particularly for our Performance Fibers business, but we expect significant improvements as we move into this quarter and to the year. As we have said before, our land sales are variable and as you saw the fourth-quarter reflects that.

However, our full year 2003 land sales contributed 87 million in operating income compared to 47 million in 2002. As I said, Performance Fibers results in the fourth-quarter were clearly well below the underlying earnings capacity of this business and as enter 2004, we see encouraging signs on the cost side as well as in contract prices for Cellulose Specialties products. For the year 2003 we finished with a very strong balance sheet and a debt to capital ratio of 46.5 percent.

As I noted last quarter, we will be refinancing about $50 million in debt and then plan to leave our debt to total capital ratio at about that level, which we feel is appropriate for REIT. Let me conclude hereby reiterating that while the fourth-quarter was particularly difficult, we are well positioned in our businesses and that combined with our new REIT structure should allow us to generate significantly better earnings and a strong cash flow, not only in the first quarter but throughout the year. Jerry.

Thanks, Lee. (indiscernible) first with fourth-quarter highlights and then some brief comments on the full year. As is typical, we tend to highlight items of special interest before we go into the numbers as reported. This quarter we considered three items of special-interest. We incurred REIT expenses equivalent to 3 cents per share as we finalized the necessary documentation for our conversion to a REIT effective January 1, 2004.

Second, we estimate there were approximately 6 cents per share in earnings that were delayed into 2004 as a result of having to modify our Northwest timber contracts to conform with REIT regulations, thereby, allowing us to realize the appropriate tax benefits on timber sales after conversion. The third item was a tax benefit of 9 cents per share related to settling an intercompany note in the fourth-quarter. An opportunity that arose from the combination of our changing to the New Zealand dollar as the functional currency of our operations in that country and the rapid appreciation of the New Zealand dollar against the U.S. toward the end of the year.

If you recall we had a similar item in last year's fourth-quarter worth approximately 7 cents per share at that time. Both of these items impacted the tax line but did not affect pretax income. As is typical, we will leave you to determine how best to factor these items into your analysis. As for the report information let me highlight the following. Fourth-quarter sales of $272 million were 15 million below prior year, primarily as a result of lower timber and land activity and lower trading activity offset by improved performance fibers and lumber sales.

Other than minor seasonal variations and some strengthening in general business unit volumes toward the end of the year, lumber pricing reflected the most important positive variance from market standpoint over the full year. Sales improvements over the third quarter primarily came from volume increases in our performance fibers unit. Operating income for the quarter of 8 million and net income of 2 million were down from both the third quarter and prior year's fourth-quarter.

As you will see shortly, variances to third quarter were primarily caused by reduced land sales activity as well as by higher cost in performance fibers. While the negative variance to last year's fourth-quarter comes primarily from lower timber volume in the Northwest, and higher corporate expenses related to the REIT conversion and fact priced based compensation. All in all, the four cents per share in the fourth-quarter earnings ended a fairly disconcerting year from an operation standpoint. As we indicated there are some promising signs going forward.

As we briefly look at the full year highlight statistics, there was a decline from 2002 in most categories basically following the fourth-quarter comparative trends, with lower sales and income in Performance Fibers and Timber offset by improved Wood Products sales and income for the year and a full year basis higher land sales. The $1.16 per share for the full year includes 12 cents per share for REIT conversion costs and the same 6 cents per share and delayed Northwest timber sales.

Final reported EPS of one sixteen represents a modestly good performance in very, very difficult times. But as is typical of Rayonier even in tough times we generate strong cash flow as we indicated. If you look at the full year activity on the lower right of the chart, you will see that first using the GAAP measure of cash provided by operating activities we generated $208 million in cash, turning into $268 million of adjusted EBITDA and $78 million of free cash flow.

These non-GAAP measures are defined and reconciled to GAAP on pages 16 and 17 of your materials. We repaid $34 million of debt, increased the regular dividend in the second quarter, paid out $61 million in special dividends, funded our required capital and still ended up with $21 million of cash at year end. Our debt to capital ratio actually went down for most of the year but had a blip upwards at the end of the fourth quarter as a result of the charge to equity for the cash component of these special E&P dividend in December.

We should reverse most of that uptick when we reverse approximately $50 to $70 million of deferred tax liabilities in January resulting from the REIT conversion. Before I go into the specific causal factors relating to operating performance I just want to end the highlight section indicating that the picture on this page is, as we see it, presents a company well positioned to maximize the benefits of REIT status both in operational opportunities and more tax efficient cash flow performance going forward. Let me briefly go through pages 4 and 5, identifying the key analytical bearings that affected results most of which have been reported in our press release.

On page 4 we track the variances between third-quarter 2003 and the fourth-quarter, reflecting a net 15 cents per share reduction in EPS. Performance Fibers pricing was generally flat in the quarter with any movement related primarily to mix. Hardwood, energy and maintenance costs though, continue to plague that unit and resulted in the first full year operating loss excluding disposition reserves in ten years. The adverse variances were offset by some strong chemical cellulose product mix improvements and volume.

The timber price in volume positive variances reflect a slow, studying and then up product prices in both regions and higher volumes than the Northwest when compared to their seasonally low third-quarter levels. Once again, we had higher volumes than in the third quarter and that is the level we typically would see in the fourth-quarter as a result of having to slow sales activities as we said to change contract terms and as a result sales were delayed from 2003 into 2004.

Land sales had a modest $7 million operating income level but down substantially from the stronger third quarter that we had where we had $24 million of income, primarily as a result of two sales that occurred in that quarter contributing $19 million by themselves. Wood product results in the back half of the year in particular have been well received, with average sales prices approximately 8 percent higher than the third quarter. Onto the corporate expense line, no major change quarter to quarter since both quarters had substantial REIT conversion and stock price based compensation expenses that brought the absolutes to a higher level but not much difference in the quarter to quarter comparison.

Nevertheless with the increased cost in Performance Fibers and lower land sales, only partially offset by good market improvements in timber and the tax benefits, results declined to 4 cents per share on a reported basis. Let me conclude the financial highlights presentation with a brief review of chart five and focus primarily on the full year. The starting point once again will be 2002 full year results of $1.28, moving down to this year's reported $1.16. There are several stories to highlight and what we have said several times it was a very challenging and disconcerting year.

In Performance Fibers pulp markets were basically stable most of the year, with some minor price fluctuations up and down in our Absorbent Materials category, but overall pricing began to improve as you moved into the second half of the year. While we were constantly plague through the year with significant wood costs, primarily hardwood, chemical and energy costs, that had not been seen on a combined basis for many years. The wood cost variance alone was $17 million and chemical energy costs, another $8 million variance to prior year.

Although the impact of these items seem to be abating toward year end, they still did affect fourth-quarter results. Timber demand was fairly soft for most of the year which when coupled with the REIT related delays in the Northwest. In the fourth-quarter volumes contributed 24 cents per share to the earnings reduction for the year, and the soft market demand for most of the year also contributed to some price erosion. Both aspects, as Lee will indicate, seem to have turned recently.

Land sales activity, which can swing from year to year, did see a strong contribution from what we call the Manassas Marsh (ph) land sale that occurred in the second quarter which contributed $9 million in operating income and 59 cents in EPS. These type of sales primarily (indiscernible) for conservation and environmental protection, do not occur every quarter nor necessarily ever year but do represent a certain section of our timberland that over time will be converted from tree farming to preservation.

Social values assigned to preservation land can often well exceed values assigned as pure timberland. As we continue to look at the financial effect on operations for the year, we can see in the Wood Products category the very strong contribution of our lumber operations with prices in the back half of the year approximately 18 percent over the second half of 2002, and 13 percent for the first half of 2003.

At our MDF operation almost breakeven results last year reversed themselves to a more significant loss with the effect of the strong appreciation of the New Zealand dollar, 26 percent higher year-over-year on average against the U.S. dollar had an effect both on costs and on suppression of some demand significantly hurting them. Corporate expenses for the year as mentioned earlier were adversely impacted by approximately 12 cents per share in REIT conversion costs as well as additional corporate compensation expenses related to the strong run-up in Rayonier's share price, in particular, the second half of the year.

Also on a favorable note, our interest expenses obviously have been coming down with that paydown of debt and contributed 21 cents per share year-over-year to the bottom line. The net impact of all these variances goes to the $1.16 per share full year 2003 earnings. Let me now turn the conference over to Lee to discuss markets and operations with a particular emphasis on what is happening in REIT related activities, as well as what trends we saw in the fourth-quarter leading to what we expect to be a stronger 2004.

Thank you, Jerry. I will take a few minutes to review the markets and operations of our businesses and provided a few comments relative to fourth-quarter, and then our outlook as we move into the beginning of this year and the REIT. Starting with our timber and land business, and before I get into the timber side, let me comment on land sales. They are obviously a key and ongoing component of our total business.

In the fourth-quarter, while land sales were lower than the third-quarter and fourth-quarter of '02 for the year, they are complement to our timber side, sales side of our business is very apparent and they are also a major contributor of our cash flow. Looking forward, while they are very likely to be quarter to quarter variability, we expect land sales growth for '04 to be perhaps somewhat below the 2003 level, but well above that of 2002.

Demand for higher valued properties remains strong as evidenced by our recent announcement regarding the sale of 5,500 acres of timber harvest lease for $26 million -- this sale, which is scheduled in the second quarter. Looking at the timber business beginning on page 7, you can see the fourth-quarter pickup in Northwest prices and the impact of the REIT related shift that Jerry mentioned. Fourth-quarter volume at 48 million was down almost 30 percent from fourth-quarter levels of '01 and '02. The volume should be recovered, but primarily in the second and third quarters of this year. More specifically with the shift of sales into the REIT, we move from lump sum sales to pay as cut, which would take a little more time to work their way through our financials.

Obviously this shift of income into the REIT and its advantages are apparent. Prices for the fourth-quarter were up mainly due to mix. For the first quarter we expect to see volumes up sequentially, but perhaps down about 10 percent from the average first and second -- or first quarters of '01 and '02. We will see some reduction in price in the Northwest due to mix.

However, for the full year 2004, Northwest volume should be up 15 to 20 percent from the '03 level, reflecting primarily the impact of sales deferrals from this fourth-quarter of '03. Southeast timber, on page 8. Here you can see that as I commented last quarter pine sales volumes should be down about -- or were down about 10 percent from third-quarter. Prices on the other hand were up, and that was a welcome development since they have been eroding from the average of first half '01.

We are continuing to see that price improvement as we move into the fourth-quarter -- from the fourth-quarter into the first quarter of this year. For the first quarter, volumes are expected to be up sequentially but perhaps down slightly from the first quarters of '02 and '03. For the full year 2004 pine volume should be down about 2 to 3 percent. On page 9, New Zealand volumes were essentially flat. The $1.00 increase in average price is basically a reflection of a weaker U.S. dollar.

Because of the very strong New Zealand dollar, markets for Timber and Wood Products in local markets have been soft, and we don't expect the significant change in the near future. For the first quarter you will see the usual seasonal slowdowns in volumes, but first quarter should be slightly above what we saw in first quarter of last year, but prices should generally hold. For the full year 2004 volumes are expected to be up 8 to 10 percent while average prices for the year may ease slightly due in large part to mix.

Moving onto Performance Fibers and the information shown on pages 10 and 11, as I noted in last quarter, hardwood chip cost shortages, shortages of volume and increased prices due to heavy rain, wreaked havoc with us pushing fiber costs to record levels. Compared to hardwood fiber costs in 2003 the $17 million that Jerry mentioned obviously very negatively impacted this business unit. We also had a very poor quarter of operations which further added to the disappointing quarter.

To alleviate the supply and cost pressure in the third quarter we faced with hardwood, we widened our procurement base significantly and build inventories to mitigate the situation but and as is expected system wide and high prices persisted in the fourth-quarter. So far this year we are seeing hardwood price reductions in the 4 to 5 percent range and inventories back up to more normal levels. We will see the benefit of that in our manufacturing costs both in the first quarter and hopefully throughout this year.

For the fourth-quarter on the chart on page 10 you can see Cellulose Specialties prices were up slightly while fluff prices were essentially flat. For the first quarter of '04 we expect cellulose prices to be up compared to 2003 and combined with more favorable overall cost environment, this should translate in certainly a better 2004 than we saw in 2003. Fluff on the other hand given the commodity nature of this product is a little more difficult to call.

While there are some indications of a slight pickup in price as the expression goes, we will count it when we get it. Demand for high-value sales specialty products remains strong, and the outlook for 2004 is certainly positive. Demand for fluff has remained steady and that is reflected in the prices we've seen for the last several quarters.

On page 11 you can see the progress we've made in shifting mix to high-value Cellulose Specialties products. For the fourth quarter Cellulose Specialties represented 65 percent of our business while Absorbent Materials was 35 percent. Although we have almost reached the capacity to enrich this mix we should see a slight gain in Cellulose Specialties in '04. Moving onto Wood Products on pages 12 and 13. In lumber the fourth-quarter prices were higher than they have been since early in 2001 and our volume in this quarter hit a new high.

While prices are now down slightly, we would expect a fairly strong first quarter. Looking at MDF on page 13 you can see the details regarding this business. Prices and volume have been fairly flat through the fourth-quarter. This quarter we are seeing modest upward moves in price. For the first quarter we should see the usual volume slowdown, put it in line with the first quarter of 2003. With that, let me turn it back to Jerry.

Thank you, Lee. As is typical we end the formal part of the presentation with our review and analysis of EPS trends. Before I begin let me make one perhaps not so simple technical disclosure that may assist some of you in setting up your models for 2004. When looking at future EPS trends we need to be aware of the impact that varying outstanding share counts have on the EPS numbers, both as reported and as perhaps should be used for comparative purposes.

For generally accepted accounting principles all prior quarters reflect the June 2003 three-for-two stock split plus any ordinary subsequent share changes on that base with the first quarter of 2003 results specifically restated to that share count. Since the stock split took place in June 2003, the second-quarter results, when reported, already reflected that split. However, the 15 percent dilution that occurred with the special REIT earnings and profits dividend on December 19th, is not cause for restatement since the bright line test for treating as a stock split is 20 to 25 percent.

Since the E&P dividend had only a minor impact from fourth-quarter 2003 results, the comparisons as were just covered are basically apples-to-apples. However, when comparing next year's results to this year an approximate 15 percent dilution should now be factored in, adjusting prior year reported EPS downward to what we believe would be the appropriate apples-to-apples comparison. As a note, 2003 quarterly results when reported in SEC documents such as our 10-K or 10-Q's, will not reflect a 15 percent dilution on historical results.

As we go through the year we will attempt to reflect on a pro forma basis what that comparison should be within the appropriate disclosure rules and regulations of the SEC. We have now earned 1.5 CPE (ph) credits. With that, let me just review the chart with you. On the far right hand column, our EPS results for the quarter as either reported previously or will continue to be reported in our SEC filings. As you can see, this year's fourth-quarter EPS is four cents per share, and the full year $1.16.

However, if we had adjusted our outstanding shares for the impact of the stock component of our special REIT dividend, which resulted in 15 percent dilution, the pro forma earnings in those quarters and for the year would have resulted in EPS per share results as shown in the pro forma column, basically 15 percent lower for each reporting period. This pro forma result may be the better base for some to use while modeling results going forward. Based on the trends that Lee has indicated and which we also have indicated in our press release, we expect first-quarter earnings to be higher than the first quarter of last year in what we see as the apples-to-apples basis and obviously then higher than the 2003 fourth-quarter.

I would also remind you that in the first quarter as disclosed in our press release, we expect approximately 10 cents per share in final REIT related costs to be recorded as there are some final steps that need to be taken as a REIT to fully affect the conversion. These steps relate to appraisals, tax declarations and other miscellaneous items. By the end of April we should have expensed and dispersed all significant costs associated with converting to a REIT.

To be specific, we are currently expecting the first quarter results even including the 10 cents per share in REIT costs will exceed prior year's first quarter. I might also clarify that what I'm referring to here excludes the significant earnings per share credit that we expect to be forthcoming in the first quarter as we complete our analysis of deferred tax liabilities and determine the appropriate amount that will no longer be needed as a REIT.

The estimate of that deferred tax reversal has been stated as 50 to 70 (technical difficulty) or 99 cents to $1.38 per share. This wide disclosure range is still appropriate as we continue to analyze deferred tax liabilities that have built up, in some cases over a 20 to 40 year period, as well as those that may be affected in some other way as a result of our becoming a REIT.

As is typical we make no comment about the full year projections at this time. I do note that the First Call estimate at $1.33 is based on the composite of several analysts estimate, one of which was posted in November. I am not sure, and you may want to inquire, whether or not these analysts estimates take into account the full dilution reflecting the special dividend. Before I conclude the conference I would just like to state for public disclosure two elements (technical difficulty) financial that seem to be important to our analysts and investors in finalizing their models.

One relates to depreciation, depletion and amortization, and the non-cash cost basis of land sold. We are currently projecting these non-cash composite items to approximate $159 million compared to $164 million in 2003. And our gross capital expenditures are anticipated to be in our traditional $90 million range compared to $86 million in 2003. I might note that the gross planned addition capital expenditure expectation I have just indicated would not include any timberland acquisitions from the funds we expect to be made available from the Timber Harvest (ph) lease sale that Lee mentioned and it was announced recently.

When that sale goes through we'll escrow approximately $26 million in proceeds. So that cash can be subsequently used in a like kind exchange in the acquisition of timberland assuming of course an appropriate opportunity can be found. Our capital expenditure therefore does not include any reinvestment of timberlands from these proceeds at this time. With that, let me turn the conference over to the teleconference operator for questions from our audience.

(OPERATOR INSTRUCTIONS). Bob Gottsman (ph) at First Manhattan.

This question is not related to the quarter but as somebody who is relatively new to this story, I just wanted some clarification on your objectives of selling 2 to 4 percent of your timberland each year. The question is how many years do you think you can do that at 2 to 4 percent?

Obviously as you may recall or not recall, in the year 1999 we acquired almost one million acres which more than doubled our holdings. In that acquisition we picked up a fair amount of property, some of which you are beginning to see. We're monetizing some of which came from our old holdings which frankly are far more valuable real estate, (technical difficulty) properties than they are as timberland growing. And looking at the values we have for that kind of property, we certainly can look out over the next several years and beyond where we can continue to develop and monetize those kind of assets.

I see, but if you just take out ten years, that is 20 percent to 40 percent of your timberland, if you're doing 2 to 4 percent a year.

Bob, that's obviously assuming we don't make any more acquisitions, and I think as Jerry mentioned one of the cases we are looking at, there are certainly others as we look ahead.

And just lastly, what roughly today would you consider of your acreage particularly in the area around Northern Florida and Southern Georgia, as land that has a higher and better use in terms of value than timberland?

Well, Bob, that's probably something that we would rather not step out into, but it is significant and a portion of the state -- a portion of the country continues to grow. I guess I could almost say that value goes up on some of this property every day. I think when you can sell a timber lease on just a lease right on 5,500 acres, the life of the lease was a little over 20 years and you can sell if for $26 million, I think that is pretty indicative of some of the values you see in and around Northeast Florida.

I see. But you don't want to get into more specifics in terms of what somebody who is looking to buy your stock could look to in terms of future realizations of timberland values into land sales?

Bob, one of the things you are faced with right away is when does it cross the line between timberland and properties for further development or conversation areas? That is always a question you have to begin with. I may think it is $2,000 an acre, somebody may think it's 15. Somebody else, 3,000. So it is pretty difficult to quantify. Obviously we're comfortable with the numbers, and we wouldn't be talking about it, we wouldn't be taking those actions if weren't.

Okay. Just to clarify again when you say for the next few years, are you talking about a specific number of years or you want to leave that in generalities?

I would prefer to leave it in generalities, but we are certainly talking well beyond the next two or three years, if that was your question.

Well I’m talking about between five and ten years, at that rate.

I would certainly have no problem getting to five, and obviously you get out beyond that, how much do we acquire in the meantime and we are certainly not going to go out and acquire just for the sake of acquiring. In the end we are in business of generating cash, and basically with that in mind as we become moved into a REIT. So anything we're going to do is certainly going to be putting us in position to generate cash in the near-term, not necessarily where we might have been as a standard C Corp before it was more earnings than cash.

Right, but conceptionally is this a liquidation over a long period of time, as you sell land?

That certainly is not the objective. The company has been in business for close to 80 years. I don't think we're looking to liquidate it. I don't think that would be what we should do for the shareholders either.

I'm saying over a very long period of time as you convert timberland into land sale.

I think as we continue to see higher values we certainly will do that, but the strategy isn't just to liquidate the company that way. Obviously some properties in perhaps more remote areas and remote is further out than we used to think about a few years ago. Obviously we will continue to make acquisitions where they have both what we call HBU, higher and better use properties, as well as properties that generate cash from harvesting timber.

Well I look forward to getting to know your company better, and thank you for your answer.

Certainly Bob, we're happy to.

(OPERATOR INSTRUCTIONS). Bob Bridges (ph) with Sterling Capital Management.

Congratulations again on making it through the REIT finish line. We're all very excited about that. First of all, can you review your expectations for 2004 and maybe beyond as to what the market pricing is going to do in your various geographies and harvest levels throughout the year?

I think, Bob, as I indicated in the Northwest in my comments, we expect some pick up in '04 volumes and primarily from what we shifted out of the fourth quarter of '03 to take advantage of the REIT status. So you're going to see a volume in pickup out there. You're going to see a little bit we think erosion in average price just because of mix both as to specie and location out there.

I think on a specie by specie, type by type if you will, in the Northwest you will see flat to perhaps some increase in price. In the Southeast we have seen prices a little higher than we expected. We expected prices to be fairly close to third-quarter level. But we are encouraged by what we see. I think you'll see pine volumes down in the Southeast slightly, just perhaps two or three percent.

And in the Northwest in the pickup of volumes, I assume it is going to be nothing stark that's going to really stick out but something more staying within the trend of prior years?

I think that's a pretty good statement. I think that's about what you're going to see. As I said, the shift -- where we shifted third-quarter volume, the majority of that you'll probably see come out in the second and third-quarter. You won't see quite such a big pickup in the first. But we will get it, and we will get it under much more favorable conditions had we left it and cut it in the fourth quarter when we were not a REIT.

In the press release and in your comments earlier you referred to the fact that you are hopeful that especially in Performance Fibers some of your manufacturing costs will -- your cost structure will be improving in the new year. Can you give us a little more color as to where those savings might be coming from and perhaps quantify some of them?

I'll let Jerry maybe make some comments on however much he would like to go into detail on it. We are certainly looking into significant reduction in the price of hardwood fiber. It is not going to come January 1, but we certainly expect it to come down as we go across the year. Right now inventories are up to almost above normal levels.

Prices have been coming down. We continue to expect to see some prices come down. We've had a difficult year particularly in the Jesup Mill last year, in operations basis, so we should see some of those, some fixed costs on a per unit basis come down on that as well. Jerry, do you have anything you want to add?

Yes. On one of the charts we showed you the Performance Fibers variance year-over-year, and in that we're about $42 million of effectively manufacturing variances. Let me give you a little breakdown on that, and then you can compute how much improvement is potentially there. About $25 million of that related to wood, chemical and energy costs. As we indicated I think we expect some improvement in all categories going forward.

About $10 million relates to the poor performance that we've had in particularly the back half of the year, primarily on the seam (ph) machine in Jesup, that's the fluff machine. While the chemical cellulose machines A and B and Fernandina did very well. So improving operations on the seam machine in Jesup is a go, and I think one that we can achieve. Then there were about $7 million above the miscellaneous variances including pension and medical and we don't know where the pension costs are going, actuarially or in reality, medical costs have gone up.

So overall $42 million of year-over-year adverse variances between 2002, 2003. We expect meaningful improvement. I think everybody will have his own estimate of what that would be. So there should be a good pickup as time moves on.

Great. We look forward to the results.

Bob, let me just add one thing. I think we pretty well covered publicly but as you may know or may not, the cellulose specialty business typically trades on twelve-month contracts. So when we went into '03 we were fixed pretty well for prices for the year. As we look at '04 we have been able to achieve some price increases in the contracts, which will hold for the year.

And is the renewal of the twelve-month contracts, is that period about complete or is there still some more rebooking that you're doing here in the next few weeks?

I would say that is 95 percent complete.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS). Mark Weintraub with Buckingham Research.

First, if you could break down for us on the 159 and 164 million on DD&A, how much of that is basis in land cost?

I'm not sure. Let me grab my hands on that. I would probably say if you include timber depletion as recovery of land basis or timber basis.

Not including timber depletion.

Not including timber depletion? Give me a second. I would probably say, I think it was about $6 to $8 million, but I will confer -- why don't you go to your second question and I'll respond on that one.

Following up on the chemical cellulose, Lee you mentioned that pricing was going to look up '04 versus '03. Can you give us a sense of magnitude?

I think a good range, Mark, is probably 7 percent plus or minus a percentage point.

That's a pretty sizable increase. Jerry, have you got those numbers by chance yet?

Just a second.

Were you talking about '04 or '03, Mark?

Useful to hear both.

It was about $6 million in '03, and it could be, depending upon once again which parcels are sold, perhaps about 13 in '04.

I apologize if I missed this from the earlier comments. Have you given any initial guidance on what we might pencil in for land sale profits for '04?

No, no, but let me just reiterate. What I remember is the disclosures out there which we haven't changed but once again this is not absolute on an annual basis. When me announced a 2 to 4 percent program using nominal dollars at that time, we said the 2 to 4 percent would add about $35 to $40 million to our land sale program, which already was at the $8 to $12 million land sales following the Smurfit acquisition, now the 8 to 12 being the higher and better deal or type property and the 35 to 40 being the initiation of the 2 to 4 percent.

So if you add the two together you would see that that as 43 to 52 on average and I guess recently we beat that. But that is the only outstanding disclosure I recall relative to land sale margins.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, we have nothing else. I turn it back to you for any closing comments.

As Lee indicated, we are looking forward to 2004 on several fronts, foremost to operate as a REIT and to maximize the advantage that this structure affords us. The second is to capitalize on what seems to be some favorable market trends in most of our businesses. We know that when they all work together there is significantly more cash flow that is derived above that our typical base level affording us many opportunities to grow shareholder value.

In the meantime we look forward to March 31 when we distribute our first dividend as a REIT. With that, let me thank everybody for joining us, and let us know if you have any further questions.

Thank you. This does conclude our call. We do appreciate your participation. At this time you may disconnect.