Rayonier Inc (RYN) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Rayonier second quarter earnings release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. 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'd like to turn the call over to Senior Vice President, Mr. Hans Vanden Noort. Please go ahead sir.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference, covering second quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our web site 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 Private Securities Litigation Reform Act of 1995 and other 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're 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 Thomas, Chairman, President and CEO. Lee?

Thanks, Hans. I'll make a few overall comments and then Hans will take you through the financials, after which I'll review Forest Resources, Real Estate and Performance Fibers businesses. I've got with me from Forest Resources, Tim Brannon, from our Real Estate and TerraPointe group, Charlie Margiotta, from our Performance Fibers group, Paul Boynton. All of us will work together to respond to any questions you've got when we get to that point.

We're pleased with our second quarter results. The strong earnings and cash flow in the quarter reflected the mix and strength of our businesses. In particular, results were driven by a higher proportion of development acre sales in our real estate business and strong demand for Cellulose Specialties and fluff pulp in our Performance Fibers business. The outlook for 2007 remains solid, and excluding special items, we expect it to be comparable to 2006. As we noted in our earnings release, the $10 million charge for forest fires reflects the company's most recent estimate--is lower than our previously reported $15 million to $18 million estimate. A final number will be available once we've completed all of our on the ground survey of the damage. We remain well positioned in our core businesses and have a strong balance sheet and robust cash flows. This will enable us to opportunistically grow our Timber business, continue to unlock meaningful value from the execution of our real estate strategies, and further strengthen our position as a leading player in the Performance Fibers marketplace. Additionally, with the announcement yesterday of our 6.4% dividend increase, we're confident in the future strength of these businesses and their ability to consistently generate strong cash flow to provide a good yield for our shareholders. With that, let me turn it back to Hans and let him review the financials for you. And then I'll come back and talk about each business in turn.

Thanks, Lee. Let's start on page three with the overall financial highlights. As Lee noted, we followed the first quarter with another very solid quarter. Sales totalled $300 million resulting in operating income of $56 million and net income of $33 million, or $0.42 per share on a GAAP basis. These amounts include the $10 million charge for an estimate of fire damage to our timber during the second quarter, which we are treating as a special item. Excluding this impact, operating earnings would have been $66 million and net income would have been $43 million, or $0.55 per share. There were no special items in the first quarter of 2007. However, the second quarter of 2006 had a special item, which was a $7.8 million pre-tax and $6.5 million after-tax gain on the sale of a portion of our investment in the New Zealand joint venture. Excluding that gain resulted in pro forma net income of $36 million, or $0.47 per share for that quarter. These pro forma amounts will be the basis for comparisons on later charts. Sales were comparable to our prior quarter, but $12 million below second quarter '06. Lee will review the key drivers behind that revenue movement. Pro forma operating income of $66 million is approximately $11 million above first quarter 2007 and $15 million above second quarter 2006. We'll go into more detail in the individual segment variances in the following pages.

On the bottom of page three, we provide an outline of cash resources and liquidity. Cash provided by operating activities for the six months of $132 million was comparable to last year reflecting higher operating income offset by increased working capital. Cash used for investing activities of $106 million was above last year, primarily due to an increase in restricted cash for light kind exchange purposes. Cash used for financing activities of $50 million was $16 million below last year due to an increase in debt at the TRS and proceeds from stock option exercises. Adjusted EBITDA up $202 million was $43 million above the prior year, driven by strong Performance Fibers results, while cash available for distribution of $107 million was well above last year's $82 million. We'll look at CAD a little later. Our debt and debt-to-capital were comparable to year-end, and we ended the quarter with approximately [$16] million in cash.

Let's turn to page four for the first variance analysis. Here we show a comparison of the second quarter to first quarter earnings. We begin with $0.45 in earnings per share for the first quarter and come down to our second quarter pro forma earnings per share of $0.55. Working from the pre-tax column, our Timber operations had a $5 million decline driven by lower U.S. volumes after a strong first quarter and lower prices in Florida and Georgia resulting from the fire damage-salvaged timber. Our Real Estate results improved $9 million, primarily because of higher development property sales. Also, although rural acres sold were below a strong first quarter, we continued to be encouraged by the level of interest in these properties. Continuing down the page, Performance Fibers benefited about $4 million from price increases in both Cellulose Specialties and Absorbent Materials. Finally, Wood Products results improved $3 million based on improved pricing and lower wood costs.

Let's move on to page five to briefly review the year-over-year variances. Here we begin with last year's second quarter pro forma earnings of $0.47 per share. Overall Timber results declined $9 million compared to the prior year due to lower volumes in the western region and decreased prices in the eastern region, somewhat offset by improvement from our New Zealand operations. Real Estate earnings were up, reflecting an increase in development acres sold from approximately 7 last year to 3900 acres this year. Performance Fibers results improved $15 million, reflecting strengthened prices in both Cellulose Specialties and Absorbent Materials. Finally, Wood Products results were $3 million below last year as weaker prices more than offset improved raw material costs. These amounts bring us to the current quarter's pro forma earnings of $0.55 per share. The major causal factors for the business unit's second quarter variances generally apply for the six-month period shown on the right half of the page.

Let's now to turn to page six to review cash available for distribution. On this page, we reconcile from cash provided by operating activities, which is the 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 benefit and changes in committed cash to arrive at we consider operationally-generated cash available for distribution. For the six-month period, cash provided by operating activities was $132 million. From this we deduct net capital spending of $51 million. This was $10 million below last year, which as you may recall, included investments in our Performance Fibers mills, significantly reduced fossil fuel consumption.

Next is a $26 million change in committed cash. The majority of this item results from the timing of an interest payment on our debt. The interest was related to 2006, but wasn't due until early January 2007, so although the payment wasn't made by year-end '06, we've reduced the 2006 reported CAD to effectively consider this as a 2006 outflow. Therefore, we need to add it back so it doesn't show as a 2007 outflow. We adjust for equity-based compensation adjustments and then make a deduction for a like-kind exchange benefits. For CAD purposes, we consider the LKE benefits to derive from investing activities versus operating activities since they're only realizable through reinvestment. The net of these amounts results in CAD of $107 million versus $82 million last year.

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

Thanks, Hans. In discussing the businesses, I want to briefly review the second quarter. Then, the outlook in general for the third quarter and to some extent for the remainder of 2007. Please keep in mind as I do that, that much can happen between now and the end of the year.

On page eight, you'll note that western Timber volumes were down sequentially as a result of weaker housing and export markets. In addition, lower volumes compared to second quarter 2006 can also be attributed to housing market softness. However, prices were up sequentially due to mix and comparable to second quarter 2006. For the third quarter, we expect the normal, seasonal decline in volumes comparable to third quarter 2006. Prices, on the other hand, are expected to be up slightly on a sequential basis and compared to third quarter 2006 due to mix. For the year, volumes are expected to be down 8% to 9%, and prices on average are expected to be lower by 2% to 3%.

Now moving to the east on page nine, volumes were down sequentially due to the impact of the fires and the soft housing market, but up slightly compared to the second quarter 2006, driven by the impact of our 2006 Timberland acquisitions. Remember the acquisitions we made primarily in Texas last year. Prices in second quarter 2007 were lower than both first quarter 2007 and second quarter 2006, reflecting the impact of selling lower priced fire-damaged timber. For the third quarter, we expect continued downward pressure on prices, as fire-damaged timber continues to be harvested and sold. However, the additional harvesting of fire-damaged timber is expected to drive volumes up sequentially and compared to third quarter 2006. For the year, volumes are expected to be up 13% to 15%, reflecting the impact of the 2006 Timberland acquisitions at average prices for the year are expected to be slightly lower.

Now turn to page ten, in the lumber business, which as you know, is a small part of overall Rayonier. We see that both prices and volumes improved slightly on a sequential basis, but are down from second quarter 2006 due to the weak housing market. We do not expect any substantive change in price or demand for the balance of the year.

Now let's turn to our Real Estate business. Let me make some general comments. Our development business had a solid quarter as we closed on contracts initiated in late 2006 and early 2007. The rural sector remains strong with buyers of rural property varying from low density residential developers to individuals seeking wealth preservation. We're also experiencing increasing interest from commercial and industrial buyers looking at our rural property. Looking forward we expect development sales for the balance of 2007 to be below recent trends as we shift our emphasis from sales of these lands to entitling activities, which we feel will unlock substantial long-term value. As you can see on page 11, development acres sold were up significantly compared to both the prior quarter and the same period last year, reflecting the lumpy nature of this transaction-based business. Prices averaged slightly above $7,000 an acre. Sales were primarily to regional developers in Florida and Georgia.

Page 12 shows a very low level of rural acres sold compared to both the prior quarter and second quarter 2006, which is due to the timing of closings and not an indication of the rural land market, which as I've indicated earlier, remains strong. For the second half, we expect to see continued softness in development land market conditions offset by solid rural market, as I mentioned earlier. Development sales volumes are expected to be down sequentially and compared to a very strong second half '06. Rural sales volume should be up versus both first half of 2007 and second half of 2006. As noted in my opening comments, our Performance Fibers business continues to perform well with a benefit of strong market demand for our unique sale of Specialty Fibers and rising market prices for our fluff pulp products, associated with good solid demand.

On page 13, you can see Performance Fibers net selling prices for both our Cellulose Specialties and fluff price products along with comparative prices for commodity paper pulp, SBSK. In looking at the Cellulose Specialties business, which represents approximately 65% of our Performance Fibers volume, prices for the second quarter increased due to the continued strong demand for these products. Average second quarter net selling prices were up 2% sequentially and 11% compared to second quarter 2006, reflecting the impact of our annual price increase. As you look at the fluff net selling prices, you'll note the continued gradual fluff pulp price increase that began early in 2006. Second quarter 2007 fluff prices were 3% above the prior quarter and 10% over second quarter 2006 due to the strength of the pulp market.

Page 14 shows Performance Fibers sales volume. Second quarter Cellulose Specialty sales volume was 3% below first quarter and 8% below second quarter 2006, mainly due to timing of our customer's requirements. In other words, when our customers wanted their product delivered. Our absorbent materials second quarter sales volume, which is principally fluff pulp, was relatively consistent with the first quarter and 11% below second quarter 2006. The volume reduction is related to the longer planned maintenance shutdown in the first quarter that affected customer orders in the second quarter. As you may recall, that maintenance shutdown was twice as long this year as last year. As noted earlier, our business saw improved earnings in the second quarter compared to the first quarter and the same period a year ago driven by strong demand. We expect this trend to continue through the balance of the year. Through the--for the third quarter, we expect Cellulose Specialty's prices to remain relatively flat compared to the second quarter 2007 and up versus third quarter 2006. Volumes are expected to be up both sequentially and compared to 2006. For absorbent materials, we expect both prices and volumes to be up sequentially and to the third quarter 2006. Now for the year, we expect Cellulose Specialty's prices to be up 9% to 11% compared to 2006, while volumes are expected to be up 2% to 4% compared to 2006. For Absorbent Materials, we expect prices to be up 11% to 13% compared to 2006, while volumes should be down 3% to 5% compared to 2006. Now with that review, let me turn it back to Hans.

Thanks, Lee. With that, let's turn to page 15 to review earnings trends. At this point, we're focusing primarily on the third quarter and remainder of the year '07. Excluding any additional impact from the Georgia and Florida Timberland fires, we expect third quarter earnings to be below second quarter's pro forma earnings of $0.55 per share and third quarter '06's pro forma earnings of $0.63 per share. On both the sequential and year-over-year basis, the decline is expected to reflect fewer development Real Estate acres sold and reduce timber results. On a full-year basis, again excluding the impact from the Timberland fires, we expect earnings to be in-line with our 2006 pro forma EPS of $1.99 per share driven primarily by stronger Performance Fibers results.

Before I close, I'd like to share a few key statistics with you. First of all, excluding the depletion charge for the fire-damaged timber, we expect depletion, depreciation and amortization of approximately $152 million, and a non-cash cost base of land sold to approximate $9 million for a total of about $161 million. Capital expenditures, excluding acquisitions, are expected to range between $90 million and $95 million. With respect to our investment in New Zealand, expect $2 million to $3 million in equity income from the joint venture, and because of the way the joint venture is structured, we expect to realize cash flow in the $5 million to $6 million range. Our first half effective tax rate before discrete items of 18.8% was above the prior year, reflecting a higher mix of TRS versus REIT income, especially impacted by $10 million charge for the wildfires write-off. Excluding this charge, the effective rate before discreet items is 16.9%, which is generally in-line with our estimate of the full-year rate. However, this rate can vary based on like-kind exchange benefits and the mix of income between our REIT and TRS business. With that, I'd like to close the formal part of the presentation and turn it over to Lee Thomas for closing comments.

Let me conclude by saying that our businesses are well-positioned. As I noted earlier, we expect 2000 (sic) earnings to be comparable to last year. Although the softening in certain residential markets will continue to put pressure on Timber and Real Estate, we expect the impact to be offset by the strength in our Performance Fibers business. We look forward to another solid year given the unique mix of our three businesses, the overall stability of earnings and the robust cash flow they provide. That combined with our strong balance sheet, tax-efficient REIT structure should allow us to continue enhancing shareholder value. With that, let me turn it back to the operator and open it up for questions and answers from you.

Thank you, sir. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll go first to Chip Dillon with Citi.

Yes. Good afternoon. As you look at the second half of the year, it seems like you're expecting, if I see this correctly, that maybe the last two quarters of the year will look roughly equal. And I guess that would mean that maybe the land sales would be a little bit higher in the fourth than the third, since I would think that the seasonal harvesting in the fourth quarter would tend to be lower. Is that a fair way to look at it or not?

I think that is a fair way to look at it.

Okay. As you look at next year, I know you mentioned the $90 million to $95 million in CapEx for '07. Was any of the spending that you did in Performance Fibers, I know that there was a lot last year and I didn't know if any of that bleed--bled into this year and therefore it could go down further in '08, or would that be sort of a fair level to guess '08 would be at as well?

I don't think much of it actually came over into this year. Most of it was last year and I would say we're taking a hard look at what kind of projects we may have next year for capital spending, so it's a little early for us to say where we'll be next year on it.

Right. But you wouldn't have--I guess if you had projects that would tend not to be big ones in Performance Fibers, those are pretty much behind you, or are there other opportunities?

No, there's some other opportunities, particularly in the energy area.

Okay, so in energy. Okay. When you look at the real estate for the year, and maybe this is in one of the supplements, but do you have sort of a rough range of what you expect the revenue to be for the year and what the basis would be?

Well, we haven't really given out really specific guidance, Chip, on the revenue for the year yet, so we're basically in-line, I think, with the previous guidance we've given where we expect results year-over-year to be down versus '06 in total.

In terms of the income? In real estate?

And revenue, that's correct.

And revenue. And do you have a--and maybe you haven't, I mean I guess through the, at least the first half, what is the percentage of revenue that would be represented by basis?

One second. For the half--first half, you're probably around maybe 10% to 15%, somewhere around there.

Okay.

A little less than that, a little less than that, I'd say.

Charlie, you want to, Charlie Margiotta with TerraPointe Services.

It's probably dependent on when we acquired it, but that's--it's right in that 10% to 15% range.

Okay. And as you look at next year and based on where we sit today and assuming that you don't see a lot more serious deterioration, but maybe not a big rebound either. Do you think as you look at next year that that real estate would tend to be in the same area as it is this year, or it sounds like you might be actually choosing to maybe hold back a little bit so that you instead of selling land as rural land, you might wait a bit and let it get entitled and then sell it later on as entitled land?

Well, if you think about the rural land versus what we've characterized as development land, a good bit of that development land we've sold is actually land that was pre-entitlementship. One of the things we want to do is ensure that where there are opportunities to add value through entitlement that we do that. And so I think that you will see us as we go forward probably continue to have good, solid rural land program, maybe less acreage on what we call development land as we work an entitlement process on that land ourselves.

Got you. I got you. So would that still mean you still might have a comparable number next year in real estate, again based on the assumptions I laid out, or would that be a stretch, or would that be conservative?

It's too early for me to give you that kind of guidance.

Understand. Thank you.

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

Thank you. Lee, just wanted to follow up a little bit on understanding development versus rural, entitled versus unentitled. Historically, you've talked about 200,000 acres of what I understood to be development-type potential land. Is that, first of all, still a good number to be working with? And how much land in your portfolio would you be expecting to entitle over the next whatever time frame you think is relevant to use?

Charlie, you want to--you want to give a comment on that?

Well, there are two questions there, Mark. One, yes, we still feel the 200,000 acres is destined for development at some point in the future because of its location. Obviously, we wouldn't try to entitle all of that right away and what we're doing now is, I guess, separating out the most strategic projects we have and beginning entitlement projects on each of those. I could tell you it's not 200,000 acres, it's well less. But where we think the market will drive the absorption of those properties, we're going to begin the entitlement process and then at some point add a lot of value to it through whatever financial structure or operating structure we decide to use. But we still feel good about the 200,000 acres, and we've got several projects on a part of that to entitle it.

The second part of that is--and by the way, those are the properties you've probably heard us talk about in the past, and we have the entitlement process is underway on those properties. The second part of that is, though, that in addition to those properties, there are a significant amount of other properties in that 200,000 acres, some of which we have been selling as development acres. And one of the things we've been looking at is to how much of that we want to continue to sell, as opposed to entitle first. And that's what I was referring to when I talked about the fact that we're going to spend more effort on entitling some of those properties ourselves before they're sold or before we make a decision as to whether we would do some other kind of participation approach on those properties. So you may see the total acres in the development side coming down over the course of the next year or so as we work to entitle more of those acres.

Right. But saying all that, we will continue to have development sales.

Yes, we'll continue to have good development sales. We'll continue to have strong rural sales. Just from an acreage point of view on the development side, you may see some of those come down.

Okay, that's helpful. And can you give us any update on the likely timing of when you might receive entitlement on the projects which you have talked about in the past?

It's really not prudent to give that out. They're all -- the projects we have are at varying stages. They all include discussions with the state, the county and so on. And I just can't give out that kind of guidance.

Okay. And just lastly, given the weakness in the residential markets in Florida, how is that factoring into, A, your business outlook, and B strategically how partners are holding discussions with you at this point, or potential partners?

Well, it's safe to say that the situation in Florida, like the rest of the country, is a bit soft. Saying that, most of our business is primary home markets, and that's not nearly as soft as the condo markets and some of the other markets in Florida. So while it's not as strong as it was last year, or in '05, it's still pretty resilient. In terms of discussions, frankly, we've been pleasantly surprised by the interest we have in our properties from potential partners because frankly we try to select partners that have a long-term view. These projects take a long time, and so far we're pleasantly surprised at the reaction we've gotten. We've really got great assets and developers and partners are pretty excited about it.

Okay. Thank you.

We'll take our next question from Steve Chercover with D.A. Davidson.

Thanks. Good afternoon. First question, and perhaps I missed it. Do you provide a figure for how much cash you might have in an account for like-kind exchanges? And if there is such an account, when does that clock start ticking?

Yes, we didn't provide a figure, but I can tell you we were a little over $40 million at the end of June, of which about--I believe about $28 million, $29 million or so was coming back since we weren't able to match it up. And so then the rest of that will expire sometime in the third quarter, if we aren't able to find a match.

So presumably, you're always looking for acquisition opportunities. How do you find the market now? Is it getting harder and harder to find accretive or attractive tracks?

As I'm sure you know, there's been quite a bit of acreage on the market. We're finding that it's a very competitive marketplace, and so we've been spending quite a bit of time in analyzing and assessing the opportunities that are out there. We're pretty disciplined in the way we look at them, and we've not had a major one to announce this year, as we did last year. But we find good availability in the market, just a very competitive marketplace.

So are you pecking away at small tracks that are perhaps not material enough to announce?

We look at large tracks and small tracks, but, Tim, you may want to respond it. Tim's Forest Resources.

Yes, of course, it's something we're always looking at. We have a group that's responsible for our acquisitions, and they are out looking for small and large opportunities, so we're in the market throughout the southeast as well as in the northwest. So, continuing to look at both sides.

Great. And switching gears just a little bit, Performance Fibers is really knocking the cover off the ball, which is a nice situation. Do you ever contemplate taking advantage of that? Are there folks for whom it might be worth more to them than it is for you, and you can redeploy?

I would say from a point of view of Performance Fibers, you're absolutely right. It's doing very well, we've got good demand in the marketplace. As you know, we operate in a pretty unique space as far as our dissolving pulp and particular acetate grades. I think it is worth quite a bit to Rayonier. I have not contemplated doing anything different with Performance Fibers. And I would be surprised, to tell you the truth, that it was somebody out there that thought it was worth more to them than it was to me. And there's certainly not been any of them knocking on my door.

Great. Thanks very much.

We'll take our next question from Christopher Chun with Deutsche Bank.

Great. Thank you. Was any of the development land that you sold in 2Q entitled?

No, I don't think it was. Charlie, is that correct?

Yes. If anything, it would have been a minor amount maybe that had been rezoned commercial. But, no, I wouldn't say much of it was entitled.

Okay. Can you give us a little more color on where that land was located?

In 2Q?

Right.

Primarily in Florida with a couple small sales in Georgia.

Okay. Can you give us any comments on with any more specificity?

I think part of it--one of the things, that is, that we have to recognize, I tried to do it in my opening comments is basically some of that was property that we had worked on in 2006, basically sales that were closed over in the second quarter. So it's just part of the real estate business that it's very difficult for you to try to model in when transactions are going to close, but it's a good example of the point Charlie made earlier about continued interest in Florida and Georgia in our property. In that case, it was property that we felt we got a better value by selling those small tracks than we did by holding on to them.

Right. Particularly--excuse me--this is Charlie. Particularly where the sales don't compete with our strategic projects. And so we are in a lot of counties where we don't have strategic projects and those sales make a lot of sense. And in this case, the Florida sales were not, and I'll say they were not in Nassau county, they were not in Flagler county. So they were--it just made a lot of sense for us to exit those properties at really good prices.

Yes, okay. And then moving on to Performance Fibers, I think you mentioned, Lee, that Cellulose Specialty's prices would be up 9% to 11% year-over-year?

Correct.

Is that likely more than previous guidance, or am I remembering that correctly?

Hey, Christopher, this is Paul Boynton with Performance Fibers. It may be up slightly, but not terribly meaningful above that.

Yes, okay. And then in terms of the 2Q volume, I know, Lee, you already touched on this, but can you give us a little comment about why it seemed to be a little soft this quarter?

On the fluff pulp side?

Yes. Well, even on the Cellulose Specialty side. Well, the last couple of years you saw a year-over-year increase, which didn't happen this year.

I guess last year you really almost need to look at first and second quarter together. This year, pretty comparable. Again, as I indicated, I think a lot of that had to do with where customers were in terms of their production and when they wanted delivery. So I looked at this year fairly comparable to last year in terms of volumes on sale of specialties.

And Christopher, also you note, and as you look at that chart, you'll see that second quarter of 2006 was a particularly strong quarter for Cellulose Specialties. So. And Lee commented looking out for the year, we expect them to have improved sales volume for the year.

Okay. And then moving on to the Timberland business, in the, what you define as the eastern region now, there was a bit more of a drop-off, I guess, quarter over quarter than I was expecting, even considering the fire damage. Could you talk a little bit about that?

You means in terms of price?

Well, price and volume, really?

Well, certainly, from a volume perspective with the fires that we had, that was drawing a great deal of our attention, as you can well imagine and so with the--from a volume perspective, that was, I suspect, a fairly major part of it. As far as the pricing is concerned, again, we're expecting that we'll see some impact of the fire-damaged wood in the second quarter and then on into the third quarter, for that matter. So our third quarter volume is likely to be up, as we come--as we're harvesting more of that salvaged wood, but prices, of course, are going to be down as a result of that same thing.

So, Chris, I think at bottom line of the thing is we saw the fire impact obviously on the overall pricing, but I think we also saw it impact us in terms of volume, just in terms of the amount of attention that we and most of our customers were giving to manage in the fire issue.

And then it seems--well, you mentioned you're moving down your estimate for how much the fire damage is going to be. Are you having more success in terms of marketing the fire-damaged wood or can you talk about what the issue is there?

Tim, do you want to comment on it?

Sure. It's not so much that, but of course the guidance that we had given earlier with the $15 million to $18 million was very early on in the process and our best estimate then. But what we found, and fortunately we found, is that we did get a good deal of rain after the fires were out, and as a result we've seen some of the trees coming back that we had not expected would. So that's really as much anything the reason that we're seeing. Just in our more in depth survey of the properties and with the rain events that we've had, things are better than we expected, which is normally not the case, but in this case it is.

Okay, very good. Thanks for your help.

We'll take our next question from Peter Ruschmeier with Lehman Brothers.

Thanks, good afternoon. Had a couple questions. One is, can you help us to better understand the potential tax leakage from the $40 million LKE balance if you cannot find matches? I mean, is it--is it more than a modest amount?

Well, the $40 million was something that we put up, I guess, opportunistically if we could find a match. The guidance I gave you for the full year around that 17% range did not assume that that was matched. So there really won't be any leakage from that versus that full-year estimate that I gave you.

Okay. I guess shifting gears back to the entitled lands, I'm curious if you could help us to better understand what kind of time period. If you look over the next ten years, how big is the pipeline for entitled lands? Are we talking about entitling 10,000 acres, 20,000, 50,000 acres? I mean, what would define success in that entitled land strategy over the next decade?

We're going through the process now, to tell you the truth, of looking at our lands, particularly all of our higher and better use lands and classifying that into what we feel we've already identified a number of strategic properties that we're in the process of entitling. We're looking at the remainder, looking at how much additional entitlement opportunity we've got, and I must tell you particularly in Florida, but also some in Georgia. And I don't think I can give you the kind of answer you're looking for right now, Peter. But that is a process that we have underway. We think there is more opportunity for value creation through that entitlement process than we had previously estimated.

Okay. And I guess on a related question. In the past you've indicated interest in finding JV partners, I think, to help you with that process. Is that something that you're still actively engaged in looking at, or is that something that could be much further out in the future? Any update on that?

We're actually right in the middle of that on one of our strategic properties right now, and as Charlie indicated, we've been very pleased with the kind of response we've got. We've actually went out with an RFP on one of our major strategic properties looking for partners, and we've gotten great response from a number of national groups as well as local groups that are interested in partnering with us. So we're--what we're doing is in some cases, we're actually pursuing the entitlement process ourselves with our own staff and outside contractors, and in other cases, we're actually working with and will work with partners to go through that process. So it is not either or, it's actually both.

Okay. That's helpful. If I could switch gears, maybe lastly, looking at your Timber basket and some of the things that are going on with biofuels and pelletized wood, are you seeing much of this in your backwoods, so to speak, either competitively in the basket or are you selling to these types of customers? And what's your expectation as to how that evolves over time?

We're beginning to see that develop. It is not yet at a point where we're seeing demand, but in Georgia we've had, I think, three pelletized wood plants announced that would actually develop pellets, I think primarily for export for fuel to Europe. We've seen one new cellulosic ethanol plant announced. In fact, it was a major announcement last week. And they're talking about actually having a plant built and in operation by end of next year. So we're beginning to see that process move forward, which eventually, we think is, obviously going to be a new set of customers for our Timber business.

And I'm sorry, just lastly on a related note, does it alter the way you think about selling wood from your forest to some of these new sources of demand, or is it just too early to comment on that?

It's really too early, I think, to comment on it. I will tell you, we've established a task force in the company just to look at the issues across the whole range of policy changes as well as business changes that are going on related to climate change and energy, because we think there are significant opportunities down the road in trying to get a better definition on that is one of the things we'll be working on over the course of the next few months.

Very good. Thanks very much, Lee.

You bet.

We'll take our next question from Claudia Shank with J.P. Morgan.

Thanks very much. I was hoping you could comment a little bit on the export market. I was a little surprised that you mentioned that exports were down in the quarter. I know they had a--you had a good quarter last quarter, but maybe some comments there on what you're seeing and if you're seeing any initial impact from the Russian wood situation, either here or in New Zealand?

Tim, you want to comment on that?

Sure. First, the export market, we were pleasantly surprised with the export market as we saw it towards the end of last year and into the early part of this year when we were selling a substantial amount of our standing timber on the west coast. And so that was quite encouraging to us, and we saw volume moving in that direction. As we've come into the latter part of the second quarter, though, what we've seen is that some of those markets, particularly South Korea, has a backlog of inventory that they've developed. Now we're seeing some of these customers who actually had acquired some of the timber, but it backed off a little bit in terms of how quickly they're harvesting that timber on the west coast. To answer your question in relationship to the Russian tax, the tariff, of course it's early days, that tariff went into effect the first of July. We are anticipating maybe a slight influence as a result of that, but probably aren't going to see a great deal of influence on that until January of '09, if and when that 80% tax kicks in at that point. So we're just kind of seeing how it goes. We really haven't seen very much impact of it as yet, even though it's at 20%. Supposed to go to 25% in April of next year, but at this point we really haven't seen much impact. This is more from what we saw December, January, February time frame, particularly South Korea.

Okay, thank you. That's helpful. And then I was just wondering if you could comment a little bit on the mix. It sounds like you've had some mix improvement in your log business. Is there more to come there and is there any color you can just put around sort of how the improvements sort of come, where it's come from?

In terms of the northwest, just basically a general shift that we've had in mix, nothing substantiative. The market, for instance, for some of the minor species has been very strong and so we've had a few tracks where we've been able to sell those at some good pricing. So it's just a general mix issue, but nothing I would point to at this point that would say long-term. It's a substantial change.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) We have no further questions at this time. I'd like to turn the call back over to Mr. Vanden Noort.

All right. Thank you very much. I'd like to thank everybody for joining us and please contact Parag Bhansali with any follow-up questions. Thanks again.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.