Rayonier Inc (RYN) 2006 Q1 法說會逐字稿

Good good day everyone and welcome to the Rayonier First 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 permission. You participation on this call constitutes implied content. Please hang up now if you do not consent to be recorded. At this time for opening remarks and introductions, I would like to turn the call over to Senior Vice President and Chief Accounting Officer, Mr. Hans Vanden Noort. Please go ahead, sir.

Thank you and good afternoon. I would like to once again welcome everybody to Rayonier's investor teleconference, this time covering our earnings for the first quarter of 2006. Our earnings statements were released this morning and supplemental materials distributed soon thereafter and both are available at our website at rayonier.com.

With us today are Lee Nutter Chairman, President and CEO and Paul Boynton, Senior Vice President, and Head of our Performance Fibers business.

Let me remind you that in these presentations we include forward-looking statements, made pursuant to the Safe Harbor provisions of the Federal Securities laws. Our earnings release as well as our Form 10-K filed with the SEC list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They're also repeated on page two of our supplemental material. Please familiarize yourselves with them. This conference is being webcast and can be reach through our home page.

Let's start the program with opening comments from Lee Nutter. Lee?

I'll make a few overall comments here. Hans will then take us through the financials. Paul Boynton will discuss Performance Fibers business and I will then cover TerraPointe, our real estate subsidiary, as well as Forest resources. Incidently, Charlie Margiotta, the President of TerraPointe will be with us in July for the second quarter call and go more into the the details of that business than I will today.

On a year-to-date business, we are where we expected to be in terms of our first quarter and outlook for the year. On an on going basis our earnings for this year should be above both 2004 and last year. Timber markets remain strong, in terms of both demand and supply, and we expect this to hold throughout the year.

One thing you should keep in mind as we have somewhat of a natural built in hedge in the price of pine. We annually sell approximately 4.3 million tons and we purchase almost actually that amount of pine for our two Performance Fibers mills and three saw mills. What is good for one often isn't so good for the other.

Lumber markets are showing little change from the fourth quarter and while we're planning for a slight downward trend as we move further into the year, we feel that second quarter results should be somewhat better than first.

In real estate, as we've said before, we're transforming this business from somewhat of a wholesaler to more of a retailer and as such is further into value added mode. When comparing this first quarter to prior periods, keep in mind that this is a transition period. We expect to see a much higher level of mostly income from real estate business units in the second half of the year you'll see in the first. For us in northeast Florida and southeast Georgia, it's not a market situation but a strategic transition and timing of sales.

Paul will cover Performance Fibers more specifically in his comments on operations, but let me once again say that this is a very strong business unit, particularly so now as we look into the balance of this year and next. Obviously, Performance Fibers has been a big energy user and somewhat of a drag on earnings, but Paul will talk about some of the capital projects in his group recently been completed or are underway, which which should be up by year-end. With that, let's go back to Hans for a review on the financial and his comments.

Let's begin with page three, First Quarter Highlights. Earnings per share for the quarter were $0.30. There were no special items in the first quarter. However, prior periods do have items which we believe should be taken into account when comparing to this quarter.

Sales totaled $277 million, resulting in an operating income of $37 million and net income of $23 million. Sales were $39 million below the prior quarter, but $2 million above first quarter 2005. Lee and Paul will go into the key drivers behind that revenue movement.

Operating income of $37 million was approximately $1 million above fourth quarter, 2005 but $10 million below first quarter '05. We'll go into more detail on individual segment variances in the following pages.

A comparison to prior periods of reported earnings per share indicates a $0.43 per share unfavorable variance to the fourth quarter and $0.15 per share unfavorable variance to the first quarter of last year. Note that the fourth quarter of 2005 included a $31 million gain, or $0.39 per share, on the sale of our New Zealand timberlands to a joint venture in which we have an ownership interest. The first quarter of 2005 included $9.5 million tax benefit or $0.12 per share resulting from a IRS tax audit settlement. We believe both of these items should be excluded for comparative purposes as shown on the pro forma income from continuing operations the first line for first quarter'sEPS of $0.30 is $0.04 below fourth quarter '05 and $0.03 below first quarter 2005. This will be at basis of our comparisons in the next couple of slides.

On the bottom half of page three, we provide an outline of cash resources and liquidity. Cash provided by operating activities for the quarter of $51 million was below last year's first quarter due to lower operating income and increased working capital. Adjusted EBITDA of $71 million was $16 million below the prior year's first quarter while cash available for distribution, or CAD, of $24 million was below the first quarter of '05. We'll look at CAD separately a little later.

Our debt and debt to capital were comparable to year-end and we ended the quarter with approximately $126 million in cash.

Let's now turn to page four for the variance analysis. On page four, we show a comparison of first quarter to fourth quarter earnings. We begin with $0.34 in pro forma earnings per share from the fourth quarter and come down to our first quarter results of $0.30 per share. Our real estate result we're about $6 million below the fourth quarter, primarily because of fewer development acres sold as well as the inherent variability in the timing of real estate transactions. The realized prices per acre were strong, although the average development price per acre trailed the fourth quarter which had some exceptional high prices.

Continuing down the page, we can see a net $4 million improvement this quarter for our Performance Fibers business unit, driven by improved sale of specialty prices somewhat offset by absorbed material price softness and lower volume. In Corporate and Other the positive variance includes lower incentive compensation accruals and the absence of a $3 million charge last quarter to increase our disposition reserves to close Washington state facilities. These are somewhat offset by the recognition of stock option expense of $2.1 million.

Moving below operating income, we are unfavorable in other income as last quarter included a $1.9 million gain on sale of a manufacturing facility. We're also $2 million unfavorable in income taxes as the prior quarter included a discrete tax benefit related to the favorable acquisition of cost between REIT and TRS.

Let's now move to page five to briefly review the year-over-year variances. Here we begin with last year's first quarter pro forma earnings of $0.33 per share, which excludes the $9.5 million tax benefit from the settlement of last year's tax audit. Overall timber result we're comparable to prior year, as higher prices in the U.S. were offset by increased costs and a loss this quarter in our New Zealand operations. Real estate earnings were down reflecting a reduction in acres sold from approximately 10,700 lasts year to 3400 acres this year. As previously mentioned, our average price per acre remains strong. Performance Fibers results reflect strength in prices in both cellulose specialties and absorb materials. However this improvement was more than offset by increased costs, primary energy, wood fiber, and chemicals, as well allower volume, resulting primarily from a longer scheduled maintenance shut down than last year.

The corporate and other $2 million unfavorable variance primarily results from the expensing of stock options. Moving below operating income, we benefited from favorable interest income, resulting from increased cash balances and reduced taxes due to like kind exchange benefits and lower foreign tax expense. These amounts bring us to the current quarter's result of $0.30 a share.

Let's now turn to page six for a brief discussion on cash available for distribution. On this page, we reconcile from cash provided by operating activities, which is a GAAP measure, on our metric of cash available for distribution, or CAD. We deduct capital expenditures from cash provided from operating activities and then adjust for any equity related cash flows, like time exchange tax benefits, and changes in committed cash to arrive at what we consider operationally generated cash available for distribution. As expected, first quarter CAD was below the prior year reflecting the lower operating earnings, increased working capital and a higher level of capital spending. As we mentioned on this call last quarter, we are investing in our Performance Fibers mills to significantly reduce our fuel/oil consumption. Also as previously noted our scheduled first quarter maintenance shutdowns were significantly longer in duration than last year resulting in higher spending. For the year, similar to our earnings trend, we expect second half CAD to be significantly above the first half of the year.

With that, let me turn the conference over to Lee to cover markets and operations.

Thanks, Hans. In covering our three business units, Paul and I will make just a comment or two about the first quarter and then move to our outlook for the second quarter and balance of this year. I'll begin with Forest resources, move to TerraPointe, and Paul will wrap up with Performance Fibers. Please remember with our comments concerning second quarter and beyond, a great deal can happen between now and then. 60% of the year is still in front of us.

Let's look at Northwest Timber sales on page eight. Here you see the usual quarter to quarter variation driven by mix, harvest conditions, and weather. In the second quarter, we expect the average price to return to the level we realized in the fourth quarter or up almost 4% from this quarter. Volume for the second quarter should be up about 10%. Looking at the year here in April, we expect both volume and average price should show little change from 2005. In the Northwest, slightly over 80% of our forecasted volume for the year is already under contract.

Page nine. Southeast Timber. On average, sales price for the first quarter moved above $20 a ton for the first time since first quarter of 2001. Volume was essentially unchanged from the fourth quarter level. In the second quarter for pine, we expect to see prices and volume dip slightly. However, for 2006, average prices should be up about 10%, with total volume down between 2 and 3%. 85% of our forecast in pine sales for this year is now under contract.

Let's move to real estate, but before I get into the operating details, let me remind you that given the nature this business, there will continue to be, over the next couple of years, a variability quarter to quarter and to some extent year to year. This has certainly been true in the past when we generally sold in bulk, but as we continue to shift our business to TerraPointe, which we created last May and we've been expanding, sales will be in smaller partials generating a more even stream of earnings in the quarters and years ahead. As you'll hear from me in a minute, you will likely see a second quarter somewhat similar to first, but a very high second half of this year as we look ahead. And above certainly 2005.

First quarter real estate results were below the exceptionally high fourth quarter due to price, as Hans mentioned. This is more of a function of sales timing and not markets. While both some recent statistics and anecdotal evidence suggests a slow down in housing, and to some extent development activities, we have not felt direct negative impact on our costal development program or on the rural side of the TerraPointe business. Due to land sales and entitlements taking several years and most successful developers realize that attractive land is required throughout this process. As you see in our financial highlights, and on page 10 and 11, we have separated the real estate business basically by geography and markets into what we call Development and Rural Properties. Development properties are represented primarily by the 11 costal counties between Savannah, Georgia and Daytona Beach, Florida. Rural properties are basically the balance of our ownership in Florida, Georgia, and Alabama.

Page ten, development sales in the first quarter are mix of relatively high value $20,000 per ton per acre for commercial properties and the 620-acre parcel at $5,500 per acre in southern Georgia, which contained an unusually high percentage of wetlands. On a trend basis, the average price is slightly above $8,000 per acre. Here you can see the four quarter rolling average trend price is now included to factor in the quarter to quarter swings.

Rural land sales, page 11. This program remains steady with prices in $2000 to $2500 range. While the approximate 2700-acres sold in the first quarter was below our run rate, we expect to trend up as sales volume increase throughout the year. On a very positive note, interest appears to be increasing on our holdings in the non-costal Florida counties.

Let me now turn it over to Paul Boynton for his review of Performance Fibers.

Thanks, Lee. As noted by both Lee and Hans, our Performance Fibers business continues to perform well, supported by strong market demand for our unique cellulose specialties fibers, yet faced with rising energy and raw material costs. On page 12, you can see Performance Fibers net selling prices for both our cellulose specialties and fluff products, along with comparative price for commodity paper pulp SBSK. In looking at the cellulose specialty prices, please first note both the overall stability along, with the premium generated by these customized fibers, roughly 86% above SBSK.

Second, as we indicated in our last quarter call, we anticipated price increases on our cellulose specialties product price line due to solid demand. The chart shows the actual price improvement on average was about 7%. This increase includes an energy surcharge implemented on the majority of our cellulose specialty business and all of our acetate volume. Acetate is by far the largest component of the cellulose specialty line.

Page 13 shows Performance Fibers sales volume. You can see our total first quarter sales volume of both product lines was down slightly as compared to first quarter 2005. The reduced sales are directly related to a longer maintenance shut down at our Jesup facility.

In the January analyst call, we commented on our efforts to reduce the amount of fossil fuels consumed in our production. These efforts continue. The extended shutdown in Jesup, and most of the capital invested in our business this year, are related to significant energy reduction projects. In 2005, we consumed approximately 780,000 equivalent barrels of oil and this year we'll use roughly 80% of that amount. In 2007, we'll consume about half of the amount of 2005.

Again, as noted by Lee and Hans, our business saw improved earnings results in the first quarter of this year compared to the fourth quarter of 2005, driven by strong demand and hence higher price for our cellulose specialty products, but offset by higher material and energy costs. We expect the second quarter will show further earnings improvement as compared to the first quarter, but below that of the same quarter of the prior year, mainly due to raw materials and energy cost. Additionally we've put in place multi-year sales contracts for our cellulose specialties volume that will help maintain strength and stability of this business. Performance Fibers business has been and will continue to be a steady source of operating income and major cash contributor. You should expect the contribution from this business for the year to be above that of 2005.

With that, let me turn it back to Lee.

Thank you, Paul. On page 14, can you see lumber prices move down slightly as did volume from last quarter, but we're comparable to first quarter 2005. Our second quarter volume should be up about 10% from first, and while we expect average price for the year to slightly move down, we should see a modest increase in the second quarter. For the year and number of volumes should be up about 5 to 6%, while we expect the average price as I said, to trend down in the range of 8 to 9%.

Let me make just a quick comment here about our timberland investment in New Zealand. As most of you know, we've held a 49.7 ownership interest in the consortium which holds 354,000 acres of timberland. While last fall, it was initially necessary to make an investment, take an interest in this business of below 50%, our strategy has been on own 40%. In the next few days, we should be announcing a transaction that gets us to that 40% target. Only a few minor details now remain to be finalized, I'm quite sure there will be questions on this transaction, but let me refer you to the announcement of October 4th and ask you to be patient for just the next few days. While 40% has been our target this, of course, and is always the case, subject to other better uses of capital value we have carrying in this investment.

With that, let me just conclude by saying we are well positioned with our unique mix of businesses. This strategy combined with our strong balance sheet, cash flow, and tax efficient REIT, should allow us to prudently pursue growth opportunities in timber, build TerraPointe and strengthen Performance Fibers, in order that we can continue shareholder value. With that, let me go back to Hans.

Thank you, Lee. Let's turn to page 15. On this page, we typically close the formal part of our presentation and give some guidance as to upcoming earnings trends. At this point, we are focusing primarily on the second quarter of 2006 and full year. Based on current market conditions, we've expect second quarter earnings, including any impact from selling down our New Zealand joint venture interest, to be above first quarter's earnings of $0.30 per share, but somewhat below second quarter 2005 pro forma earnings of $0.44 per share. On the sequential basis, the increase is driven primarily by anticipated improvement in Performance Fibers and timber results. On a full year basis, we still expect earnings to be somewhat above of our 2005 pro forma EPS of $1.57 per share, driven primarily by improved real estate and Performance Fibers results in the second half of the year.

Before I close, I would like to share a few key statistics that are relevant to some of us in maintaining your forecast model of Rayonier. First, for 2006, expect depletion in depreciation and amortization, and the non-cash cost basis of land sold to range from 140 to $145 million. Capital expenditures, excluding acquisitions, are expected to total $106 million, well would have our typical 85 to $90 million target level. This increase reflects the Performance Fibers projects as noted earlier. With respect to our investment in New Zealand, excluding any impact from the sell down of our interest to 40%, we expect our 2006 equity income from the joint venture to range from one to two million, although this will be somewhat back end loaded. However, because of the way the joint venture is structured, we expect to realize cash flow in the 5 to $6 million range.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Peter Ruckmeyer with Lehman Brothers.

Thanks, good afternoon. Lee, I wanted to ask a question if I could on development revenues. You mentioned, obviously, the second quarter will be relatively low as well as versus the first quarter wot second half will be up sharply. Can you comment on your expectation for the full year for that business, year-over-year?

I think we indicated, did we not, Peter, that year-over-year we do expect certainly to be up above the 2005 level.

Okay. Fair enough. Another question I guess, Lee is can you comment on your optimal capital structure, the way you think about it. Not a lot of debt in your capital structure. You may free up some capital with the sales -- partial stake in the JV, maybe ask the question differently priorities for free cash flow at this point?

As you noticed with the cash we're carrying on the balance sheet which is pretty substantial in our debt to total capital, we're down at 38%. And I think we've said pretty much all along we're looking for opportunities to grow the REIT, and build TerraPointe, the cash opportunities are in build the REIT. As you know things are v been pretty pricey out there. What we have been looking for and will continue to look for are properties that have a fairly high front end load on them, which allows us to do more 1031 work than we have been able to do recently, which allows us to make move some of our higher and better use properties down into the TRS and the newly acquired property up.

Okay, helpful. Last question if I could, perhaps for Paul, in the Performance Fibers you mentioned volumes were down year-over-year and sequentially in part because of Jesup and the capital project. Can you quantify the impact of that outage on either as measured in tons or as measured dollars on the business and the time line for that to come back up?

Yes, sure, Peter, this is Paul. We can quantify that. It's that we had a longer maintenance shut down in the first quarter and roughly in ton,s for absorbed materials business it was approximately 11,000 tons less, and for our cellulose specialty business about 5000, 5500 tons less.

All right, I'll pass it over. Thanks very much.

We'll go next to Chip Dillon with Citigroup.

Yes, good afternoon.

Hi, Chip.

We look at the real estate business, I'm sort of looking at the proportion of what you think we should be using as basis versus what your revenues will be. And I know, for example, last year it. Would that still be a good ratio to use this year?

I think it's going to be less than that, Chip. I think the basis would go roughly around 15% to 20%.

And then are there any other expenses that you flow through that segment or through that business, like roads and other things you might do to it. And if so, what percentage of revenue should we, as a rule of thumb, use there?

Well that's going to vary somewhat. If there is timber basis that's going come off. That's really going vary on a parcel by parcel basis and the other expenses, of course are just with the group operating expenses for the marketing group there. I don't really have a -- we don't really have a set percentage on that.

But I guess the inning think about it though is if the basis is 15% the EBIT won't be 85% because you'll have something in between the basis and the EBIT, correct? For marketing or developing or for whatever you too to enhance the value.

Chip, this is Lee, let me just make a comment here. As we've looked at the balance of the year and our forecast, we've really not forecasted to get values that have to put in roads and other utilities. So if that's maybe what your thought was, you won't see that. The other costs above our depreciation and amortization will be pretty low.

Okay. And as we look out, how do you think about the just what you said, it seems like you've got a pretty flush balance sheet, and you've got this tremendous asset base that is now an HPU base, particularly in those 11 counties you mentioned. Why not get more involved downstream and capture more of the value that you could get from moving toward something from raw land to something maybe beyond entitled and perhaps even partly developed?

Well, I think, Chip that's what we've been saying, our thought and it's the reason we put TerraPointe in place was to get -- move away from wholesale, if you will and into retail. And as we look at some of those opportunities, our strategy is -- and we're working on some of those sort of as we speak, is to make a contribution, which is the value of our property, and bring in well respected, if you will, of course, in that business who will come in and do the so-called horizontals, the roads and utilities. That's exactly the direction we're heading in and that's the near term is to go in in joint participations and then maybe after we've gotten a little better at it and matured and we will move further the into it perhaps on our own.

And again subject to the accounting for minority interest and all of that, what we would expect to see is the revenues, whether it's consolidated or not to go up faster than the number of acres but maybe the income won't go up as fast because you'll have to spend some of that incremental revenue in preparing the land for more of a retail sale?

I think we may see our revenue recognition tempered by the amount of cash up front under the accounting rules. You have on have a certain amount up front and certain continuing participation. I think that's more likely to have an impact on the revenue, especially if there's participation down the road that's ultimately with sale of lots, for example. We likely will not be able to recognize that up front. Maybe down the road.

And shifting gears to Performance Fibers. Two big trends that's we see going on is on the sort of lower end of it. The fluff pulp end we see more folks converting to get into that part of the business, and at least from where I sit, it looks like that hasn't had any detrimental impact on the market. And then I guess the question more is -- can you verify that as you see it, and if you can talk a little bit about what you think the impact of, we've now seen a second major competitor announce they're withdrawing from the specialty high-end dissolving market in a place I think called [Kosmopolus] if you could talk a little bit about how, if any, impact we've seen on the market, either volume for you or pricing trends in the wake of the announcement.

Sure, again this is Paul. First on the absorbed materials. We've seen additional players expand and existing players expand production into the area. But overall, there is some fairly good growth of perhaps 3% in the marketplace out there so I think that's staying roughly in balance and therefore you're seeing the prices stay balanced in the marketplace. With regard to the Warehouser Kosmopolus mill closure you noted, that has certainly brought more tightness to the cellulose specialties and particularly to the acetate market with that. I noticed we've continued to push on longer term sales contracts and we've been able to do that in light of some of the changes in the marketplace. But overall we see the demand out there is stabilizing and the market kind of evening up, with but we remain in a very strong position as a result.

Okay and one last question is this might be more for Lee but one of the other, two timber REITs mentioned last night they regarded the IP process is really good for IP but the levels that were in that deal were not attractive as they saw it from a buyers,' standpoint as at least for them. Could you talk a little bit about, would you share that view? Is this something you may or may not have been involved with but what you thought of the financials there and if you think it would work for Rayonier.

Just comment from our distance, if you will. I thought they were pricey, but I guess if you're the seller, prices are always low and if you're the buyer the prices are high. In our opinion, certainly they were high, I thought some of the conditions that were under the sales to supply agreement, that we saw in the paper. I thought they were interesting, especially the one that had 50 years for pulp wood in it. I don't know what role that might have played in it. There are some opportunities out there and different buyers have different objectives. As I mentioned, ours is to find more of the front-end loads in it. Some of the TMOs are looking for something a little further out. But let me go back and add just to what Paul told you. One of the things that the shrinkage and supply out there in the high value cellulose was it allowed us to not only extend our contracts, but enrich our sales mix. So, it did a couple things in that respect.

Got you, thank you.

We'll take our next question from Mark Weintraub with Buckingham Research.

Thank you. First, just wanted to clarify, on the development acres that you've been selling have any of them been entitled or has that all been unentitled.

I think there's been some of both. Most of it unentitled and our shift as we've indicated before is to move further into getting these properties entitled and add certainly the value at that juncture, and then shift further into the joint participation agreements, but we think we can certainly add value by getting the entitlement process. You just don't do that overnight. That's some of the pain you're seeing as we shift gears here.

And to understand, so in the JVs have you established you want to entitle properties first and then contribute them to JVs or would you be contributing properties into JV's where the partner would be responsible for the entitlement process. Could it vary or are you ready to speak to that a little bit?

I can speak to it. Initially, our plan is, and our actions now, are based on putting these joint participations or joint ventures as you call them on properties that are unentitled and work to gather to get them entitled. That is certainly what we're looking at initially and perhaps later we'll move further into the entitlement on our side and bring in the partner.

Okay. And do you have much in the way of properties, which you have entitled at this point but have not sold? Is there a pipeline yet? And then maybe just as a follow on. Is there -- can you give us a sense of quantity of pipeline of properties that you in process of entitling?

Well, rather than sort of get into that, you get into all kind of stages, but we do have a small amount of entitled properties, which we have not yet sold. And we're working on and will continue to work on.

Okay. And, recognizing again you don't want to get into the specifics, but when do you think that there's a potential for really a step change in contribution from the shift in the monetization model to either entitled and/or JV's as opposed to ramps in the amount of acreage. Is that going to be happening next year? Is that two-three year out? When do you see that real shift kicking into gear?

I certainly wouldn't say two or three years out. I think you're going to be looking at some significant moves in the joint participation in the next 12-18 months. Some of those then get further into development process. Begin to see sales of lots. But in the meantime, Mark, I think as we've said before, we'll continue to sell non-strategic, smaller parcels of that 200 acres we own down this corridor. There's a little bit of a balancing act, first quarter and we knew it. As we went into the year the first quarter on the real estate sales were going to be light and second half would be much higher and that's the course we're on that's where we expect to be.

And the property that you are selling, which are unentitled are you purposefully choosing not to sell some of choice acreage, or acreage which you think you can add a lot of value through the entitlement process, or is that not necessarily a constraining factor on what you're choosing to too at this point.

I guess I could give you a short answer and say yes. Our plan, what we are doing and will ton do is sell the non strategic smaller pieces that aren't necessarily that kind of an opportunity where we can add a lot of value. Those are things that smaller track that're are sort of off by themselves that suit themselves for selling to smaller developers. What we have to do and will do with certainly the larger tracks, which require a lot of work and a lot of investment and a lot of value. We'll Hold those back for the joint participation agreements or down the road perhaps we'll be doing some of these things on our own. We will hold the strategic pieces and the smaller out on the edge we'll monetize as we move along.

This will be my last one. So, then would it be fair to conclude that the types of prices that you're getting on the acreage that you're selling is below what you consider to be the average value of the coastal properties that you own, if you are are indeed holding aside the more valuable acreage for potential entitlement and or joint participation?

No, we've always held the strategic back, Mark, and really not moved them I think what you will continue to see from us on the -- I'll say the wholesale side is prices that are very similar. There's been some certainly upward movement in the market, but very similar to what you've seen in the past. We've not been selling high value strategic tracts.

And we'll go next to Christopher Chun with Deutsche Bank.

Good afternoon, guys. If I might just follow up on Mark Weintraub's last question. I think he was suggesting that if, if it's the case that you've been holding back your most valuable tracks some of the land you're selling now, would it it be fair to say it sort of below average in terms of how attractive that particular land is in the context of your entire 200,000 acres of development land.

Well, I wouldn't necessarily say that. We have some certainly small very high value pieces, they just tend to be small. We can just deal with so much at a time. And I think maybe as I've said to Mark, some of these pieces, the smaller entrepreneurs or even mainly development companies can come in and move fairly quickly on it. Our focus is just been primarily on the big strategic opportunities that we need to need to get in and process. These don't happen overnight. I think as we said entitlement can take an extended period of time. So that's our focus, and what we're going to do on the smaller tracts, we will continue to sell them on a sort of a one by one basis. As I indicated, you have to be careful, sometimes in selling tract that is small enough that you can sell off into one developer or maybe two, so you don't destroy value sometimes out on the front end of the leading edge of this property you sell it to one property and they can destroy value in the property behind it. We have to be careful, and that's particularly true and why we're going on the big tracts by ourselves or as joint venture partners.

Okay, and then staying on the development acreage theme. Lee, some observers maybe distressed that the per acre value you got in 1Q is down quite a bit from the level that you saw in 4Q. Can you talk about maybe where the land was in the two quarters and why there was that drop?

I think it was pretty well scattered. I think in the first quarter, or in the fourth quarter, we had some very high value mix in there. I don't think, as I recall, I'm trying to remember the value per acre on some of that but -- Hans, do you recall?

I know we had a small commercial parcel that went at $70,000 a acre, for example, in the fourth quarter. So that was exceptionally high values for that quarter.

So, a little of that goes a long ways. So, I don't think you're looking at any -- certainly any overall change in mix. We will continue to have those kind of things. Unfortunately, I guess everything we own isn't worth $77,000 an acre but we certainly have some of it.

In terms of the amount of development land you have right now, it seems to me it's been a few quarter and a few thousand acres since you first put the 200,000 acres out there. Would it be more accurate at this stage to say that you have alike a195,000 acres or something like that or is that getting too precise.

I think that's probably getting too precise. That thing tends to move a little bit and as we looked at it, of course we put our estimate on it, time is -- over time certainly has expanded those numbers of acres and periodically there's inholdings in some of the properties we now own. There's properties in which we own an undivided interest in, and there's lease properties in which we have opportunity of first right or refusal to purchase. So you will also see us make purchases property that's better described as real estate. This is not a program in which TerraPointe is simply and Rayonier simply in a sales mode.

Okay and lastly, if I may on the rural acres side, conversely, you got the very nice price this quarter. Can you talk about how you were able to achieve that and also how much more of this sort of premium rural acreage there might be?

Well, I think a lot of the price you saw in the second quarter had to do with some property we put out on auction basis. You are looking at such a mix of properties out here. You're looking at sometimes at conservation that we often say you purchase swamps and sell marshes. You're looking at wetlands that are certainly far better at leaving in a marsh or wetland state than you could ever get out of -- by trying to harvest trees, in fact, couldn't harvest trees. You'll find opportunities for a hunt club or a group of people who want to buy a property for hunting will pay values above what we can pay. We can pay for timberlands if you can't pay it, you better look at selling it. Sometimes it's just people adding to the back of farmland or sometimes people want a small amount of property for a weekend home, small horse ranch, or just an opportunity to get way.

Okay, thanks for your help, Lee.

We'll go next to Frank Dunau with Adage Capital.

Just had a couple of questions. CapEx, I assume in 2007 will be meaningful below 2006?

I think we'll be back to the trend you saw in perhaps '03 certainly '04 and '05. What you're seeing in this year's is about a $29 million wood fired boiler and a good piece of the reduction in oil -- that oil usage that Paul talked about earlier here.

Just conceptually. If you can get energy surcharges what is the need to spend for a boiler?

I don't think you can live on on surcharges forever. I think it puts stress on customers because they're often sitting with long-term contracts. I just think it's a prudent investment for us to maintain market share and maintain customers, but I'll let Paul add to that.

Yes, the only thing I would add is our continued push to take cost out off our business to better serve our customers and make sure we hit the value component they're can looking for. It's got to be part of that equation. So we're going to continue to do things to decrease our costs and operations.

If I can comment just one thing earlier, from an earlier question from Peter, I wanted to make sure this is clear, because I answered the question related to the tons going on relative to the shut down but please keep in mind relative to the whole year we'll continue to push and de-bottleneck specialties, and we would expect our sales of cellulose specialties to be above that of last year, and our [INAUDIBLE] material sales to be below that of last year. So relative we'll continue on our mix push on the higher value cellulose specialties for the year.

Okay a couple more questions. Is -- would you expect working capital be a source or use of cash this year.?

For the year -- I would expect it will end up being a slight source of cash for ye the year.

And I know you don't want to talk about it if you sell down to 40% on New Zealand does that change the way you account for currently the way -- they way you're currently accounting for it?

No that won't change the accounting for it on an ongoing basis.

Great, thanks. That's all the questions I got.

We'll go next to Steve Chercover with D.A. Davidson.

Good morning, just wanted to clarify from Paul first of all. Can you quantify the energy savings again, where you're coming from and where you're going get to?

If I may. I'll be more specific. I think if you just roughly come to a 400,000 barrels just to use a round number. I know that's high. 400,000 barrels of oil savings and if you can take you save $40 a barrel between fossil fuel and the cost of purchasing wood. Obviously that's in the $16 million range I think Paul can probably give you a better number than what I just pulled out of the air.

I think that's pretty fair number, Lee. And I think when we looked at the payback these few projects, we're looking less than a three year time frame for payback and energy prices now are about 40% higher than when we did these calculations, so you can see they're pretty good return projects.

Okay. Thanks for that. And also, on the specialty cellulose. We're seeing the normal paper pulp business basically moving down to rapid growth areas like Brazil, where you can grow a tree in eight years. Is there anything that prevents the specialty business from moving off-shore over time? Is it something specific to the fiber?

Steve, let me answer that. First of all, there is thing that's prevent it surely in the time frame. Our fibers are all customized for a particular process. In fact, at one customer we may have several different grades tuned into different processes that they may have. Its a fairly exact type of engineered fiber going into our customers' processes. So, switching is a little bit difficult. Now having said that, can it happen? Certainly. Would we expect competition to come from higher faster growth areas. We would certainly expect that, which takes us to the point where we continue to do things to reduce energy. Reduce other costs in our process so we can keep that value equation for our customers.

One final question, moving back to timberlands. Seems like we've kind of emerged through almost a final feeding frenzy. Do you still see attractive opportunities or do you still want to grow the timberland side, provided you can do it in a non competitive situation?

Maybe to take take it backwards, we certainly will continue to participate in timberland markets. You're right, it is very pricey right now. We think there are some opportunities still out there. One of the attractive features for us is doing 1031 exchanges and some 1033, which we still maintain. So, we will be out there, and we have been, and we'll continue to be. So, it is a piece of us. We've been in this thing, in fact, tomorrow happens to be the 80th birthday of this Company. We've learned some lessons, as they say, when to hold them and when to fold them, but there are opportunities, you just don't want to do something huge and foolish. Thank you.

We'll take our next question from Stuart Binway with Standard and Poors.

I think you said you expect lumber prices to decline, maybe 8 or 9% of this year and you said that the timber markets remain strong and should all year. Can you give me an idea of the connection between lumber and timber and possibly housing? I would think the housing market would have some effect on lumber prices, I'm not quite so sure the affect on the timber market.

Well, I think, Stuart, maybe it's easiest for me to deal with the southeast and northwest is not quite the same. I think you're going to see housing start to come off, I think most people would agree from the level that we seen in '05, perhaps you could see it drop down into the $1.9 million range. One of things that I think sometimes people forget in the Southeast is the high percentage of fiber that comes off an acre. I don't just mean pulp wood, but the fiber that comes off an acre ends back in paper, I'm just using that almost as a generic term, of course some of it ends up in OSB. I think everybody would agree that paper markets are strong and probably continue to have for maybe the next 18, some people may tell you something differently, we're not in that commodity side. You're going to see that continue and as far as our ownership, and our timber harvest for the years, I think I said in the Southeast, 85% of what we forecast to tell this year is currently under contract and little over 80% in the Northwest, so we're comfortable with where we are. I think hopefully we're a little pessimistic on lumber prices but anyway our plan is built on that 8-10% slippage year-over-year.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll take our next question from Todd Peters with American Century Asset Management.

Good afternoon,.

Good afternoon, Todd.

Hi, I want to clarify a couple things. The interest expense for the full year, you kind of look roughly analyzed at $12 million?

That would be a good estimate for interest expense.

So all your debts fixed? Most of it.

We do have some swaps,. but I think that's a good estimate right now, 40-49 million.

Another comment on the joint venture in New Zealand. You said the equity income would be between 1-$1.5 million for the full year or per quarter?

That's $1 to 2 million for the full year.

And then there's cash flow associated with that.

That's correct.

And I assume those numbers are for the 40% ownership level?

That's still at the 49% ownership. That may change slightly if we do move on that to the 40% level.

Right.

I wouldn't expect a material change.

Sure. Okay. And then also on going back to the use of cash, kind of prioritize. As a restructure you have a certain amount of dividend you need to pay out. So, can I expect another increase in the dividend as your CAD goes up over time, and then any desire to reduce your debt level further or you looking to look for other timberland or HPU type land?

Maybe I'll start backwards on it. Sitting here at 38% debt to total cap, We certainly have the value of the assets out there, well above what is recognized on the balance sheet. I think 38% debt to total cap, and frankly if you take the current cash balance we have in there, you drop below 30%. With that kind of cash sitting on the balance sheet and that kind of capacity to take on debt, I think we're doing our stockholders somewhat of a disservice to hold it at that level. Maybe it's pretty comfortable for management to operate there, but I don't think we're doing what we should.

Looking as far as increasing our dividend, of course, we always will, we did twice last year, we just felt we had the cash available, the CAD to make that increase. Right now, I think we told you that capital spending this year is pretty heavy. We thought the best place or our cash in the near term was to put some of these projects in place to reduce our energy, our fuel fossil energy usage so we look at number, we look at it essentially quarterly. We'll continue to do it and when we're comfortable with the CAD can be, we continue to support the dividend with our CAD, we will do it. So, that's where we are.

Then one last question. I guess when you look at potential land purchases, are there any desire or preferences to different parts of the country, I mean you're pretty focused to the Southeast would you prefer to stay in the Southeast?

Well, we have almost 400,000 acres out in western Washington too. I think you tend to look at areas in which you've a low risk factor and you're putting less of a discount rate on it. It we'll continue, certainly comfortable in the states several out from where we are in the Southeast and in the Northwest we would be very comfortable in western Oregon and western Washington. As pricey as things are today, I think that you'll see where we'll concentrate our efforts. And just think that's probably where we're going find the best opportunity. Maybe tomorrow, we'll find one in Wisconsin or something, but that's our focus right now is fairly close to home.

All right, great, thank you.

That is all of the questions we have at this time. I'll turn it back over to Mr. Hans Vanden Noort for any additional or closing remarks.

Okay, thank you very much. I would like to thank you everybody for joining us and if you have additional questions, please contact Parag Bhansali. Thanks again.

This does conclude today's conference call. You may disconnect at this time. Thank you for participating.