Rayonier Inc (RYN) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the Rayonier third quarter earnings release conference call. Today's call is being recorded by Rayonier and it's copyrighted material. It cannot be recorded or rebroadcast without our expressed 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 introductions I would like to turn the call over to Senior Vice President, Hans Vanden Noort. Please go ahead.

Thank you and good afternoon. Welcome to Rayoniers investor teleconference covering third quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on 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.

I'd like to 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 lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also repeated on page two of our supplemental material. Please familiarize yourselves with them. This conference is being webcast and can be accessed through our home page. With that let's start our teleconference with opening comments from Lee Nutter. Lee?

Thank you, Hans. I'll make a few comments here, Hans will then take us through the financials, and Paul Boynton will review the markets and operations of the Performance Fibers business. I'll then discuss timber, real estate, and lumber.

As expected, third quarter performance was very good reflecting both the mix and strength of our core businesses. Results were largely driven by Performance Fibers which continues to experience strong demand for it's high margin, high value sales. Specialties production and our real estate business which closed on several significant transactions including our first participation agreement. As we continue to expand our real estate business unit, we'll be shifting more and more to participation agreements. The outlook for the fourth quarter was solid and while results are expected to be below this very strong third quarter, we should see earnings that are above last year's fourth quarter. Assuming fourth quarter performance meets our expectations, results for this year excluding special items should be above that of 2005. Let's go through the financials now with Hans and I'll discuss -- Paul and I will then discuss operations. You want to take us through the financials, Hans?

Sure, thank you, Lee. Before we go into our discussion of this quarter compared to prior periods let's review page three of the supplemental material where we itemize various special items that we believe should be taken into account when analyzing the current quarters earnings.

At the top of the page we've highlighted the effect of our favorable settlement with the IRS covering the years 2000 to 2002 which increased net income by 5.3 million. This was comprised of 4.8 million of a tax benefit and a 0.6 million pretax reduction of interest expense. To the right, we note the year-to-date items. Here we've included the second quarter gain on the sale of a portion of our investment in the New Zealand joint venture. The sale, which reduced our ownership to 40% from 49.7% yielded an after-tax gain of 6.5 million or $0.08 a share. Adjusting for these items results in third quarter pro forma earnings of 49.7 million or $0.63 per share. And year-to-date pro forma earnings of 109.3 million or $1.40 per share.

The bottom half of page three indicates special items in the prior year's periods. The first item is impairment charge and loss from operations of our MDF business of $0.52 per share which was characterized as a discontinued operation. The second line item is the impact of IRS tax audit settlements which contributed $0.10 per share in the third quarter of 2005 and $0.32 per share for the first nine months of 2005. The third item was a $25.8 million tax benefit on repatriation of foreign earnings. Finally, the last item was an 8.2 million favorable arbitration award of a claim against our former parent Company for insurance proceeds recovery which contributed $0.07 per share. Adjusting for these items results in third quarter 2005 pro forma earnings per share of $0.46 and for last year's nine month period pro forma earnings per share of $1.23. These pro forma amounts will be the basis for the comparison on the following pages. With that, let's turn to page four for the overall financial highlights.

As Lee mentioned, third quarter results were very strong. Operating income and pro forma earnings exceeding the comparative periods. Sales of 312 million were comparable with the prior quarter but 12 million above third quarter 2005. Improved real estate and Performance Fibers sales driving the year-over-year increase. Lee and Paul will go into the key drivers behind that revenue movement. Operating income of 66 million approximately 15 million above both second quarter 2006 and third quarter 2005. We'll go into more detail on individual segment variances in the following pages.

Pro forma income from continuing operation of $0.63 per share was $0.16 above the second quarter and $0.17 above the third quarter of 2005. On the bottom half of page four, we provide an outline of cash resources and liquidity for the nine months ended September 30. Cash provided by operating activities for the nine months of 222 million was 16 million above last years amount, mostly due to lower working capital requirements. Cash used for investing activities of 99 million was 21 million above last year, as 36 million of increased capital expenditures and 18 million of increased timberland and real estate acquisitions, 21 of which was in close proximity to our other HVU holdings were offset by 22 million in proceeds from the sale of a portion of our investment in a New Zealand JV.

Cash used for financing activities of 102 million was 48 million below 2005, due to a decrease in debt repayment and higher current year dividends to date. Adjusted EBITDA of 264 million was 11 million below the prior year's nine month period, while cash available for distribution or CAD of 146 million was 16 million below last year. 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 169 million in cash.

On page five, we show a comparison of third quarter to second quarter earnings. We begin with pro forma $0.47 per share from the second quarter and come down to our third quarter pro forma earnings of $0.63 per share. Our timber operations had a $13 million operating income decline which was mostly expected. The third quarter is historically the northwest regions lowest volume quarter as other higher elevation properties are more heavily logged during the summer. Similarly, our Southeast operations had a volume decline which was also impacted by the softening lumber demand and prices. Our real estate results were significantly improved, reflecting the realization of a number of development property transactions which we had been working on for some time.

Continuing down the page, we can see a $5 million improvement this quarter for our Performance Fibers business unit as improved prices and reduced costs more than offset lower cellulose specialties volumes. Next, our Wood Products Segment posted a $5 million decline in operating income due to the dramatic price decreases in lumber this quarter. Finally, the third quarter effective tax rate was 13%, above the second quarter effective rate of about 11%. Let's now move to page six to briefly review the year-over-year comparison.

On page six, we begin with last year's third quarter pro forma earnings of $0.46 per share. The first significant variance was in our real estate results which improved driven by higher development acres sold and significantly better price per acre realization. Performance Fibers results reflects strengthened prices in cellular specialties however this improvement was somewhat offset by increased energy, wood fiber, and chemical costs as well as lower cellulose specialties volume. The Wood Products results were 7 million below prior year, again reflecting the drastic decline in lumber prices in the third quarter.

Moving below operating income, we benefited from lower interest expense from reduced average debt levels and favorable interest income resulting from increased cash balances. These amounts bring us to the current quarters result of $0.63 per share. The major causal factors for the business units third quarter variances generally apply to the nine month period. Additionally, note that timber operating income to date is 7 million above last year, driven primarily by additional northwest volume and improved year-over-year prices in the southeast.

Let's now turn to page seven 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 to our non-GAAP metric of cash available for distribution or CAD. We deduct capital expenditures from cash provided by operating activities and then adjust for any equity related cash flows, like kind exchange tax benefits and changes in committee cash to arrive at what we consider operationally generated cash available for distribution. As expected, CAD for the first nine months was below the comparable prior year period primarily due to a higher level of capital spending. As we mentioned on last quarter's call, we are investing in our Performance Fibers mills to significantly reduce our fossil fuel consumption and expect full year capital expenditures to be approximately 20 million above normal levels. With that, let me turn the conference over to Lee to begin covering markets and operations.

Thanks, Hans. In covering timber, real estate, and lumber, I'll briefly review the quarter and then generally discuss our outlook for the fourth quarter and to some extent for early 2007. As always, and as we all know, much can happen between now and then so please keep this in mind.

For the northwest on page nine, you can see the normal seasonal decline in volume and essentially flat pricing compared to second quarter and slightly up from year ago levels. For the fourth quarter, we expect sales volume to be lower reflecting the offset of higher sales in the first half and somewhat lower demand. However due to mix, prices for the fourth quarter should be up slightly. For the year, sales volume and average prices should be essentially flat to slightly up.

Moving on on to page ten, on the southeast, you'll see the usual pull back in sales volume compared to prior quarter. The average price was down slightly and more in line with the levels we were seeing last year. The relatively dry weather in the southeast has resulted in an increase cellulose supply which coupled with a sharp drop in lumber prices has put downward pressure on timber prices. However, these factors have been somewhat mitigated by continued strong demand from pulp and paper mills. On an overall basis, we expect these factors to move the average fourth quarter price down slightly.

For the quarter, sales volume should be up and in line with last year's fourth quarter. For the year, this will mean that pine volume will be down about 3%. Prices on the other hand are expected to show improvement of about 5% year-over-year. For real estate, before I get into the operating details, let me reiterate a point we continue to make and that is given the nature of this business, there's likely to be variability quarter to quarter as well as to some extent year-over-year and third quarter Is a good example of this phenomenon in the development as well as rural sales.

For the third quarter, results were strong and well above second quarter as well as third quarter last year. As I commented earlier, we just closed on our first participation agreement with ICI homes in addition to realizing immediate proceeds from this sale, we'll be sharing in future revenues generated from the developed property. Our plan is to shift more of our real estate business to these joint participation agreements as they allow us to realize some immediate benefits as well as position us for benefits in the future. Fourth quarter operating results are expected to be down from this very strong quarter, but still well above fourth quarter of last year. This will translate into very solid year for real estate with results well above those of 2005.

Let's look at pages 11 and 12. As you know, we separate this business basically by geography and markets into what we call development, what you see on page 11, and rural properties on page 12. Development properties are represented primarily by the 11 coastal counties between Savannah, Georgia, and Daytona Beach, Florida. Rural properties make up the balance of our ownership in the southeast. Interest for both our development and rural properties remains relatively steady and we continue to have discussions with various parties about joint participation opportunities on several strategic parcels.

Development sales for the quarter, as you can see on page 11, were strong and represented transactions in four counties. Three in Florida and one in Georgia. They were a mix of primarily residential but also included 100 acre commercial site. The participation transactions covered 1946 acre property located just West of Jacksonville in Duvalle, and Nassau counties. You can also see in this chart the continuing move up in the rolling fourth quarter average. Looking at the near term, it's fair to say that the multiyear run up in values appears to have flattened. As we look forward to the fourth quarter and into 2007, we will remain disciplined in the sale of properties as we look to balance supply with underlying, real underlying demand.

Rural sales on page 12 show a sequential decline in both price per acre and acre sold. The decline in price is due entirely to mix and not the market. This quarter consisted primarily of scattered low value properties located in western Florida. Looking forward to the fourth quarter, started well with the recently announced 2,300 acre conservation sale here in Florida. The rural sales program is clearly less sensitive to housing slowdown than development properties. With that let's turn it over to Paul Boynton and Paul will discuss our Performance Fibers business.

Thank you, Lee. As Lee noted during his opening comments, the Performance Fibers business posted strong third quarter results driven by our cellular specialties business and solid operational performance. As we look at the Performance Fibers net selling prices on page 13 for the third quarter, you can see the pricing of our cellular specialties, the largest segment of our business, moved up by roughly 3% due to an increase in our energy surcharge. A surcharge that has been implemented on the majority of our cellular specialties business.

We anticipate that this third quarter incremental surcharge will not be in effect in the fourth quarter due to the leasing easing of energy prices and therefore, fourth quarter prices will be more in line with the second quarter. On average for the full year, we expect our cellular specialties pricing to be about 10% above the prior year. Below, on the same chart, fluff pulp prices nudged upward in the third quarter by $8 a ton or just over a percent relative to quarter two as we implemented some reasonable pricing adjustments earlier in the quarter. Looking ahead to the fourth quarter, we anticipate our prices will improve modestly, mainly supported by a tight, underlying commodity paper pulp market. Overall, for year to year on average, we anticipate fluff pulp prices to be slightly above the prior year.

Moving on on to page 14 and looking at Performance Fibers sales volume, you'll see our third quarter cellular specialties volume retreated slightly relative to prior quarter, mainly related to an anticipated cellular specialties mix shift between the two quarters. We anticipate fourth quarter cellular specialties volume to be considerably above the third and in line with the same quarter prior year. Absorbed material sales volume was solid in the third quarter mainly due to favorable operational performance trading incremental volume for sale. As we look to the fourth quarter, we anticipate sales absorbed materials above that of the third quarter but below that of fourth quarter 2005.

Looking forward to 2007, we're optimistic about the strength of the business. First, we anticipate energy costs will improve significantly driven by the start up of our new power boiler at Fernandina, at year-end which will reduce our total fossil fuel consumption for the business by approximately a third. Second, we see a continued positive product mix shift to cellulose specialties. And finally, a third, we anticipate as noted earlier further price improvement in cellulose specialties. In summary, the third quarter was strong for Performance Fibers Led by our strength in cellulose specialties business. We're anticipating a similarly strong fourth quarter and we look forward to further improvement in 2007. With that, I'll turn it back to Lee for additional operational comments.

Page 15, lumber. Which as you know is a small part of Rayonier's business. Prices continue to decline in the quarter. Volume was slightly below second quarter due to market related production curtailments. For the fourth quarter, we expect average prices to be slightly below this quarter. Volume is expected to be down as well. Now let's go back to Hans for a few more comments.

Thanks, Lee. With that, let's turn to page 16 to review earnings trends. Based on current market conditions, we expect fourth quarter earnings to be below third quarters pro forma earnings of $0.63 per share. The decrease is driven primarily by lower real estate sales, offset somewhat by improved Performance Fibers results; however we expect fourth quarter earnings to be somewhat above last years fourth quarter pro forma earnings of $0.34 per share due to stronger cellulose specialties prices, lower costs in Performance Fibers, and higher real estate revenue. This anticipated improvement should more than offset the impact of reduced northwest timber volume and lower lumber prices. As a result, on a full year basis, we expect pro forma earnings to be above our 2005 pro forma EPS of $1.57 per share.

Before I close, I'd like to share a few key statistics that may assist some of you in maintaining your model for Rayonier. First, for full year 2006, we expect completion depreciation and amortization and a non-cash cost basis of land sold to range from 140 to $145 million. Capital expenditures excluding acquisitions are expected to range between 105 and 110 million well above our typical 85 to $90 million range. This increase reflects the Performance Fibers projects to significantly reduce our fossil fuel consumption as noted earlier. With respect to our investment in New Zealand for the year, we expect breakeven results from the JV; however because of the way the JV is structured we expect to realize cash flow in the 4 to 5 million range which is in addition to to the 22 million we realized on the sell down of our interest to 40% in the second quarter. With that, let me turn it back to Lee for some summary comments.

Let me conclude here by saying that we're well positioned with a mix of our business as we look at fourth quarter and certainly as we look at 2007. Why don't we just go back to the operator now and open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Steve Chercover with D.A. Davidson.

Good afternoon and congratulations. I guess the first comment or question I have is we appreciate the earnings guidance we get for you, but I was wondering, did the $0.63 that you achieved in Q3, was that above your expectations when you gave us guidance at the end of Q2?

Not really, Steve. Maybe slightly. I guess I don't like to use the word guidance. Sometimes I get concerned with using guidance and there's a tendency sometimes, or perhaps a tendency to push numbers one way or the other, but yes, we are just about right on where we thought we would be. We would always rather maybe indicate a little bit on the low side just, I don't think it serves us well to miss.

I agree with that. Secondly, we know that there are some looming chip shortages particularly here in the Pacific Northwest. How do you intend to, I guess take advantage of that? Are you going to change your mix of saw logs to pulp logs and can you get involved with any whole log chippers and help alleviate some of the problems?

Well, in the northwest, of course we don't have any facilities out there and such a small percentage of a second growth stand in timber actually goes into pulp wood. It gets awfully expensive for people to start using even small saw logs to make chips from chips and we have some chipping facilities down here in the southeast. We have four that tend to be our most expensive sources of fiber. Lumber Mills, the residual chips coming out of lumber mills are our first priority and that has -- the volume of that in the Southeast has pulled back to some extent but so then we'll just rely a little more heavily on our outside chip plants to supply us, but no, we don't plan on doing anything, or making any switches in the northwest, Steve.

Okay, one more question, please. When you turn on the new boiler at Fernandina Beach, are the benefits of that project something that will be kind of felt immediately or is there a ramp up for the financial benefit?

Well, if you listen to the people that are out there putting the thing together, it would be almost like a light switch coming on slightly before the end of the year. As we would look at it here, I think there's going to be a ramp up period. It's a major expenditure. It's a big addition to the facility and a dramatic, almost dramatic reduction of cost, but I think it's well done. We're not talking about new experimental technology. It's pretty much off the shelf technology, so I think we'll feel it pretty quickly.

Sorry I'm going to sneak one more in. Is there any debottlenecking associated with that? Will you be able to increase capacity given that you have the investment on the power side?

Go ahead, Paul.

Yes, Steve, it's Paul. No, we wouldn't see anything as far as significant debottlenecking associated with the new power boiler in Fernandina coming on.

Great. Thank you, Paul.

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

I've got a couple questions. As the prices for saw timber came down in both your regions did you pull stuff off the market or did you cut it at your budgeted rate?

Pretty much at our budgeted rate, and we tend not to push it up in stronger markets or pull it way back in soft markets. We may be a little selective in some cases of the mix of what we put up in property, but just overall volume, basically, no. We tend to, let me add here.

Yes.

We tend to make sales close to year-end or the beginning of the year so I guess there's still some information to come in, but what you're seeing in '06 is pretty much sales were being made earlier in the year and now we're being harvested.

Okay, and given that it looks like the mix of your earnings or EBIT is coming from more of your non-REIT businesses. I'm just trying to figure out why the tax rate doesn't seem to rise accordingly.

Well, earlier in the year you recall we had pretty healthy timber earnings, in fact on a year-to-date basis we're ahead, and so that mix, I think the offset on the TRS side of the business as well was on the lumber side, so those are kind of counteracting each other.

So you're not balancing like some people balance the quarterly rate around?

No, we still go with what we expect our full year effective rate to be.

Okay, and once you get done during, doing the boiler and getting the lower fossil fuel costs, do you do anything with your contracts as far as fuel surcharges are concerned or does that actually accrue to you?

Steve, I'm sorry, that will be a brand new year for our business and our contracts and our surcharges will be independent of that, so we will not see surcharges come back on to our business next year. We'll have that built into our pricing mechanism for the whole entire business.

Okay, and one last question. You gave the DD&A and tax basis of estimate for the year. Can you tell me how much is tax basis and how much of the Real Estate sold and how much is DD&A?

Maybe I'll have to get back to you.

Why don't we get back to you.

I don't have that right in front of me, but we can get back to you on that.

That's it. Thanks.

We'll go next to Chip Dillon with Citigroup.

Yes, good afternoon. First of all, you mentioned in New Zealand the cash coming in, the 22 million I believe when you closed the joint venture change, but what was the other number you gave us?

We were expecting 4 to $5 million for the year to come back.

And is that sort of indicative of what you'll get in cash every year from that JV?

I would think that's probably not a bad estimate. Hopefully a little bit better next year.

And then getting back to the issue Frank brought up on the taxes and I'm not going to ask you all to be lawyers on this, but you probably do have experience here. If you --well, first of all, I noticed unless I misread a table, it looked like you were booking taxes on your real estate activity. Did I totally misread that because I wouldn't believe you'd have to do that.

No, some of our real estate taxes or some of our real estate transactions will be taxable from either the REIT or the TRS, they will be subject to some sort of tax. Now, if we can offset an unsolicited sale from the REIT with an acquisition then we can basically realize a lifetime exchange benefit and have no income taxes.

Got you. But well actually, I would have thought you would have -- you did that because didn't you recently announce a pretty large acquisition in various regions including the Northeast?

That's correct. We'll close on that acquisition in the fourth quarter and we expect to have lifetime exchange benefits from that.

So maybe some of that that you indicated in the third quarter might be reversed?

No. Again, we project for a full year. When we do our full year projection, we do make an estimate of what we expect our lifetime exchange benefit for the year to be. And that's built into the effective rate throughout the year.

Okay. Well, my question was this--I know that for the building, REITs, the hotels, the properties that you tend to get, I always understood that to be eligible as a REIT, a certain minimum level of your income had to come from eligible activities and I might be wrong about that, but is there any point at which the income from Performance Fibers or even from building materials, the non-REIT activities, could cause you a headache or cause you to have to change things around so that you don't lose your REIT status for any period?

Well, there is an income test that we monitor that monthly. Basically that's going to be driven off of the amount of dividend income that comes from our TRS businesses up to the REIT so you may have a situation where there may be some cash in the TRS until we can figure out ways to maximize it down there, but right now, we have enough room on the calculation to dividend up typically 35 to $40 million a year of that cash up to the REIT.

So what's the maximum that you can dividend, or what's your maximum income you can have from a non-REIT source?

Well, we're at 25%.

25% okay that's what I'm looking for. And again, you don't have to technically recognize that income until you actually pay the dividend up from the TRS?

Right.

Got you, okay. And as you look at the, Lee was talking about how you plan to do more work in participating in the further development of the real estate and you mentioned there's up front benefits and back end benefits. Does that mean that as you contribute land to a joint venture the partner actually pays cash or either you get some kind of consideration so you can recognize income at that level and then as the property is even either further enhanced or entitled or actually developed, you book more income?

I think you pretty well stated the answer. This is Lee Nutter, Chip. You pretty well stated the answer, yes. What it allows us to do of course is get something on the front end. We do contribute our property as a contribution. We'll take some cash back out initially and then of course as the property becomes entitled and appreciates over time, we get value there, so I think what it does to us and the attraction is, of course, we move further down the value chain and we get something near term and then we, if you will, almost lock in a more even flow of earnings over time. So now, where markets aren't as strong I guess as they were a year ago, it still allows us to make what I think are attractive investments, one way of looking at it in real estate which positions us well for the future. So that's sort of our rationale and that's why we're moving in that direction.

I know, Lee, way back when, you all looked at the possibility of separating Performance Fibers from the rest of the Company, and not that you would tell us if you were planning to do that tomorrow, but is there, I think back at that point, there were a couple of impediments and I think there was a tax impediment and this was back when you had a C -Corp. status and maybe there was a concern that what you had would just not be practical as a stand alone entity. Obviously today, there's -- you've got a very stable business, you've got a great market structure with the departure recently of two players. And given the environment with private equity, et cetera, is that something that structurally still would not make sense because of tax issues or not?

Well, let me take the first part of that, Chip. This is Lee again, and I'll give it back to Hans. We are always looking at whether it's Performance Fibers or timber or real estate to see what combinations and what structure will return the most to us, shareholders. And let me go back to Hans and he can kind of answer the tax question for you, but certainly Performance Fibers is at this juncture a key piece of the balance that is coming and you're beginning to see it come forward in '07 and quite sure in '08, but you want to go back and answer the tax question, Hans?

Sure. Well, we do have a relatively low tax basis on that business, so any outright sale of that business, would result in a pretty significant tax bill, you're correct, and then basically as Lee mentioned it's just a question of where can you put that after-tax proceeds into something that's yielding the cash flow that business is throwing off and right now it's performing quite well.

Got you. Okay, thank you.

We'll go next to Christopher Chun with Deutsche Bank.

Yes, thank you, good afternoon. Can you talk a little bit about the real estate sales that you announced earlier in the month and where those sales fit into the scheme of the 3Q results?

Well, let me -- Chris, you want to state the question again? I'm not sure we all heard it, and as you may know, one of them in the fourth quarter which we would close in the fourth quarter and the other two were third quarter items.

Yes, that's basically what I'm getting at. Like which of those transactions are part of the 3Q results and which is going into the Q4?

Yes, there was two that were in the third quarter that would be $22 plus million participation transaction, and the fourth quarter item was about a $10 million conservation sale.

Okay. And then in terms of the participation deal, does the the $22 million payment reference only the up front payment or sort of the expected value of all payments over time?

No. That just references the up front payment and under GAAP, that's all we're allowed to recognize now. The remaining participation of that will be recognized as we receive the cash.

Right. As of now, do you have sort of an expected amount over time that you expect to receive?

No. We expect to receive about another $5 million on that particular sale.

And over what time frame?

That was up to ten years.

Okay. Going back to the new boiler out at Fernandina Beach, can you remind us again sort of what quantity of energy you're expecting to save or produce in consumption?

Yes, Chris. This is Paul. That facility today uses just over 200,000 barrels of oil a year and this will take us down below 20,000 barrels of oil per year, so about a 90% reduction in our fossil fuel usage for Fernandina.

Okay, great. So that 1/3 figure that you mentioned was sort of overall?

That's for our total business, total fossil fuels, natural gas and fuel oil combined between Jessup and Fernandina, correct.

And then in terms of pricing in Performance Fibers for '07, is it too soon to talk about how that should compare to '06 prices?

Yes, it is a bit. Chris, we're still in discussions and negotiations with our customers. I think as Lee indicated we anticipated it should be strong and meaningful, but beyond that I don't think we want to comment.

Yes, okay. How about in terms of the cellulose specialty volumes during 3Q. Can you talk a little bit about why that was a bit off?

Yes, it was a bit off and we noted it was really a mix shift between the second quarter and the third quarter and bottom line it comes down to revenue recognition and volume that we may have out on the open sees that we can recognize. Essentially we had more volume put into the second quarter and less in the third quarter just from a revenue recognition standpoint, but overall it's on balance and on par for what we expect for the year. So no change in our overall plan. Just more volume that shipped earlier in the second quarter we could count as revenue as compared to the third quarter.

Okay, thanks. I'll go ahead and turn it over.

We'll go next to Peter Ruschmeier with Lehman Brothers.

Thanks, good afternoon. I also had some question on Fernandina Beach, and I was curious, is the lions share of the increase in CapEx this year about 20 million? Is that all pretty much Fernandina Beach?

Yes, it is.

And I guess I'm curious, back to the volumes, I think this was a first year in awhile that you're tracking down on Performance Fibers year-over-year. Is there a volume impact because of what's going on at Fernandina Beach?

No. There's not a volume impact. Obviously as you've looked through our back history of volume and you've seen some previous analyst calls that we've shown our shift over time to cellulose specialties through debottlenecking projects at both mills we will continue to do that but specifically this boiler will not impact that.

Okay. And were there certain expense items that weren't capitalized that you've been incurring in that business this year that will go away? Presumably your costs go down a lot as the energy costs go down but are there other expense items that go away as well?

Yes. You'll see improvement in some maintenance and some other expenses that will translate to the bottom line for the Fernandina mill.

And then looking into '07 you mentioned that you expect some price improvement for cellulose specialties and I believe a lot of that is kind of contractual. Can you give us order of magnitude as to what kind of percent or any order of magnitude improvement you're looking for in '07?

It's just premature to do that. We're still in discussions with our customers so I'd prefer not to other than the fact it should be meaningful and significant.

Okay.

Peter, this is Lee again. Let me just add a comment here. I think Paul made it earlier but just to reiterate. We're looking at an improvement in prices and we're looking at improvement in mix of products sold, so we're going to get -- we get something on both sides.

Okay, great. And then lastly if I could, the 176,000 acres that you are acquiring from GMO, any update on the timing? Is it mid quarter, end of quarter, I'm curious as you look at that acquisition that you can maybe share with us things like age class distribution, or harvest profiles as you -- front end loaded, back end loaded as you go forward?

Well, right now, we expect the acquisition to close some time in the middle of November. As far as age class distribution, I think we're -- basically it looks pretty even out of the shoot there. So no, it's not particularly front end or back end loaded.

That's all I had. Thanks very much.

We'll go next to Mark Weintraub with Buckingham Research.

Thank you. Firstly, if we look at where costs are for oil and the alternative fuels that you would be using at Fernandina Beach, how much does the cost reduction project save you, again, at current type of pricing?

Paul, you want to take it?

Yes. I think in the neighborhood, Mark, of, and again we noted that there is some other savings in that operationally for maintenance and things lake that, but certainly just from an energy standpoint and of course you're getting rid of fossil fuels but you're bringing in something else, some biomass fuels, but we would expect just from the fuel exchange alone in the 8 million plus range.

Okay, pretty good pay back there. On the -- the other question I had was your saw Mills. Are they running currently and what is your thought process as we're going through what could be a tougher period? You've obviously had this experience, five or six years ago and you thought long and hard about what to do and then the markets got better and now we could be coming into what could be another tough period. What is your strategic thinking on your sawmills at this point?

Well, a couple of thoughts, Mark, this is Lee. One, we're such a small player in the saw mill business and secondly, I guess our mills are much better, recovery is better, production is better than it was four or five years ago. The other thing if need be which is where we are, not right now, we're running into cash. As long as we're making cash, at a reasonable margin between shut down, we're not going to run them down into nothing but we don't think shutting our mills down is going to have a darn thing to do with the market price, so we'll crowd the edge on our purchase price for wood and if the time comes when we have to shut them down -- shut one of the three down to try and have some impact on the market, we'll do that. We'll cut the edge pretty close.

Okay. And then lastly, I don't know if you're in a position yet where you can start commenting on sense for on the timber side, how contracts for the year ahead are looking?

I guess I would say, Mark, we really haven't gotten out yet. We haven't gotten into the latter half of November, December, and one of the things, of course, you always have is buyers expectation. He has a full year in which to harvest it, they will certainly, at least everything we've seen in the past, they will price it well above current price levels when we're delivered log bases from where we are right now. So there's always a little bit of speculation and on the other hand, and it's just difficult for us to give you a good answer now until we're a little further towards the end of the quarter and even into early '07.

Okay, thank you.

We'll go next to Alec Mitchell with Scopist Asset Management.

Hi, good afternoon. Just wanted to follow-up on the cellulose specialty business and can you just comment on some of the demand trends there and I guess some of the China demand applications, I guess, FilterTel and some others.

I think I got your question. You're asking about the demand and what's happening out in the market?

Yes, in cellulose specialties.

Cellulose specialties? Yes, the market is comprised of a lot of different components for cellulose specialties from filters for engine, filter media to ethers and other products to make -- go into food and pharmaceutical but a large application certainly is going into cigarette filters and we see overall global demand for that increasing modestly just on a consumption and then some other components of that that just drives it up that overall makes it reasonably attractive for us going forward.

Let me just add one thing to Paul's comments. Sort of the newest more rapidly developing areas, some of the materials that go in making LCD screens and on the applications but that's probably the most fast growth area for us.

And with Chinese demand for filter products?

Yes. It continues to increase. They are moving to longer filters in their products and so we continue to see that move forward and positively.

Okay. And I'm just curious as to whether that is giving you increased confidence about the fourth quarter volumes and volumes going into '07.

No, I think and someone noted i earlier, a lot of the confidence is not only just a stable market but just some of the activities that happened out there with other suppliers and so that's given us the confidence in not only fourth quarter but the coming period of '07 and 08.

Okay, thank you.

All right, are there no further questions then?

We do. We'll go next to Claudia Shank with JP Morgan.

Hi. I was just hoping you could comment briefly on the overall acquisition environment and what you're seeing with regard to land prices and opportunities out there, and maybe just put into perspective how you weigh balancing acquisitions with potential for share buybacks or dividends or internal investment.

Well, Claudia, let me sort of, this is Lee. Let me take it in some order. I think everybody would recognize that the price for timber lands out there is really pretty high. One of the things and I think Lance touched on it maybe earlier that we're looking at in order to take advantage of 1031's and unsolicited sales out of the REIT or sales even down below, timber land acquisitions become much more attractive than they would on just a stand alone basis, so that can have a bigger impact than you might first estimate. So that is an attractive expenditure for us. They aren't ever as attractive as you would like, but you might look at some of the transactions we have and that you say gee, the price is pretty high. You need to put the impact of the 1031 into it.

When you look at how much, what our yield is, as low as it is if you will and how much cash we would have to put out to justify that kind of investment and you have the loss of liquidity, we're certainly well above and before you ask the question, I'm not going to go into where we think it becomes prudent to buyback in stock, but certainly our price is well above that and other alternative uses for our cash.

Okay, thank you. And then just also, if you could just please comment on the development side. You obviously took an important step forward in the third quarter but what sort of opportunities do you see going forward here?

Well, what we've been dealing with certainly are large reputable realtors both what you've seen and what you will continue to see. I think they're pretty open to a number of different arrangements. Certainly participation is an area that's of greater interest to us right now just because of where we think we are in the cycle and our ability to participate downstream and some of the evening out of our earnings as we get several years out, it will take us out of this sort of the roller coaster we're on in which none of us are particularly enthused about but it's just sort of the nature of the business.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Aaron Winothan with Jay Goldman.

Hi, guys, thanks for taking my question. I had some questions on the performance business. First off, the contracts. I know you guys have booked a good portion of the volume for that business. Does that allow for periodic reset of price as well?

Yes. Most of them have an annual reset of price built into the contract.

And when or what part of the year? I mean, are you coming up on that now or is that kind of rolling for a portion of the contracts?

Yes. They are typically at year-end so they are reset January 1, the discussion will go throughout the year.

And as far as what we should use -- how do you guys -- what's a good benchmark for us to use as far as tracking the overall pricing for that business? Does it track NBSK? Or does it fluff?

No. It doesn't track any of the commodity -- it really is more of a specialty chemical product and therefore, it doesn't track anything that we would see in our industry and it's relatively stable and if you look back over our disclosed numbers over time, it's pretty steady and increasing year to year, sort of in the past few years.

Okay. And then the other question I had was in the real estate business, you had a great quarter and are having a great year. Would you kind of look at this as a more indicative of your normal earnings power in that business now that you've made some adjustments or is it still going to be quite lumpy and unpredictable?

Well, it will be kind of bumpy, if you will, as you've seen over the last number of quarters, and I think we indicated that fourth quarter will not be at third quarter level. What it will be is significant. We won't be there, but you will continue to see bumps as we go along and as I said, one of the reasons certainly not the only reason by any means going into joint participation other than benefits as we move ahead is to perhaps get us a little bit away from the lumpiness during earnings and we would rather not have of course.

Right. And is there anything that -- there's been a lot of discussion in the press about housing and whatnot but is there -- is that related to how you guys look at this business, i.e. a housing downturn would make you less optimistic in this business or is it not really as correlated?

Well, this is Lee Nutter again. A couple of things there. One, Florida in particular and certainly other areas have been painted with the same brush that especially Florida, I guess, destination areas, way over belt and the other problems that go with it. The market that we're sitting in down here in northeast Florida and southeast Georgia are really primary residential areas and not secondary so we aren't going to see and you don't see here that big overhang of unsold facilities. So the market isn't as strong right now as it was perhaps six months ago, but it hasn't fallen off a cliff by any means.

Okay, thanks.

We'll go next to Chip Dillon with Citigroup.

Hi. I think when a couple questions ago you were talking about alternate uses of cash and I thought you said that you probably didn't see the stock as attractive here as it might be at a different price to buyback. How do you look at that? Is it simply sort of like, do you look at CAD relative to stock price and get a yield and look at how that would compare to some of the other projects and certainly that would make sense especially given the payback you suggested on the Fernandina project, but did I hear you right that you just thought that there were just other things you could do that would be more attractive than buying back stock here?

Yes, Chip. This is Lee again. Unfortunately, we don't have a lot of projects that are as attractive. The good news is and the bad news is that Fernandina, we have an awfully good attractive investment. The other thing is, particularly on the timber side, there's a lot of opportunities, our real estate business grows to utilize almost everything we can get our hands-on this day to facilitate 1031s to relieve ourselves really of the built in tax on the built in gain. So that's certainly what our focus is now, and while some folks may not quite agree, I think our stock is under valued and while that is the case, I think we're well above where we think it would be a good use of our cash to buyback in stock.

Versus the attractiveness of the 1031s and not sort of voluntarily paying taxes?

Particularly on the 1031 side, particularly very good use for our cash in timber land acquisition.

Got you. Thank you.

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

Just one last question. I noticed when you declared your dividend last week you kept it the same which I guess is five quarters in a row now at the $0.47 rate and I guess most people kind of expect people to raise their dividend after four quarters. Just trying to figure out what the dividend policy or your -- what was going beyond keeping it at $0.47 instead of raising it?

Well, Frank, Lee Nutter again. We continue to look at it on a quarter to quarter basis and the best use of our cash. I think your comment about sort of annual reviews and then perhaps touch ups is there. It's something we look at every quarter and we looked at it this one and we said well, let's take another look next quarter, as we've done all along.

Okay.

Nothing -- you shouldn't make any broad interpretation of not having moved it up for this quarter.

Okay, thanks.

And there are no further questions at this time. I'd like to turn the conference back over to Mr. Vanden Noort for any closing remarks.

Okay. I'd just like to thank everybody for joining us this afternoon and please contact Parag Bhansali with any follow-up questions. Thanks, again.

Thank you, everyone. That does conclude today's conference. You may now disconnect.