Rayonier Inc (RYN) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome, to the Rayonier fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS]. At this time, for opening remarks and introductions, I would like to turn the conference over to the Senior Vice President, Mr. Hans Vanden Noort. Please go ahead, sir.

Thank you, and good afternoon. Welcome to Rayonier's investor teleconference covering fourth quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our website at Rayonier.Com. 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 Form 10K 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. Also, 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, Chairman, President, and CEO. Lee?

Thank you, Hans. I'll make a few overall comments here and then we'll go back to Hans to go through the financials. Today, Tim Brannon, Senior Vice President of Forest Resources, and Charlie Margiotta, Senior Vice President, Corporate Development, Charlie is also President at TerraPointe. They will review those two business Segments and I'll come back and take you through the third, Performance Fibers.

As expected, fourth quarter results again reflected the overall mix and strength of our three core businesses. In particular, the results were driven by a major contribution from Performance Fibers, which as we move into this year, continues to see strong demand towards high margin, high value, cellulose specialties grades. In Real Estate, we closed on several significant transactions, including our second participation agreement. Across-the-board, 2006 was very solid for us.

We had strong operating results in each of our three businesses and strategically, we made progress on several fronts. In timber, we completed two major timberland acquisitions totaling almost 230 acres, stretching across six states. Those purchases did several things for us. Obviously, they increased the size and geographic footprints of our holdings. They also allowed us to move on a very tax efficient basis some of our high value land holdings into our Real Estate subsidiary, TerraPointe. Also in 2006 in TerraPointe, we entered into two major joint participation agreements, with LandMar and ICI, both premier southeast land developers and home builders. We will continue to execute on this strategy to move further up the Real Estate value chain as we look ahead.

In Performance Fibers, we entered into long term contracts that run into 2011. These agreements are with the world's largest manufacturers of acetate-based products and other key customers for approximately 80% of our high value cellulose specialties production. The total of those contracts represent approximately 2 million tons and more than $2 billion in revenue. In New Zealand, we monetized a portion of our investment there by reducing our equity interest in the joint venture from 50% to 40%, which provided net cash proceeds of about about 22 million. We still remain the largest equity holder and will continue to manage the 354,000 acre estate.

Our earnings, as you continue to see, reflect a very favorable business mix, which translates into consistent and strong cash flow. Coming into 2007, we have a strong market position in each of those three core businesses. As we look ahead, integrating the 230,000 acres of forest land we purchased in 2006, strategy, further strengthening our position in Performance Fibers through higher return cost improvement projects and in Real Estate, we'll continue to move up the value chain. With that let's go back to Hans for a review of our financials.

Thank you, Lee.

Before we go through our discussion of this quarter's earnings compared to prior period, let's review page three of the supplemental material where we itemize very special items that we believe should be taken into account when analyzing the current period's earnings. At the top of the page, you can see the fourth quarter 2006 reported earnings of $0.71 per share. We back out the gain of $5.3 million or $0.07 per share from discontinued operations, which resulted from a regulatory action relating to a more cost effective remediation solution at one of our closed sites. The second item is a $3.7 million or $0.05 per share gain from reversing excess deferred tax liabilities. In the past year and a half, we've settled tax audits for tax years 96 through 2002 which has allowed us to more fully analyze the tax liabilities required. Adjusting for these items results in our pro forma earnings of $0.59 per share.

To the right, we note the year-to-date items. In addition to the fourth quarter items, we've included the Second Quarter gain on the sale of a portion of our investment in the New Zealand joint venture. As Lee mentioned, the sale and after-tax gain, $6.5 million or $0.08 per share. This is followed by the effect of our favorable settlement with the IRS, covering the years 2000 through 2002 which increased net income by $5.3 million. Adjusting for these items results in full year pro forma earnings of $155.6 million or $1.99 per share.

The bottom half of page three indicates special items in the prior years periods. In the fourth quarter of 2005, we backed out the $30.5 million, or $0.39 per share, gain on sale of the New Zealand timber assets upon the formation of the joint venture. For full year 2005, we had a number of other items of a one-time nature that we have listed here. Adjusting for these items results in full year 2005 pro forma earnings per share of $1.57. These pro forma amounts will be the basis for the comparisons on the following pages.

With that let's turn to page four for overall financial highlights. As Lee mentioned, fourth quarter results were very solid. Sales of $329 million were $17 million above the prior quarter with strong Performance Fibers sales driving this increase. On a year-over-year basis, sales improved $13 million, driven by increases in Performance Fibers and Real Estate. Lee and Charlie will go into the key drivers behind that revenue movement. Operating income of $68 million was $2 million better than last quarter, and well above the $36 million in the fourth quarter of 2005. We'll go into more detail on individual segment variances in the following pages.

Pro forma income from continuing operations of $0.59 per share was $0.04 below the third quarter and $0.25 above the fourth quarter of 2005. On the bottom half of page four, we provide an outline of cash, resources and liquidity. Cash provided by operating activities for 2006 was $53 million above last year's amount, driven by the improved operating results of our core businesses and reduced working capital. Cash used for investing activities of $385 million was $361 million above last year driven by almost $300 million of timber land and Real Estate acquisitions and $20 million of increased capital expenditures. Cash used for financing activities of $30 million was $186 million below 2005 due to $100 million of additional borrowings in 2006 versus the pay down of about $100 million of debt in 2005. Adjusted EBITDA of $370 million was $17 million above last year, while Cash available for distribution of $178 million was $9 million above last year. We'll look at CAD separately a little bit later. Our debt and debt-to-capital ratio were above year-end 2005, reflecting the additional debt to finance a portion of our timber land acquisitions. Also, we adopted a new pension financial accounting standard this quarter which reduced our equity by about $42 million, increasing the debt-to-capital ratio by about one percentage point.

Turning now to page five, we show a comparison of the fourth quarter to third quarter earnings. We begin with pro forma $0.63 per share from the third quarter and work down to our fourth quarter pro forma earnings of $0.59 per share. Our timber operations had a $2 million operating income improvement, driven primarily by increased Southeast volume and hunting lease income, which offset lower prices in the Southeast due to the continuing softness in the Lumber Markets. Our Real Estate results declined $8 million from a very strong third quarter, particularly in development property sales, but still finished with a respectable $30 million of operating income this quarter.

Continuing down the page, we can see a net $12 million improvement of our Performance Fibers business unit driven by increased cellulose specialty volumes and lower manufacturing costs, including a $4.9 million benefit from a property tax settlement related to prior years. Although our position was supported by a favorable court ruling last year, accounting rules required that we keep these accruals until final settlement occurred this quarter. Our corporate expenses were $3 million above the prior quarter, due to Business Development expenses and increased stock price base incentive compensation accruals. Finally, the fourth quarter effective tax rate was 18%, above the third quarter effective rate of 13%, reflecting a higher proportion of income from our taxable REIT subsidiaries.

Now move to page six to briefly review the year-over-year comparison. We begin with last year's fourth quarter earnings of $0.34 per share. Our timber income was $4 million below last year, due to lower prices in the Southeast and reduced volume in the Northwest as harvesting occurred earlier in the year during 2006. Next, our Real Estate results improved 14 million, driven by more acres sold and significantly better price per acre realization on rural sales. Performance Fibers results reflect strengthened prices in cellulose specialties, additionally, manufacturing costs were favorable, led by lower energy and wood fiber costs as well as the aforementioned property tax settlement. Finally, Wood Products results were $7 million below the prior year, reflecting continued weakness in Lumber prices. These amounts bring us to the current quarter's result of $0.59 per share.

Turning now to the full year comparison on the right side of the page, timber results improved $3 million, with price improvement in both the Southeast and Northwest more than offsetting increased costs. In Real Estate, the strong third and fourth quarter development sales performance resulted in operating income exceeding prior year by $25 million. The Performance Fibers, the strong cellulose specialties price environment yielded a $47 million year-over-year benefit, which was partially offset by $22 million of additional costs, nearly from energy, chemicals, and maintenance. The only year-over-year shortfall occurred in our Wood Products business, with a $19 million variance resulted from the steep decline in Lumber prices in the second half of 2006.

Let's now turn to page seven for a brief discussion of Cash Available For Distribution. On this page, we reconcile from cash provided by operating activities, which is is a GAAP measure, to earn on GAAP metric of cash available for distribution or CAD. We deduct capital expenditures and then adjust for any equity related cash flows, lifetime exchange tax benefits and changes in committed cash to arrive at what we consider operationally generated cash available for distribution. Cash provided by operating activities was strong at $306.9 million, $53 million above the prior year, due to the strong operating results of our three core businesses, and improved working capital. From this, we deduct net capital spending of $105 million, which was $20 million above last year. As we mentioned on last quarter's call, this increase was primarily for investments in our Performance Fibers Mills to significantly reduce fossil fuel consumption. The $19 million deduction for committed cash results from the timing of an interest payment on our debt. Since the payment did not clear by year-end, we are reducing CAD to effectively consider this as a 2006 outflow.

Finally, the last deduction we make is for like kind exchange benefits. For CAD purposes, we consider the LKE benefits to derive from investing activities versus operating activities, since they are only realizable through reinvestment. The net of these amounts results in our CAD of $178 million versus $169 million last year. CAD per share of $2.31 was well above our 2006 dividend of $1.88 per share. With that, let me turn the call over to Tim to cover Forest Resources, Markets, and operations.

Thanks, Hans. In discussing timber, I will briefly review the fourth quarter and then discuss the outlook in general for the first quarter of 2007, and to some extent for the year. As always, much can happen between now and the end of March, let alone December 31st, so please keep that in mind. For the Northwest, on page nine as expected, volumes were down sequentially as well as year ago levels reflecting the impact of the strong first half and the impact of the declining Lumber market. Prices, however, improved compared to both third quarter as well as fourth quarter 2005, as buyers completed harvest on older, higher priced timber tracks, and we had a favorable mix of species.

For the first quarter, volumes are expected to be up sequentially but below first quarter 2006 levels. Prices are expected to be weaker sequentially, but only slightly down on the first quarter 2006. While we originally expected log prices to drop further, reflecting the poor lumber market, rising pulp wood and export log markets have moderated the decline. For the year, volumes are expected to be down about 8 to 9%, and prices on average are expected to be lower by 7 to 8%. Moving on to the Southeast on page ten, volumes were up sequentially as well as compared to fourth quarter 2005. Prices on the other hand, as expected were lower compared to the third quarter and fourth quarter 2005 because of the weak lumber market. For the first quarter, volumes are expected to be down sequentially and compare to first quarter 2006. Prices are expected to be below first quarter 2006; however they are expected to move higher sequentially.

In 2007, we begin to see the impact of our 2006 timberland acquisitions. Although our legacy volume and price will be down year-over-year, the mature nature of some of the stands and the geographic diversity of our new holdings will mean the overall volume will actually be up 7 to 8% and average prices flat to slightly up in 2007 over the prior year. With that, let me turn it over to Charlie to review the Real Estate business.

Thanks, Tim. The Real Estate market in the Southeast continues to be mixed. Interest from regional developers on small to mid-sized properties, 3 to 1,500 acres remains quite good, while the more national companies appear to have pulled back. Since we have historically worked with the more mid-sized regional developers, our outlook for '07 remains solid. We are coming off 2006 Real Estate financial results, which are at a historic high. As you can see on page 11, development acres sold and the average per acre price were well below third quarter, but prices remain strong. It is important to note that as we announced in December, the fourth quarter included a sale of 1940 acres to LandMar, a prominent Southeast developer, for $27.5 million, or approximately 14,000 per acre, which included the option to convert the transaction to a participation structure. We received $10 million, or $5,000 per acre at closing, and under the accounting rules, can only recognize the cash component. This distorts the numbers for the fourth quarter and the four-quarter-rolling average calculation. Put another way, when revenues are received in the future, there will be no acreage associated with that revenue.

Including LandMar, the fourth quarter consisted primarily of three transactions with residential developers and averaged 1,300 acres per shale. The rural sales as shown on page 12, were positively impacted by the 2,300 acre sale to Alachua County, Florida of an environmentally-sensitive property which will be used for conservation and recreation. This transaction, which involved ourselves, the county, and the Nature Conservancy, is a prime example of what can be accomplished between the public and private sector. We continue to feel quite positive about the rural sales program where the market is clearly less sensitive to housing. The operating income outlook for 2007 in Real Estate indicates some sequential reduction, although it is expected to be above 2005 with fewer acres sold, as we believe it is prudent to not push volume into this market. Also, we continue to refine our strategy, regarding which land should be entitled and there for should not be part of our current sales inventory. With that, let me turn it over to Lee for a review of Performance Fibers.

Page 13, Performance Fibers. We had a very good quarter as I said earlier, and we expect to see more of the same as we move into 2007. Looking at 2006 prices on page 13, you can see the strong pricing for sale of specialties which represent 64% of our volume. For first quarter, we should see average prices for this product move up 6 to 8%. For the year, we expect prices to be up in the range of about 8%.

Looking at absorbent materials, or fluff, shown in the lower part of the graph, the average price in the fourth quarter reflects a slight improvement. For the first quarter, we expect to see fluff prices to be flat to up. For the year, given the commodity nature of this product, it's a difficult call. Looking on page 14, as you see here, the volumes, you can see the sequential as well as year-over-year improvement in total volume, over 50% of that volume increase is in cellulose specialties. For the year, this is translated into a very favorable mix of our 64% volume being cellulose specialties, reflecting our continued efforts to not just shift the mix more towards this high value, high margin part of the business, but what you don't see here is enriching the mix within cellulose specialties. For the first quarter, you should see the typical sequential lower quarter volume however compared to first quarter 2006, we expect cellulose specialties volume to be up, absorbent materials will be somewhat lower, of course. For the year, we'll continue our efforts to further shift the mix to cellulose specialties grades.

In summary, from both a market and operational standpoint, we're well positioned in the Performance Fibers business. We expect to see meaningful savings as a result of the $30 million new power boiler in our Fernandina mill, which is now up and running, 30 days ahead of time which is not always the case. This plus other high return cost improvement initiatives in Performance Fibers and overall strong markets should translate into another solid year for this business. On page 15, Wood Products, which is relatively small business for us, as we all know, markets are quite weak, albeit first quarter prices are up slightly from before. We are planning for a continuation of the very soft markets as we've seen. We should see some uptick from where we are, as we move into the year, but again, we should expect to see fairly flat to slow soft markets. With that, let's go back to Hans.

Thanks, Lee. Let's turn to page 16 to review earnings trends. Based on current market conditions, we expect first quarter earnings to be well below fourth quarter's pro forma earnings of $0.59 per share. The decrease is driven primarily by lower Real Estate sales. On the year-over-year basis, we expect first quarter earnings to be slightly below last year's first quarter pro forma earnings of $0.30 per share. On a full year basis, we expect the second half to be stronger, primarily due to the timing of Real Estate transactions. Overall, we expect full year '07 earnings to be comparable to 2006 pro forma earnings per share of $1.99.

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 2007, we expect depreciation, depletion, and amortization of $145 million and the non-cash cost basis of land sold of $9 million or approximately $154 million in total, which would be a net $5 million increase over 2006, DD&A is expected to increase about $8 million, mainly due to the recent timber land acquisitions while the non-cash cost of land sold is expected to decline $3 million. Capital expenditures, excluding acquisitions, are expected to range between $90 and $95 million, $10 to $15 million below 2006. With respect to our investment in New Zealand, we expect $2 million of equity income from the joint venture; however because of the way the JV is structured, we expect to realize cash flow in the $4 to 5 million range.

Finally, we ended 2006 with an effective tax rate of approximately 16% before discrete items. As we've seen throughout the year, the effective rate can vary significantly based on lifetime exchange benefits, foreign exchange movements, and the mix of income between our REIT and TRS businesses. With that said, we expect the 2007 effective tax rate to be in line with 2006. Now, let me turn it back to Lee for some summary comments.

Thank you, Hans. Let me conclude here by saying that at this time, as you've heard from Tim and Charlie, with our three core and somewhat diversified businesses we feel we are very well positioned coming into this year, 2007. And as we've said, while the first quarter is expected to be slightly below first quarter 2006, primarily due to lower timber earnings, we expect the earnings for the year to be generally in line with 2006. Although the softening in certain residential markets will put pressure on timber, we remain optimistic given the mix of our overall stability and of our businesses, the stability of our earnings and cash flow. That combined with our strong balance sheet and tax efficient REIT structure should allow us to continue enhancing our shareholder value. With that, let's go back to the Operator for questions.

[OPERATOR INSTRUCTIONS]. We'll have our first question from Mark Weintraub, Buckingham Research.

Thank you. First question was regarding the Real Estate side. You indicated that you were expecting a stronger second half due to timing of Real Estate transactions, and I'm just trying to get a sense as to first, whether those would be primarily or geared more toward the development side or to the rural side and also, get a sense as to the confidence level you have when you're kind of looking out to the second half of '07 for these types of transactions, so the predictability, so to speak.

Okay, Mark, this is Charlie. I'll take a shot at that. In '06, 75% of our earnings, operating income came in the second half, 25 in the first half, and as we sit here today I don't think it's going to be weighted that strongly to the second half. It won't be 50/50. It will still be stronger in the second half, but not nearly as back-end loaded as '06 was. In '05, we were 42-58 in terms of first half, second half, so we will be back-end loaded but sitting here, three weeks into the year, I don't think we will be as back end loaded as we were last year.

In terms of confidence, the second question, we're reasonably confident. I mean, we still have deals that have to be put together in '07 that we believe will be put together that are not under contract, but that's the way it is every year, and with our geographic diversity with the kind of interest we're getting from regional developers and also a pretty strong rural program, I'd say there's a high level of confidence.

And Charlie, do you expect the mix between rural and development to be fairly similar this year or is that going to be shifting and if it's not shifting this year, when do you expect that to start shifting more dramatically to the development side?

That's a harder one to call. I don't expect a dramatic shift. If and when the shift occurs will be when we start with greater, when our participation deals start paying off. In other words, when those deals start coming back around, a la the LandMar deal, they will begin to see a shift in earnings. That's a couple years out, so I don't, sitting here today, I could be wrong because this is a very transactional-driven business. One or two large transactions can shift the mix, but sitting here today, I'd say that the mix will be pretty consistent.

And when you look at your pipeline, are there a number of LandMar-type transactions which or transactions such as the one you did with LandMar which are in the pipeline or should we be expecting to see some more of these JV types of deals being announced in '07 recognizing that the pay out can sometimes be a few years hence?

Right. Well, clearly our strategy is to do more participation type deals and that's what our focus is in conjunction with having a pretty robust sales program, so there's a lot of effort to do those. They take a lot of work, so sure, you should expect more but exactly when is just very difficult to predict. It's certainly a lot of work to put them together.

And then actually two quick last ones. One, in terms of the dividend, what type of percentage of CAD would you expect over time to pay towards the dividend?

Mark, this is Lee. Without being specific, I think, let me put it this way. We're very comfortable with where we are based on looking at the results for '06, and the emphasis probably being on very comfortable with that mix, percentage wise, I think saying that, one always has to look ahead and say what's the best, or how is the best way to return value to the shareholder and the argument can certainly be made for increase in dividend. Was that evasive enough?

That's pretty straightforward. And Lee, can you give any update on where you are at succession thoughts?

Well, obviously, when everything is in place we'll make that announcement. As I'd indicated to the Board six or seven months ago, I said I would give them 12 months notice. I said that several years ago, and last June, I said I'm here to give you the 12 month notice, so I would say in the relatively near future, the Board will have made a decision and shortly thereafter, be announced. Obviously, it's going to be done before the end of June. We're down to essentially five months here, so I think we'll have a reasonable transition period.

Okay, thank you, Lee.

We'll have our next question from Christopher Chun, Deutsche Bank. Please go ahead.

Okay, thanks. Just following up on the prospects on the Real Estate side. Can you talk about how many acres of land sales you have baked into your '07 forecast?

I can't tell you how many acres because we just don't, certainly we internally forecast but we try not to give that out publicly because it moves around so much. Our sense today is it will be less acres. Our goal is, I'm sorry, our sense is less acres in '07 than in '06 and our goal is that higher average selling prices, so we do think that it's probably not prudent to push acres into this market, so unless some unusual opportunity comes and we're always interested in opportunities, we would or I would guess less acres in '07 but we're pushing real hard to improve our per acre prices.

Okay, well then that's certainly fair. And then in terms of your 4Q transactions, the LandMar deal was disclosed separately, so we know quite a bit about that one, but in terms of the other two deals on the development side, can you talk about where those parcels were located and also whether there was any deferred payment structure like there was in the LandMar deal?

Sure. As I said, there were three transactions. The other two were right in the thousand acre range and it just turned out that they were, the other two were also in Northeast Florida, but I will point out that we had some pretty nice sales in '06 in Georgia but fourth quarter just turned out to be kind of the Florida quarter so they're in Northeast Florida, proximity to Jacksonville, and no, they were straight sales. Outside of the other two were straight per acre sales.

Great. And in that case, it seems to me that the per acre value on those deals were quite a bit lower than the LandMar deal. Can you talk a little bit about what the factors were, in your opinion, that influenced the per acre valuations?

Well, I'm looking at the numbers. One was right at LandMar and one was above it, so I'd have to just work through the numbers.

Oh, well, when I'm thinking about the LandMar, I'm not thinking about just the $5,000 initial payment but more --

Right.

The present value as total expected payments.

Well, not to get cute, but it really is location, location. The Landmar property is right in the middle of the development area in St. John's county, and they developed the property across the street, across the road called South Hampton, very attractive area. The other two, while they're proximate to Jacksonville, are very much on the outskirts and also pretty heavy wetland component on those two, so it's a combination of location and quality of the site.

Okay. Switching gears a little bit, finally, can you talk a little bit about the $5.3 million that you gained from the environmental reserves?

Sure. We have about about $122 million on the Balance Sheet set aside for these closed operations and basically, every year we're evaluating what reserves are required. We're talking about very long term liabilities in some case here, on these sites and this particular case, we were able to come forth with an on site remediation plan which received regulatory approval versus an off site type of disposal plan that had previously been assumed in our reserves and as a result of that, we were able to take that reserve down.

So would it be fair to say that in addition to being able to reduce the reserve, you have greater confidence then that the reduced amount will be sufficient in the long term to cover your potential liabilities?

Yes. That's fair. Right now, that's our best estimate of what we need for these sites at this point in time, so like I said, we evaluate these typically the most thorough evaluation occurs in the fourth quarter and in this case it resulted in a pick up for us.

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

We'll go next to Chip Dillon, Citigroup. Please go ahead.

Hi. My first question is really exciting. What, inside of current liabilities on December 31 the would be considered like debt, current maturities or bank loans?

I think our current maturities were just a couple million dollars, 2 or $3 million. $3 million I believe.

Okay so 3 million on that, okay. And then second question is you mentioned that your tax rate would be the same in '07 as in '06 and you're saying that all of '06 for the investors would be capital gain. When would ordinary income ever flow out of you? In other words, if you have a year where Performance Fibers keeps cranking up, would that not count or actually start to effect the blend? Because I would imagine that income and the TRS is considered ordinary or will there never be ordinary income taxation?

It would be highly unlikely for us to have ordinary income. Effectively for the income test, the income that's counted is only what's actually dividended from the TRS businesses up to the REIT so effectively, we control that.

Oh, okay.

So if you do have excess cash building the TRS, you don't have to dividend at all so we can manage that.

And so the way to think about it is is that the Rayonier tax rate will include the taxes that the Corporation pays on that income, but unless and until you actually pay that cash flow through the Rayonier Company to the shareholders, there's no ordinary income taxation to the shareholders?

That's essentially correct, yes.

Okay, that's great. And then when you look at last year and I think this is mainly the fourth quarter if I understand, the timber acquisitions all in were about about $300 million and I can see that your debt went up about 100, although I think you mentioned something about a pension change might have even accounted for part of that, and so I guess where do the other $200 million come from to pay for that? I know the spread between the CAD and the dividend was about $30 million.

We opened the year with about about $140 million of cash on the balance sheet, so between that and cash flow from operations and debt essentially financed those acquisitions.

Okay. And I guess if your cash went down 106, I guess $10 million from stock options and the hundred from the debt, then maybe the operations were the other --

Yes, also remember in the Second Quarter when we monetized a piece of our New Zealand operations, we returned returned $22 million from that.

That was 22, got you. And then just so I understand as a follow-up for sort of to the first question about the Real Estate transactions you expect in the second half, I would assume most of those are not deals you plan to be tied to some of the larger home builders but mainly the small and medium sized developers you talked about who are still quite active?

Yes. Hi, this is Charlie. I'd say that's fair again. We still have transactions to do and you never know, but the smaller, small to mid-sized developers that develop in this part of the south are certainly more active right now, so I wouldn't rule out a national developer, but I think we're having more success with the customer base we have.

Okay. And I guess the last question is on the dividend, you all have been a REIT for three years I believe, and you raised the dividend twice I think in '05 and didn't in '06 and I know that Lee has graciously been evasive already on the call but I just wanted to ask, with you expecting kind of a flattish year and in fact a down first half, would it be in your thinking to wait to see how the second half starts to unfold, or for the Board to wait, or do you think it's more openness for the Board to look at the current situation and make a decision?

I guess yes, Chip, we have been a REIT for three years and you're right, we did raise it twice in '05 , the fourth quarter was the last one. No, I think, well, to answer your question, we look at the dividend for the Board -- we can look some ways down the road in our businesses. Timber is much more steady than you see in Lumber Markets and anything you see in Lumber Markets and Performance Fibers is in awfully good shape as we look ahead. Hans talked about our CapEx which will be down a little bit. It's on the agenda quarterly or I'm sorry, at each Board meeting. We'll continue to do that but we'll be looking several quarters or even further down the road when we make the decision on dividends, but I think you sort of touched the issue last year. We put a lot of money in timber lands. I think the two big transactions took about $270 million. We ran our capital up as well as capital spending last year to put that $30 million into that power bore to pull our energy costs down, so we look ahead at good cash flow.

I guess the last question is and this is more, maybe more of a gut feel question than what, maybe what the numbers generated would be showing in a month ago or two months ago, but as you know, Lumber and certainly panels but Lumber prices have been very weak and they're up a little bit since December, but it seems like that production is down. I'm not so sure about in your regions but are you seeing first of all would you agree that the demand for your timber from I guess both paper and Lumber Mills is still sort of low or do you regard it as low and if it is, do you see any seasonal recovery in demand or does it feel like a normal season or does it feel more like maybe it's below recent years as we've seen for example, in Lumber prices and housing markets.

Well, let me maybe start, I'm not quite sure how to answer your question but let me start this way, Chip. In the south, typically the areas we operate in, about 50% of the product coming off of an acre goes straight to a pulp or paper mill and the balance normally would go to some kind of Wood Products facility, unless in this case, let's use Lumber. Certainly there's not been a drop off in the demand for fiber right off of an acre. Clearly, it's even probably been a little stronger because Lumber markets are not, I'm sorry, Lumber mills are not running as hard as they have in the past so the residual chip coming out of them isn't available to mills are out pushing harder for wood coming off the stump so they're paying a little more and moving further up the quality of wood to get it. Northwest, I think Tim stated it. While domestic Lumber Markets are off, certainly new capacity has gone into the Northwest and the other wrinkle on the West side of particularly Washington as the export market has sort of come back so there's a couple of alternatives for timber land owners and I think Tim also indicated maybe contrary to what we might have thought and certainly others, the results we've seen on recent timber sales have been better than we have been above what our expectations were, let me say that. We were pleased.

Got you. And the last question is you guys have certainly, if you haven't written it, you certainly read front and back every page of the REIT conversion book. In a hypothetical situation, if you were to acquire, technically someone in a reverse [morse] trust, I.E., by somebody bigger than you, would it be necessary for that 75% test to be applicable right off the bat, if that makes sense, or said differently, if that happened, would you all, would your REIT status become in jeopardy? In other words for someone to do a reverse morse trust with Rayonier being the smaller but acquiring Company, would that other entity have to pretty much just be timber land?

Hi, Chip, it's Hans. We would have to meet the test right off the bat, so the extent that the timber land obviously is going to have to be the largest component and obviously we look at the test every quarter and we have a little bit of room so I guess in theory you could have some TRS component come with it, but in concept, you're correct.

Got you. Thank you.

We'll have our next question from Steve Chercover, D.A. Davidson. Please go ahead.

Thanks. A lot of my questions have been asked so maybe I can just talk about log markets a wee bit more. You said that the volumes will go up by 7 to 8% by virtue of your new land under management. What makes you think that prices won't soften up going forward?

This is Tim. We've got a mix issue there in that some of the property that we've acquired has considerably more mature timber on it for one thing and secondly, the fact that it's in a different geographic market, so the markets in Texas and Oklahoma, for example, are much, tend to be much more of a saw log market for us and that tends to draw a larger price, bigger price, and so as a result, it's kind of a mix issue that we're seeing there, so we're not anticipating that our overall pricing would be down. If we look at just our legacy timber, we would be expecting and we are expecting some price deterioration there, but on the larger mix, when we pull in the Gibbs and GMO properties, we're seeing property prices basically flat.

Okay, switching gears, you also indicated or Lee did that the pricing for specialty cellulose should be up 6% in the current quarter and 8% for the year. I assume that because of the contractual nature of that business, you've got a high degree of certainty that will come to pass?

Yes. Yes. These companies we've done business with for decades. Some of them, I think this year, Eastman Chemical at 75 years and last year was 75 years, so this is all essentially in place.

Great. And final question, just in terms of timber landmarks in general. Do you still see a decent pipeline of these kind of smaller bite size transactions that you can undertake in 2007 and in terms of the new geographic areas that you're operating in, is TerraPointe equipped to do any sort of HBU transactions in up State New York or Texas-Oklahoma?

Steve, I'm not sure there's even any bite size timber land acquisitions. One of ours was 121 and another was I think $150 million last year that I guess maybe they are bite size in today's world. They were fairly strategic for us as I indicated, it allowed us to stretch our geographic foot print. It also allowed us to in a very tax efficient way to move our HBU properties down into TerraPointe. As the TerraPointe's capabilities our expertise certainly is in the Southeast. That's not to say is we've looked at some of the properties in Texas and perhaps even up in New York, but certainly the acquisition we made recently in Texas, there's some properties we've identified in there that could have higher and better use. Our Real Estate at TerraPointe may say well we've taken a look at it and we're going to turn it over to somebody else. That's certainly where we take the properties and say here it is, TerraPointe, see what you can do with it.

Okay, thanks very much.

We'll have our next question from Claudia Shank, JPMorgan.

Thanks very much. Just a couple of things on the Performance Fibers business. You mentioned that the mix in the cellulose specialty business has grown to almost 65%. Where do you see that sort of leveling off or where do you see that headed in the next several years?

Well, Claudia, each time I ask the people that run that business, can we get more out of it, I've been told that and I think it started when we were at about 53% and now we're at 64%. Part of the process, it's a chemical recovery system and you do run into limits and some of you can get around with some more capital. I would say we're maybe within a couple of percentage points of being there. Again, a few years ago I would have told you the same thing when it was maybe 55. So, you are doing two things. One is you're pushing that up as far as you can, and then within cellulose specialties you're moving up the higher value and more profitable segments of the cellulose specialties business.

Okay. And then you mentioned the power boiler project at Fernandina. Sounds like that wrapped up. How did the start up go there and from a budget standpoint, versus your expectations, I think you said about $8 million or so hit in the fourth quarter you expected from that.

Yes, Claudia, well it started up, I guess reasonably well, given the complexity of the operations and it's up and running now and for full year '07 we expect savings in that range that you mentioned there $8 million plus.

For the year, Claudia.

Okay, perfect. Is there any other major sort of maintenance down time projects you're expecting in that business in 2007?

I would say not out of the ordinary. There's always some kind of shut down, maintenance shut downs taken. I think we have one in the first quarter that maybe is a little bigger than we might normally do, but we don't have a major projects. We don't have another $30 million on the shelf. As I indicated, I was very, I've been very surprised and pleased with how that project has come up at Fernandina

Perfect. Thanks very much.

We'll have our next question from Todd Peters, American Century. Please go ahead.

Oh, thank you. How do you think, Lee, on the Wood Products side of the business, it's a smaller piece of your overall EBIT, EBITDA, and going forward is this a business that you see core to Rayonier?

No, Todd. It isn't. We've identified the three cores as Timber, Real Estate and Performance Fibers. It's as I say it's a relatively small business. Of course right now it's not so great, certainly, a couple years ago we were very happy to have it. It doesn't tend to move the needle very much one way or another. It tends to be a little bit counter cyclical, but it is not big. We're not looking at increasing it. Any investment we make in it will certainly be to reduce some of the cost and move it down into a more competitive down into a smaller size piece of wood, but it's not one of the three cores.

Okay. And one other quick question and then I have to go. When you look at your "HBU" land and I think there was some commentary land that your purchase of these two timber land tracts in six states allowed you to put some land into HBU. How many HBU acres would you say you have at the end of the year?

Charlie, you want to take that?

Well, there's two ways to answer it. How much do we think has potential and how much is actually in the sub and we try not to move acres into the sub until we have a real tax advantaged way of doing it. We've indicated in the past that we felt prior to those acquisitions that we had 200,000 acres in the coastal corridor that we thought over the long haul, over 20 to 30 years had development potential, so we're basically sticking with that number, and there's a few acres on the December purchase that was north of Houston, we think there's some HBU opportunity on that that we're certainly interested, but again, we don't move acres down, specifically into the sub until we have try not to do it until we have a real tax advantage way of doing that.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. We'll now go to Peter Ruschmeier, Lehman Brothers. Please go ahead.

Thanks, good afternoon. I apologize. I tuned in a little bit late but so I apologize if you answered these questions. On capital spending, can you update us, Lee, on I guess the level and I'm presuming that most the CapEx is basically down to a maintenance level at this point as opposed to discretionary projects?

Well, no. There's always discretionary and different people define maintenance differently. I think in any business today, you just can't stay with what typically people would call maintenance. You have to have discretionary in it to stay in the race. Not any big strategic pieces in there, at least as we were looking at it today in the neighborhood. I think Hans indicated it's about $90 million, 90 to 95. We certainly have money, we have room on the Balance Sheet if we saw strategic opportunity in timber land, we would certainly take advantage of it. But we're not looking at anything big like we saw this last year, the $30 million project. We're comfortable with what we have in the 90 to 95 to certainly move our businesses ahead.

Okay. That's helpful. And just two final points on the Income Statement. The corporate expense, are you still expecting that to be in a range of $35 million a year and a little bit above that run rate for the fourth quarter but is that about right or do you have any updated guidance on what you expect corporate to be running at?

You're right. Fourth quarter we did tick up a little bit with an accrual we had to make for stock based comp and some other development work we did, but '07 corporate I think would range actually a little under that 35 rate, probably closer to 30 to 32.

And then just lastly, is the interest expense for the quarter, the $14 million reported, is is that representative of the run rate, I know you had some timing issues on the balance sheet, so as i think about i guess we've modeled a little bit higher interest expense in the first quarter but any guidance on that as to whether that's representative of the average debt balance or is is there some catch up with period end balance?

No. There won't be any catch up. I think 14 a quarter is a pretty good number to use for your model right now.

That's all I had. Thanks, guys.

At this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Hans Vanden Noort for any additional or closing comments.

Thank you very much. I'd like to thank everybody for joining us once again, and please contact Parag Bhansali with any questions. Thank you.