Rayonier Inc (RYN) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the Rayonier Q4 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 permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded.

At this time, for opening remarks and introduction, I’d like to turn the call over to SVP and CFO Mr. Gerald Pollack. Please go ahead, sir.

Thank you and good afternoon. I’d like to once again welcome everybody to Rayonier’s investor teleconference, this time covering our earnings for the fourth quarter and full year of 2004. Our earnings statements were released this morning and supplemental materials distributed soon thereafter.

With us today is Lee Nutter, Chairman, President and CEO. Lee will open the formal presentation, followed by review of the financial highlights for the quarter and the year. Lee, as usual, will then cover markets and operations and I will close our presentation with a discussion of earnings per share trends.

These presentations may 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 those factors which may cause actual results to differ materially from the forward-looking statements we may make. They are repeated on page 2 of our supplemental material and at the end of our earnings release. Please familiarize yourselves with them.

With that, let’s start the program with opening comments from Lee Nutter. Lee?

Thank you, Gerry.

I’ll make just a few overall comments now and then after Gerry takes you through the financials I’ll come back and discuss the business units. As you know, we have now completed our first full year as a REIT and we’re very pleased with how far we’ve come. As you might expect, we are excited about the opportunities as we move forward.

Across the board 2004 was a very solid year for us, as operating results in all of our business segments improved. Our earnings reflect a very favorable business mix, which translates into our strong and consistent cash flow. In 2004 this enabled us to pay dividends of $111 million, make $89 million timberland acquisition, invest almost $90 million in CapEx in our business units, and end the year with cash and cash equivalents of $84 million.

With our conversion to a REIT and our 2004 performance, we have moved our market cap from $1.5 billion at the time of our August 2003 announcement to approximately $2.3 billion now, an increase of $800 million or more than 50%. While we don’t see that level of opportunity in the near-term, we certainly feel we can opportunistically grow our timber business and we’ll take a hard look at how to add incremental value to our HBU properties.

Gerry, will you now take us through the financials?

Thanks, Lee.

I’ll keep my comments on the financial highlights fairly short, as there are no significant unusual items and the operating results and variance analysis provided speak for themselves.

The only item of material note for the year was the first quarter tax account adjustment, made as a result of our conversion to REIT status and related to deferred taxes on timber activities that were no longer needed and a provision for taxes on the repatriation of foreign earnings.

The net effect of these two items was $0.98 per share, which we tend to exclude when analyzing and comparing operating results.

So let’s start with the fourth quarter highlights on page 3. As Lee indicated, demand for basically all of our products was quite strong in the quarter, with sales of $298 million representing an increase of 7.0% over the third quarter and 10% over last year’s fourth quarter.

Operating income and net income declined, however, from the third quarter, primarily as a result of higher manufacturing costs and performance fibers and a decline in lumber pricing. We’ll see those variances in a few moments.

Earnings per share (EPS) of $0.26 was $0.21 below the third quarter. But if you recall, the third quarter included approximately $0.20 in like-kind exchange tax benefits, whereas only $0.02 per share of those benefits were recognized in the fourth quarter. If we simply pull those two items out, results from operations were only $0.03 per share lower than the third quarter.

As Lee indicated, our cash flow remains strong, and as we have indicated from time to time, needs to be looked at on a YTD basis through the fiscal year.

As shown on the bottom of page 3, on a full year basis, Cash Available for Distribution (CAD) of $168 million represented a $55 million increase over prior year and compared very favorably to the approximately $111 million in dividends paid during our first year as a REIT. EBITDA of $335 million also reflects a strong indicator of enterprise value.

As we indicated in the third quarter analyst conference call, we expected debt to increase as a result of our taxable REIT subsidiary purchasing land for resale from our REIT qualifying timber/land group, with the net increases at the TRS level offset by cash balances at the parent company. As a result, gross debt increased to $659 million, although debt-to-capital decreased favorably 1.2 percentage points to 45.3% compared to year-end 2003.

Let’s turn to page 4 to take a brief look at more detailed causal variances of the third to fourth quarter income trend.

Using a bottoms up approach first, if we look a the next to last line on page 4, we can see that the absence this quarter of significant lifetime exchange benefits contributed almost all - or $0.18 per share - of the $0.21 earnings decline from the third quarter’s $0.47 per share, to the fourth quarter’s total of $0.26 per share.

Now with that noted, let’s restart at the top of the chart to look at the trends on an operational basis. We can see the quarter-to-quarter improvement in timber and land activities driven primarily by higher prices in the Northwest and favorable volume in other income in the Southeast. The favorable trend in timber results could have been even better if approximately $3.0 million in hurricane-related price and delayed volume impacts had no occurred.

Our performance fiber segment, however, did experience higher manufacturing costs and in the third quarter related to significantly increased demand and subsequent cost of wood, particularly for hardwood on a seasonal basis. As well as the post-shutdown production problems at our fluff producing saw mill at Jesup.

Lumber pricing also took a dip quarter-to-quarter of approximately 6.0%, but remained at very strong levels.

There were no other significant variances in the quarter, but on a combined basis, as I indicated, excluding like-kind exchange benefits, we were approximately $0.03 per share short operationally.

Let’s turn to chart 5 for a quick look at the year-over-year comparisons on a quarterly and annual basis. Let’s start with the fourth quarter and track from the 2003 EPS result of $0.04 per share to the 2004 fourth quarter results of $0.26.

The $0.22 per share improvement was well spread among all segment categories, but in particular a significant improvement in performance fibers resulted with both cellulose specialties and absorbent material pricing significantly ahead of last year.

The more compelling story is the full year analysis, reflecting movement from a consolidated 2003 level of $1.02 per share to this year’s $2.10 per share. Both per share statistics have some adjustment in them that I would like to repeat or note.

2003’s $1.02 per share reflects the pro forma affect on outstanding shares for the year of the fourth quarter 2003 earnings and profits distribution that resulted in an approximately 15% stock dividend. And as I mentioned, this year’s 2004 results, as shown here, exclude the $0.98 per share positive benefit of the tax adjustments in the first quarter.

As you can see, almost all segments showed improvement and even land sales, which shows a negative variance from 2003, reflected strong years in both annual periods. As we mentioned, in 2003 we had $87 million in operating income from land sales and 2004, although the level was $12 million lower, still was a significant $75 million.

The improved results of the performance fibers group year-over-year can also been seen contributing $0.62 per share in higher earnings. Proportionate improvement in our wood products and other operations or trading activities also helped 2004 results to reach the pro forma $2.10 in EPS.

We talk a lot about our cash flow both on an EBITDA and CAD basis. Now let’s briefly take a look at that on page 6.

In this chart we show the component parts that bring adjusted EBITDA down to the cash that is available for distribution or for other strategic use. Starting with the 2004 adjusted EBITDA of $335 million, representing a 25% increase over prior year, we remove our typical or recurring capital spending level, deduct income tax and interest expense and other working capital changes to reach the $168 million level I mentioned previously, or $3.29 per share of CAD for the year.

This analysis excludes any strategic acquisitions and therefor excludes the $89 million timber acquisition that we mentioned that we consummated in the third quarter, funded with opening cash on hand, lifetime exchange tax benefits, and some of the cash generated from operations.

As we indicated, we ended the year with $84 million in cash and cash equivalents and a sizable $44 million, if the increased debt at the TRS level is deducted. As a result, our balance sheet is well positioned for value capturing opportunities in 2005 and subsequent year.

With that, let me turn it over to Lee for his commentary on the state of the markets and operations in our segments.

I think the numbers and charts over the next several pages speak for themselves, so I’ll quickly cover the fourth quarter for each business and in doing so, give you our sense of the first quarter and to some extent this year. Obviously a lot can happen between now and the end of March, let alone December 31st, so please keep that in mind.

* In the Northwest, demand and prices were strong in the fourth quarter for our timber business and at this early point in the first quarter, we see little change aside from a likely increase in sales volume.

* In the Southeast, prices continue to be impacted, as Gerry mentioned, by hurricane-related conditions, which we feel led to increased supply from timber salvage and thus a slight drop in average prices you’ve seen.

* Looking at the first quarter, you should see little change in either price or volume from the fourth quarter.

* For the year, we should see an approximate 10% move up in volume, but we expect little movement in pricing from that you’ve seen over the last two quarters.

* In New Zealand, we should probably see flat pricing from fourth to first quarter and volume similar to last year’s first half average.

* For the year, we expect prices to change little, but volume should be up about 10%.

Looking at sales and higher better use (HBU) --

* Properties, as we all know, they don’t come in small increments so we have considerable variability quarter-to-quarter.

* Our fourth quarter operating income here of $11.7 million, as Gerry mentioned, was above both third quarter ’04 and fourth quarter ’03.

* As things look today, we should see a strong first quarter, but for the year we’re expecting to be somewhat below the level of 2004.

In performance fibers --

* Fourth quarter operating results were down sequentially, as Gerry mentioned mainly due to higher wood, chemical, energy, and maintenance costs.

* However, for performance fibers, demand is strong, it’s remained strong, especially for our higher-value, higher-margin cellulose specialties grades.

* As you can see on page 12, we were again successful in continuing to enrich our products mix, with cellulose specialties in 2004. This is despite my having been told, at the end of the last several years we just couldn’t go any higher.

* For the year, cellulose specialties in 2004 accounted for 63% of the performance fibers’ volume and compared to 61% in 2003 and just a few years ago, 55% in 2000. Obviously, in each of these years, cellulose specialties grade represented an even higher percentage of performance fibers’ revenue and operating income.

* Look back at page 11 for a minute. As we’ve known and you’ve seen before, cellulose specialties pricing for 2004 was essentially flat.

* In the first quarter of this year, we should see a 2.0 to 3.0% increase in price, as our sales benefit from our annual price adjustments.

* I expect absorbent materials’ prices first quarter to first to remain fairly steady, but we should see a stronger 2005.

* Higher prices and stable-to-somewhat lower raw materials costs should lead to another good year or perhaps a better year in 2004 for performance fibers.

Looking at lumber --

* While prices eased, as Gerry mentioned, in the fourth quarter, for the full year of 2004 this business had operating income of $14 million despite absorbing $2.0 million in a write-off of obsolete equipment.

* For 2005, while our conversion costs should be down, I think as things look today lumber prices remain somewhat of a question.

On page 14, you can see the numbers for our MDF business.

* Volumes were up and in line with last year’s fourth quarter and prices have continued their upward trend.

* On an operating basis, this business continues to be hurt by the weak U.S. dollar. It reported a small loss in the fourth quarter and will likely continue to do so in 2005.

Let me conclude here by saying while it’s early, we’re off to a good start in 2005. We are well positioned in our businesses and that, combined with our tax-efficient REIT structure and strong cash flow, should allow us to continue enhancing shareholder value.

Let’s go back to Gerry now.

Thanks, Lee.

With the chart on page 15, we typically close the formal part of our presentation and give some guidance as to the upcoming earnings trends. At this point in time we are focusing primarily on the first quarter of 2005.

Based upon the current market conditions, as Lee outlined, we expect the first quarter earnings to be up from the fourth quarter 2004 earnings of $0.26 per share, but down from that reported in the first quarter of 2004 of $0.51 per share. The decline from 2004’s first quarter is primarily related to the volume of land sale activity expected in the first quarter of 2005.

In 2004, we had 77% of our land sales income occurring in the first half and 35% in the first quarter itself. Although we’re never sure of the exact timing for closing already contracted land sales, at this point in time we don’t expect 2005 sales to be so first quarter loaded. But excluding land sale activity from both years, we would expect the first quarter 2005 EPS to be on par with last year.

Before I close I would just like, as I typically do at year, to give you some thoughts on a few key statistics that are relevant to some of you in maintaining your forecast model for Rayonier. And also of interest to some of you that pay taxes or pass on tax attributes to your investors.

First, for 2005, we expect non-cash depletion, depreciation and amortization, and the core spaces of land sold to approximate $175 million, which will be about a $10 million increase of how we ended 2004. Capital spending, excluding strategic capital, is still expected to be within a $90-95 million target level.

Another common question asked relates to our expected effective tax rate. As you will have seen throughout this year, YTD rates can vary quite a bit, based upon when like-kind exchange benefits, foreign exchange movements and other factors are realized.

Excluding the first quarter special net tax benefit, we ended this year with an effective tax rate of approximately 12% before discrete items. This is shown in Schedule I of the attachments to our press release.

For 2005 we are not assuming, at this time, any substantial like-kind exchange tax benefits and therefore the longer-term guidance that we have given you in the past would still seem to hold. That is, prior to becoming a REIT, our effective tax rate seemed to hover between 28 and 32%. But as a result of REIT status, we expected that to decline approximately 8-10 percentage points, falling to within an 18-22% effective tax range.

Now, as time progresses, the tax on the January 1, 2003 built-in gain on land inventory will comprise a lower percentage of the total gain and after 10 years of being a REIT disappear. However, for modeling purposes short-term, based upon the mix of earnings that we see ahead of us, that 18-22% range still seems to hold.

And finally, I would like to make note that 1099 dividend information that is being disseminated to our shareholders as we speak reflects an income classification of our distribution, reflecting approximately 68% capital gains, 0% ordinary income, and 32% return of capital. This capital gains component is slightly higher than we had indicated previously.

We also want to note that that this percentage can vary substantially year-to-year based upon intercompany land sale activity and dividends paid from the TRS to the parent company. Nevertheless, the weighted combined tax rate to individuals should still be very favorable compared to typical REITs. This information will be posted to our website very shortly, as well as on the NAREIT website, joining other REITs with similar disclosures.

With that, I’d like to close the formal part of the presentation and turn the teleconference back to the conference operator for questions from our audience. Dave?

Thank you, Mr. Pollack. (Caller Instructions)

Mark Weintraub, Buckingham Research Group.

Thank you. First just wanted to understand, Gerry. You mentioned on the like-kind exchanges that you weren’t assuming any for 2005. Should we be reading that you don’t expect to have any or that that’s just purely for modeling purposes, you just are not making that assumption but in all likelihood you would?

Well, we’ll be pushing for it as much as possible, Mark, as you can imagine. The land sale side will be there. The issue is whether or not we can then swap that out for timberland acquisitions that make sense to us and it’s really the acquisition side that you can’t speculate. So we’ll be pushing. But for planning purposes, right now we’re taking the conservative approach.

I guess, as a follow-up, if you don’t find opportunities -- you’re obviously generating a lot of cash above and beyond what is needed to meet where the dividend is right now

And if I couple that with two other points, one, I believe when you set the dividend that, Lee, you chose to go on what you considered the more conservative end of the range that was being contemplated. And two, I’d imagine that business is probably played out at least as well or better than what you would have been anticipating at that time.

So, with those factors in play, can you update us and help us think through how we should be looking forward toward the dividend and what your thought process in establishing what that level’s going to be at?

Yes. Let me start by saying you are right on those first two points you made, Mark, as to where we set it and business, in fact, has been better in ‘04 than we expected.

Other than to say that the Board periodically looks at the dividend, it is an item in front of us we continue to look at. I obviously can’t give you answer now. I can only say that it is an item on our agenda. We are focused on it. We will continue so.

Okay and just real quickly on the performance, about shifting gears on the performance fibers, on the cost side. What type of expectation should we have in the first quarter?

I would expect, Mark, in the first quarter -- we had a difficult fourth quarter. We had really a great year going through three quarters. We had a difficult fourth quarter. I would expect we’re going to see some improvements in raw material costs, almost all of them, and operations-wise I don’t have any reason to fear, I guess, or I have every reason to hope, that the problems we had in the fourth are behind us.

And do you know roughly how much that costs?

Mark, I’m sorry, what? You mean the cost improvement?

Well, the operational issue.

Problems we had in the fourth quarter.

Well, on a manufacturing cost basis, if you compare the fourth quarter to the third quarter, we were estimating roughly a $14 million operating impact, between wood cost of maybe $4.0 million, chemicals of about $3.0 million, oil and energy and maintenance of another $3.0 million or $4.0 million. So in aggregate, we saw, compared to third quarter levels, a big increase of about $75 a ton.

Now not all that’s going to come back to us, because once again there’s still strong demand to wood costs. But I would probably say that half of that should come back in the first quarter and then once again, hopefully with the mill running, we can get the rest of it back by the end of June.

Okay, so was -- the operational was $4.0 million? Because I guess you said $14 million and then you listed $4.0 million, $3.0 million and $3.0 million. So was it $4.0 million? Was additional to that was the operating issue?

You mean the difference? I mean, this isn’t exact. I mean, I won’t go to decimals. But it was roughly $5.0 million of wood, $3.0 million of chemicals, another $3.5 million between oil, energy, and maintenance and the rest would be production buying problems.

Okay and that got you to the $14 million?

A lot of the production problems result in higher oil, higher chemical usage.

Okay.

So it’s difficult to say. I mean, the chemical variances wouldn’t necessarily all be by themselves a purchase cost.

Okay and just lastly, because I think it’s very important for people looking at your stock and you’ll say what you can and obviously what you can’t you won’t. But can you help us at all in thinking through the metrics that you would use in determining what an appropriate dividend level is?

Well, I mean, obviously, Mark, we can’t tell you. Looking at where our cash position is, looking at our business over not only ‘05 but ‘06, as you can imagine, we’re here telling you that ‘05 looks like another pretty good year. It is an item. It is an item that we take a hard look at and beyond that, I really don’t want to go any further, but it certainly is an item.

And as you said, we started conservatively. We had a better ‘04 than we expected. I would say overall our business outlook is a little better than we expected when we se t the original level of $110 million. I think you probably can appreciate I can’t go any further than that. I wish I could.

Thank you, Lee.

Chip Dillon, Salomon Smith Barney.

Yes, good afternoon. My first question is I noticed that the spread between what you earned and your cash available for distribution is a little more than $1.00, at least it was last year. Is there any reason to think that’s not sort of what normally you will have in the future? I know that can change, depending on what your bases of land sales are. But if you’re sort of seeing a normal year, is the spread about $1.00?

Chip, this is Gerry. I’m not sure we really look at relating CAD to earnings levels in that way. Once again, putting working capital changes aside, a lot of it may relate to the mix of earnings between timber and land and performance fibers. I’m just not sure that -- obviously cash available will be more than earnings because of the depletion and depreciation factors and possibly also, as a result of deferred taxes, that may come along the way if we can be more efficient rather than pay it deferred or eliminate it completely.

So I’d rather not relate cash flow to earnings, but other than the fact that we’ve reported EBITDA for all these years. Our income tax and interest expense and the income tax is computable and I’d rather suggest you derive it on a typical way of source and usage of funds, less typical expenditures and come up with a normalized for cash available.

So I don’t think it’s a fixed spread. I think it depends on the quality and mix of earnings.

Got you. And then, secondly, when you look at performance fibers, which clearly had a good year and certainly could be in for even a better year this year, is there -- what are your thoughts toward possibly separating that, since that’s not really conducive to the REIT structure? And would there be logistical or tax issues, even if you did want to separate it, that would prevent you from it? Or do you think that that’s not something you’d want to do anyway?

Well, Chip, I don’t know which order to answer your question, but I think the last one I can say not necessarily would we say we’re never going to do it. It’s a significant cash generator for us. As you can imagine, there are tax issues involved.

We continue to look at all of our business and the structure of this Company and see if there aren’t combinations, both within and without Rayonier, that we can add more value to the shareholder. And as you can imagine, there are a lot of alternatives.

But we certainly don’t have anything locked in our minds. I just think one of the things that we have to keep in mind is the amount of cash that generated from that business. It is not insignificant.

Got you and then, when you look at the timber base at year-end, I know that you historically have given us the acreage as well as, I think, the thousands of cubic meters. Could you tell us how that changed between year-end ‘03 and year-end ‘04, if you have that?

I don’t think we have it right here at hand. I think we can probably get it for you, but I don’t know if one of us is sitting here with it. Do you have it, Gerry?

Well, let me -- I’m not sure exactly what you’re driving at, but a couple things. As Lee indicated, we’re looking at, in the Southeast, an increase in the harvest in ‘05 versus ‘04 and a pretty significant one. Because, once again, we had deferred volume in the fourth quarter of 2004, as a result of the hurricane, that hopefully will move into 2005.

And that was the 10%, right?

That Lee mentioned. Yes.

Yes. Okay.

On the Northwest harvest levels, once again you’ve got to do some puts and takes. We had the volume of sales contracts that were deferred from 2003, second half of the year, into 2004 in order to capture benefits from a REIT status and that was about 25 million board feet. So you’ve got 2004 and 2003 that you’ve got to normalize.

But when you do that, you’ll see that -- I won’t say you’ll do that, but we expect that, as a result, that the 2005 harvest levels in the Northwest will return to more normal levels of about 250 million board feet. Which will represent a drop of about 8.0% or 9.0% on year-over-year volume. So you’d really have to look at 3 years to figure out that the harvest volume in the Northwest is basically flat at about 250 million board feet.

Acreage is a different issue, because you’ve got a mix of timberland and land and land health inventory, so I don’t have that information on a total acreage. But I suspect that overall, in the last couple years, although the market value of the timberlands have increased as they do and appreciate, the actual number of acreage probably declined over the last several years.

Got you and the last question is you all are sort of out there activity looking to do the land sales and swaps. Are you finding that valuation levels are holding at where they’ve been a year ago? Are they up? Are they down? Or again, are they about flat?

Well, I’m not sure from a year ago that they’re down, Chip. If you look at some of the transactions and you kind of shake your head, I guess, for at least one of those that consumes the product and deals in it every day.

I’m just trying to think, though. I would say they’re pretty flat and there’s very little discounting for size. It used to be you could go north of half a billion dollars and it made a difference. I don’t see that anymore.

Are you seeing more people kicking tires? Are there even more like pension funds and others out there that are showing up that you have to sort of compete with? Or should I put it the other way, as you sell parcels that are competing to buy your parcels than you had a year or two ago or would you say it’s about (inaudible - technical difficulty)? Or is it just hard to say?

Well, you probably asked a couple of different questions in there. I would say let’s deal with our stumpage sales for a minute and I can’t tell you exactly. Demand certainly -- the number of bidders has not diminished, at least in selling stumpage. Selling HBU, higher and better use, properties particularly in north Florida and Southeast Georgia there’s more interest. The demand is stronger, which also have, obviously, a relationship to price.

On buying timberland, there’s probably just as much money out there chasing it. It comes in probably a few more people out there doing it. I’m not sure there’s even more money than there was, but there’s certainly adequate moneys out there and they’re willing to push hard.

Okay. All right. Well, thank you very much.

You’re welcome.

Thanks, Chip.

Steve Chercover, D. A. Davidson & Co.

Thank you, a couple questions. First of all, with the like-kind exchanges, if you sell something in 2005 and you can’t find a good deal to acquire, how long of a window do you where you can kind of maintain, would be able to do a like-kind exchange and get a tax credit?

I’m not a tax expert, Steve. But what we have to do is from the time of closing of the land sale, assuming that occurs first, we’ve got about 45 days to designate certain properties and it can be several properties that you’re trying to go after. And then you’ve got about another 135 days or a total of 180 days to close the second part of the deal. So there is a time limitation that you have to work toward.

But, once again, as we have land being sold, we are parking it. It’s restricted cash. But if we don’t find a way to culminate it in a sale, we will effectively have to bring that cash back in and as Mark indicated, we’ll have more cash available for distribution.

I see. Now, could you do, I think it’s called a 1081 exchange instead? Will that entail a whole different kind of business model or approach to buying and selling?

Steve, unfortunately I’m not familiar with 1081. I don’t recall that the tax people raised it. I would suspect if they haven’t raised it we’d probably have some difficulty, but we’ll come back to you on that. It’s not something that I recall having discussed recently.

Okay and I’m not a very fast writer. Could you just repeat how the breakdown of the tax treatment of the distribution, what’s referred in principle?

Yes. It was 68% capital gains, 0% ordinary income, and 32% return of capital.

Great and I kind of wanted to follow-up on Chip’s question as well, in terms of what you’re seeing out there to buy. I mean, presumably, with the cash accumulating, you are in the market to buy as well as sell and are you seeing anything that’s attractive and if so, in what jurisdictions?

Well, the first thing is - and I think it gets right back to the 1031 exchange - we’re looking every day. We’re staying, if you will, fairly in the Southeast, generally in the Southeast, the Southeast quadrant of the state and the Northwest, pretty much the west side of the Cascades and north of California.

There are lots of opportunities to buy. The issue is can you buy right and there’s obviously the tax impact on what we sell, and as Gerry indicated, we try to roll it over into an exchange at which we’ve simply moved a taxable item over to a nontaxable item when we harvest the timberland.

One of the issues you face is how quickly you can get the cash back, so we’re usually - well, we are - looking for a profile that has a fair amount of mature timber on the front end so we could move. Which is what we found in that 83,000 acre acquisition that we closed here 4 or 5 months ago, I guess.

Anything else for you, sir?

No. That’s great. Thank you.

Todd Peters, American Century Investments.

Hello. Thank you for taking my question. On your capital spending, it’s a little higher in the quarter and for the full year than what I had in my model. Is there some step-up going on there and where are you spending your capital on, capacity in any product area?

This is Gerry Pollack. I’m not sure what you had in your model, because actually I think we closed the year at slightly lower than what we expected, at $89 million. It was a couple million dollars lower. So there was no bum’s rush, if you want to say it, to spend the capital.

Okay.

And Lee indicated it’s really production efficiency at some of our sawmills.

I think Gerry’s right. It tends -- in the sawmills for example, we spent some money in cost reduction or production efficiencies, higher recovery, lower costs in some areas. In the performance fibers business, basically no push for re-increase in capacity other than reliability.

I think we indicated that we had a fair number of problems in 2003. I think we did an awfully good job of solving those in 2004. We did mention we had some fourth quarter problems, but there’s really no big expenditures to increase capacity in any of our businesses, just efficiency improvements.

Okay and then just a quick follow-up, if I can. So the production issues that occurred in Q4, have those been alleviated in the current quarter?

Well, we expect they have. One of the problems you have - and I think anybody with big manufacturing facilities, be it paper or pulp - you take one of these down for 2 or 3 weeks, you do major maintenance on them and then it’s difficult to get them back up and leveled off. And in the fourth quarter we suffered from some of that.

I think we have some pretty well behind us. I think we’re probably looking at a quarter that’s similar to the second or third quarter of last year. No reason not to expect so.

Okay, very good. Thank you.

Gentlemen, we have no other question in the queue at this time, so I’d like to turn the call over to Mr. Pollack for closing comments.

Thank you. Not really much to say other than the fact that we ended 2004 a lot stronger than we entered the year and the same thing is happening with 2005. So we appreciate everybody who joined us today and Parag and I will be available for any further questions that arise. Thank you. Good afternoon.

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

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1 Q4 2004 Rayonier Inc. Earnings Call