Rayonier Inc (RYN) 2007 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 is copyright 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 would like to turn the call over to Senior Vice President and Chief Financial Officer, Mr. Hans Vanden Noort. Please go ahead, sir.

Thank you, and good afternoon. Welcome to Rayonier's investment teleconference covering third quarter earnings. Our earnings statement and supplemental materials were released this morning and 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 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 are also referenced on page 2 of our supplemental material. Please familiarize yourself 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. At that time, I'll review each of the businesses. In addition to Hans, with me today are Tim Brannon, who's our Senior Vice President, Forest Resources; Charlie Margiotta, our Senior Vice President for TerraPointe, our real estate business; and Paul Boynton, our Senior Vice President for Performance Fibers. We'll all work together to respond to questions when we get to that part of the discussion.

We're very pleased with our third quarter results. Had strong earnings and cash flow that reflect the strength and diversity of the three core businesses at Rayonier. In particular, the results were driven by performance fibers, which continues to experience strong demand and prices for our specialty cellulose and fluff pulp products as well as our real estate business which closed on a $46.6 million 31 acre rural land sales in Florida. I'll talk more about these businesses later. Now let me let Hans go through the financials.

Before I do that, let me say that I know a number of you are interested in 2008. You need to realize we've yet to complete our budgeting process for 2008, so during this call, we're not going to provide any guidance for next year. Instead, we'll provide that guidance during our January call and we'll plan on updating that annual guidance each quarter thereafter. Hans, go ahead.

Thanks, Lee. Let's start on page 3 with the overall financial highlights. As Lee noted, we followed the second quarter with another very solid quarter. Sales totaled $334 million, resulting in operating income of $93 million and net income of $72 million or $0.90 per share. There were no special items this quarter. However, last quarter included a $10.1 million charge for an estimate of prior damage to our timber. Excluding this impact, operating earnings would have been $66 million and net income of $43 million or $0.55 per share. Also, the third quarter of 2006 had a special item of $5.3 million for a favorable settlement with the IRS, covering tax years 2000 through 2002. Excluding that gain resulted in pro forma net income of $50 million or $0.63 per share for that quarter. These pro forma amounts will be the basis for comparisons on our later charts.

On the bottom of page 3, we provide an outline of cash resources and liquidity. Cash provided by operating activities for the nine months of $264 million was $42 million above last year, reflecting higher operating income and improved working capital. Cash used for investing activities of $84 million was $15 million below last year, primarily due to lower capital expenditures and timberland acquisitions. Cash used for financing activities of $129 million was $27 million above last year. That's mainly due to the repayment of debt at our taxable resubsidiary. Adjusted EBITDA of $334 million was $70 million above the prior year, driven by strong real estate and performance fibers results, while cash available for distribution of $217 million was well above last year's $146 million. We'll take a look at CAD a little bit later. Our debt and debt to capital ratio were below year end and we ended the quarter with approximately $92 million in cash.

I'd also like to briefly comment here on the $300 million exchangeable note issuance just completed. These five year notes were issued by our taxable resubsidiary and bear interest at 3.75% with a 22% conversion premium. To minimize potential dilution upon conversion, our taxable resubsidiary and Rayonier Inc. then entered into separate hedge and warrant transactions to effectively increase the conversion premium to 40% or just under $63 per share. We're very pleased with this transaction, as we'll be able to use this low-cost debt to pay off $113 million of 8.3% notes at the REIT as well as higher cost borrowings under our revolver, while still increasing our ability to act quickly on suitable timberland acquisitions.

Let's now turn to page 4 for the first variance analysis. Here we show a comparison of third quarter to second quarter pro forma earnings. We begin with $0.55 in pro forma earnings per share for the second quarter and come down to our third quarter earnings per share of $0.90. Working from the pretax column, our timber operations have a $9 million decline driven by lower prices in Florida and Georgia due to fire damage salvaged timber and seasonally lower volumes in the western region. Our real estate results improved $24 million primarily because of strong rural property sales and in particular the $46 million in west central Florida that Lee referenced. Continuing down the page, performance fibers benefited about $3 million from increased volume in both cellulose specialties and absorbent material and $9 million of lower costs. These resulted primarily from reduced conversion costs. Finally, on the tax line, our third quarter effective tax rate was just below 10% reflecting the low built-in gain on our third quarter real estate sales which has reduced our estimated full-year rate.

Let's now move on to page 5 to briefly review the year-over-year variances. Here we begin with last year's third quarter pro forma earnings of $0.63 per share. Overall, third quarter timber results declined $5 million compared to prior year, again, due to decreased prices from the sale of the fire damaged salvage timber and a change in mix between pulp and saw timber which Lee will touch on later. Next, real estate earnings were up, reflecting the strong rural sales noted earlier. Performance fibers results reflect strength in prices in both cellulose specialties and absorbed materials, and lower costs primarily due to the absence of some one-time costs incurred in last year's third quarter. Interest expense -- net of interest income was $6 million above third quarter 2006 due to higher average debt levels and a $2.3 million accrual related to a disputed tax item with the IRS. These amounts bring us to the current quarter's pro forma earnings of $0.90 per share. The major causal factors for the business unit's third quarter variances generally apply for the nine-month period shown on the right part of the page.

Let's now turn to page 6 to review cash available for distribution. On this page, we reconcile from the cash provided by operating activities, which is a GAAP measure, to our nonGAAP metric of cash available for distribution. We deduct capital expenditures for cash provided by operating activities and adjust for any equity-related cash flows like kind exchange tax benefits and changes in committed cash to arrive at what we consider operationally generated cash available for distribution. For the nine-month period, cash provided by operating activities was $264 million. From this, we deduct net capital spending of $67.4 million. This was $21 million below last year, which as you may recall included investments in our performance fiber mills to significantly reduce our fossil fuel consumption. Next is the $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 of 2007. Though the payment wasn't made by year end 2006, we reduced 2006 reported CAD to effectively consider this as a 2006 outflow. Therefore we need to add it back so it doesn't show as an '07 outflow. We adjust for equity-based compensation adjustments and then make a deduction for lifetime exchange. The net of these amounts results in CAD of $216.7 million versus $146.3 million last year. With that, let me turn the conference over to Lee to cover our markets and operations.

Thanks, Hans. In covering the businesses, I'll briefly review the third quarter and then discuss the outlook for the fourth quarter. Please keep in mind that much can happen between now and the end of the year.

Let's start with a review of our timber segment. Look on page 8 of the webcast. For the west you can see the normal seasonal decline in volume. Prices also declined versus the second quarter and comparable period last year due to harvest mix, reflecting reduced demand for saw logs somewhat offset by strong public demand. For the fourth quarter, we expect sales volumes to be lower, reflecting reduced saw log demand. However, due to mix, prices for the fourth quarter should be slightly up sequentially but will remain below last year's fourth quarter. For the year, sales volumes and prices are expected to be down versus 2006, largely reflecting mix again.

In the east, on page 9, volumes increased sequentially and compared to the third quarter last year, reflecting increased fire salvage timber volumes and strong pulpwood demand. Prices declined sequentially and were below last year's third quarter due to lower priced salvage timber and higher pulpwood volumes. We continue to experience strong pulpwood demand due to favorable global pulp markets and a lack of residual chips from sawmills. Grade markets remain depressed due to lumber mill curtailments driven by the weak housing market. As a result, we've shifted our product mix focus towards pulpwood. Although this generally results in lower operating income, it drives solid cash flows. For the fourth quarter, we expect sales volumes to be down, reflecting reduced saw log demand and lower salvage timber volume. However, due to lower salvage volume, prices for the fourth quarter should be above last quarter and in line with fourth quarter last year. For the year, volumes are expected to be up 17 to 19% due to harvesting salvage wood from the fires. Likewise, prices are expected to finish about 11% below last year, also due to salvage harvest.

Turning to lumber on page 10, which as you know is a small part of our business, prices rebounded slightly compared to second quarter, but remained down compared to the third quarter last year. Volume was comparable to last quarter and slightly below last year's third quarter, reflecting continued weakness in the housing market. For the fourth quarter, we're expecting average prices to be slightly below the third quarter but above fourth quarter last year. Volume is expected to be in line with last quarter and slightly above the comparable period last year.

Turning to real estate, before I get into the operating details, let me remind you that given the nature of the business, is likely to be variability from quarter to quarter as well as to some extent year-over-year. Third quarter is a good example of this in both our development and rural businesses. As you can see on page 11, we did not close on development sales this quarter, reflecting both the shift in our emphasis from sales of these lands to entitling activities to unlock long-term value as well as the softness in demand due to the weak housing market. On page 12, you'll see some of the activity currently underway in our Coastal Corridor properties. In Georgia, we're pursuing entitlements on 3300 acres of land in the Richmond Hill area near Savannah. This property spans Interstate 95. This project's in the final stages in the regulatory process. In Nassau County in north Florida, we're actively engaged in land planning and exploring joint venture opportunities for 24,000 acres with six miles of bluffs along the St. Mary's River. In Flagler County, Florida, we're pursuing a joint venture opportunity for our 6300 acres called our Three Lakes Property.

Moving on to page 13, you'll note that the rural sector remains strong. Rural acres sold were well above last quarter and third quarter last year. Prices averaged over $10,000 per acre. As I noted earlier, the improvements were driven by $46 million, 3100 acre land sale in west central Florida to an industrial buyer. In the fourth quarter, we expect to see continued softness in the development land market, partially offset by stable demand for our rural properties. Development sales volumes are expected to be down compared to a very strong fourth quarter last year. Rural sales volumes should be down as well compared to third quarter and last year's fourth quarter. We expect to finish with a very solid year for real estate with results above those of 2006.

Now, on page 14, you can see performance fiber's net selling prices for both our cellulose specialties and fluff products. In looking at cellulose specialties business, which represents approximately 65% of our performance fibers volume, prices for the third quarter remain strong due to continued favorable demand for these products. Average third quarter net selling prices were roughly in line sequentially and up 7% compared to third quarter 2006. As you look at fluff net selling prices, you'll note the continued improvement in fluff prices quarter over quarter -- increases that began back in 2006. Third quarter 2007 fluff prices were 4% above the prior quarter and 12% over third quarter 2006 due to the strength in the pulp market.

Page 15 shows performance fiber sales volume. Third quarter cellulose specialty sales volume was 7% above second quarter and 6% above third quarter 2006, mainly due to the timing in our customers' requirements. Our absorbent materials third quarter sales volume, which is principally fluff pulp, was above second quarter due to the planned maintenance shutdown in the second quarter and above third quarter 2006, reflecting continued strong demand. For the fourth quarter, we expect cellulose specialty prices to be comparable to third quarter 2007 and to be above fourth quarter 2006. Volumes are expected to be up sequentially and generally in line with a very strong fourth quarter last year. For absorbent materials, we expect fluff prices to be up both sequentially and compared to fourth quarter 2006. Volumes are expected to be up sequentially and comparable to the fourth quarter of last year. For the year, we expect cellulose specialties prices to be up 9 to 11% compared to 2006, while volumes are expected to be up 1 to 2%. For absorbent materials, we expect prices to be up 11 to 13% compared to 2006. Volume should be down 4 to 6% due to the extended maintenance shutdown we took this year. Now with that overview, let me turn it over to the operator -- or turn it back to Hans. Go ahead, Hans.

Thanks, Lee. With that, we'll turn to page 16 to review full-year earnings. Excluding the impact from the Georgia and Florida timberland fires, we expect earnings between $2.25 a share and $2.32 per share. That's in line with the guidance we provided last month. Before I close, I'd like to share a few key statistics for the full-year '07 that are relevant to some of you maintaining your models. First, excluding the depletion charge for the fire damaged timber, we expect depletion, depreciation, and amortization of $155 million and the noncash cost basis of land sold of about $9 million or approximately $164 million in total. Capital expenditures excluding acquisitions are expected to range between $92 million and $95 million. With respect to our investment in New Zealand for 2007, we expect $2 million to $3 million in equity income from the joint venture and cash flow of about $6 million. Our year-to-date effective tax rate before discrete items of 14.5% is comparable to the prior year and is in line with our estimate of the full-year rate. However, this rate can vary based on lifetime exchange benefits and the mix of income between our REIT and TRS businesses. With that, I'd like to close the formal part of the presentation and turn it over to Lee for some closing comments.

Let me just conclude by saying we feel we're well positioned with our three core businesses. We had a strong third quarter, and we feel that 2007 will be a good year for us, with results between $2.25 and $2.32 -- well above last year's results. With that, let me turn it back to the operator, and let's take your questions. Operator?

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll pause for a moment to give everyone the opportunity to signal for a question. We'll go first to Mark Weintraub with Buckingham Research.

Thank you. Lee, when you're looking at acquisitions, what criteria does it have to meet? For instance, when the Florida acquisition had been done several years ago, it was cash flow accretive but it was very earnings dilutive. What's your philosophy on acquisitions? And just as a follow on and connected to that, how much pressure is there on you to be making acquisitions, given the growth and profitability of the performance fibers business?

Let me take the first part of that, Mark. I would say we have several criteria we look at. A primary one is cash flow, and we look at cash flow accretion as a key criteria. Obviously, earnings is not going to be the primary factor we look at. We'll look at cash flows. We certainly go beyond that, though, and look at geographic positioning, how the overall species mix fits in, whether it is -- gives us the kind of increased diversity we're looking for both geographically as well as species. We also look at whether it is located in an area where we can cover it with existing manpower or need additional resources. So there are a variety of criteria beyond the financial criteria we look at. Having said all that, we, I think, are quite disciplined in the way we look at acquisitions. We're clearly acquisitive and have been, but we look at an awful lot more than we acquire. Particularly over the course of the last year, as I've seen prices escalate for timberlands. We still are able to acquire some in cases, I think, negotiated sales seem to be an approach we're able to be successful on as opposed to bids. But we certainly participate in both. As far as pressure, because of performance fibers, I really don't feel this pressure from performance fibers. It is a business that's performing very well. We feel confident in the future of that business and the way we look to that business. I would say our timberland acquisition is a part of -- is much more a part of our overall strategy for growth for the future. So we look at it as a key part of how we want to go forward overall and don't feel it's because of some particular pressure from one business or the other. Hans, you want to make a point?

Mark, you may have been referencing perhaps potential pressure on the retest.

Yes.

A couple points there. As far as the income test goes, recall that's based on the actual dividend of income from the TRS to the REIT which is something we can control. That's something we monitor basically every month and see what that limit is. We basically manage to that limit from the income test perspective. From the asset test side, again recall that it's based on the net assets of the TRS. We review that quarterly. Some of the debt that we just placed for example was actually placed in the TRS, which as we move the cash out, we'll have effect of actually reducing the net [asset] to the TRS. Right now there's no immediate pressure from the asset test perspective as well.

Understood. I guess the question, though, would be if this level of relative earnings performance were to continue, say, for an extended period of time, five, seven years, whatever -- at some point does it become an issue and do you have to start thinking and managing to that, or does it not even over more extended period of times?

I would say, Mark, as we've looked out over the long term with our strategic planning process, we feel that's not an issue we're going to confront as a significant problem. We feel like we'll be able to manage both the top and bottom of that equation well.

Lastly, so do you -- given the terrific performance right now in performance fibers, do you still view it as something much more valuable to you than it could be to somebody else?

We do. It's a strong business. As you know, it's a unique business. We have very much a niche in that [dissolving] business and provides very strong cash flows.

Thank you.

We'll go now Steve Chercower with D.A. Davidson.

Thanks. First question, wanted to determine whether the tightening credit markets are having an impact on your land sale or do you expect they will?

As I indicated, there's no question that there's -- the weakness in the housing market is having an impact as far as development land sales. It coincides, frankly, with our overall strategy to spend more time in titling those lands ourselves. So I would anticipate as I said next year you'll see less acreage sold by us in the category that we would have typically called development lands. We continue to have strong demand on the rural side, but I think there is -- clearly a relationship between the weakness on the housing side and demand for development acres. I think we'll see that until the housing picks back up. I'm anticipating the next, year, eighteen months or so, that's what we're going to see.

Switching gears. On the specialty cellulose, do you have built-in price escalators to your clients? So will we see more upside in pricing next year?

We have, as we've said in the past, we have long-term contracts with the vast majority of our customers. We do review with those customers pricing generally on an annual basis and negotiate prices largely depending on market conditions at that point in time.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Ross Gilardi with Merrill Lynch.

Good afternoon. Thank you. Let's just talk a little bit more about what gives you confidence that rural land demand in your key southern states is going to continue to hold up in this environment.

Really, it's the continued inquiries we get. For our rural lands that are in our REIT, we don't market those lands. We get inquiries -- unsolicited inquiries. And we have continued good volume of that. I would say for recreation purposes, conservation purposes and in some cases industrial and commercial purposes. Charlie Margiotta, you want to add anything to that?

No, only that we're in several states and different states have got different activity. Georgia is a bit slow but the rest of the states are quite strong. Florida's strong, Alabama's surprisingly strong. The property we recently purchased in Texas also appears to be quite a strong market. So no, it overall hasn't slowed down. Whatever credit crisis there is doesn't seem to be directly impacting the rural program.

Thank you. Could you talk more about what you're seeing in the timber export markets out of both the U.S. and New Zealand?

Tim Brannon, do you want to comment on that?

Sure. Certainly in the Northwest early in the year, we were quite pleased with the export activity. We weren't directly involved in it, but our customers were taking a fair amount of wood, and it was going overseas, particularly to Korea, and we were pleased with that. The market did slow up during the summer months, but we're expecting that to continue to be at a relatively good pace for us going into next year. Much of that timber that's been going out from the Northwest has been going in containers and at a relatively attractive rate. Unfortunately, out of New Zealand it's been much more difficult because the overseas freight has gone up quite substantially, and that has been a deterrent to the export market out of New Zealand. It is continuing, but it has made it much more difficult and prices there fortunately have gone up some. But it's pretty tough going in the export market out of New Zealand right now.

You don't have the same freight rate issues coming out of the U.S.?

No. That has not been the case, because as I say, much of that wood that's been going to our customers is going by container into Korea and other markets. So it hasn't been nearly as severe a situation as it has been in New Zealand this year.

You have such a great rate on containers going back to Asia because you have so many coming into the United States.

I see. Thanks for clarifying.

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

Thanks. Congratulations on a very nice quarter, guys.

Thanks.

I wanted to ask you a little about the huge per acre value you got in your west central Florida property. Can you give us a little more color on exactly where that was and what the attributes of that land were that allowed you to demand such a high price?

Yes, Charlie. Why don't you do that?

I thought I might get that question. So the best answer I can give is it was an unusual sale by size but not by price. It's an industrial buyer who had a very specific need and frankly we had what that buyer was looking for and the per acre price of $15,000 an acre is certainly what industrial land brings. The 3100 acres was a bit unusual. That's about 5 square miles. That's an unusually large size. It's just a very unique situation where a buyer for this industrial property came along and wanted a property that's this large. We get inquiries all the time. This one worked out.

What makes a property suitable for industrial purposes as opposed to other types of property?

I'm sorry, say that again.

You mentioned the fact that we shouldn't be shocked by the per acre value because this was industrial property, if I heard you correctly. I'm just wondering what attributes of the land itself would make it suitable for industrial and therefore demand a higher price.

Well, they needed access to water for their operations, so that was one thing. Second, they needed direct access to paved highway frontage. That was number two. Three, they wanted it somewhat isolated, so the attributes were a bit unusual to find all three. Lastly, they were looking for a large parcel where they could negotiate with one land owner. They didn't want to amalgamate. They needed a large parcel -- again 2,000 to 3,000 acres -- and they really didn't want to spend a long time trying to amalgamate a property of that size. So they were able to negotiate with one party in a relatively short period of time and get the deal done.

That's very helpful. Thanks, Charlie. Moving on to the development area, we saw that there were -- there was no sale of development land in this quarter. You took an extra slide to talk about activity that continues in this region. I'm wondering, to what extent you guys are feeling pressure from investors or who have you to put together sort of a steady pipeline of sales in each bucket, and how you balance that against the potential danger that you might be leaving money on the table by striking deals at (inaudible) conditions.

We went through those very questions last year, or earlier this year, as we worked on our longer term plan. That was when we concluded we really wanted to spend more effort and more time on the entitlement process ourselves and pull back from trying to sell as many of the development acres as we may have in the past, because we saw the real value opportunity in entitling those lands. As it turned out, given where the housing market has gone, it coincides with the marketplace. We don't feel that there is pressure for us to push forward and sell lands prematurely. So our strategy, in fact, doesn't do that. One of the things we tried to do on these large projects in this package that you see is give you a little more understanding of the size of the projects, the three big ones that we have work underway and the status of those projects. The one in Georgia, which we've just about completed the entitlement process, the one down in Flagler County where we're very close to selecting a joint venture partner and have begun the entitlement process. The one in Nassau, which is a very large project and one where we just about completed our master planning process and will now begin selecting a joint venture partner, and we're also making progress to begin an entitlement process. In addition to those big development projects, we have a number of other properties that we work on -- both identifying and beginning to look at how we would proceed with an entitlement effort. It's not to say that we may not find at point some of that land that we feel is more valuable to someone else than us, but we're not pushing land forward because we feel there's some need to sell that land prematurely. Frankly, one of the advantages we have over some other companies is we've got three well-balanced businesses that give us the staying power to realize good value from the terrific land assets we've got.

Okay, great. Thanks for that detailed answer, Lee. My final question concerns performance fibers. Performance there is certainly quite impressive, especially relative to the historical trend. I'm wondering to what extent you see, say over the medium term, the threat from new capacity coming on in different part of the world to your price and margin outlook going forward.

I'm going to let Paul Boynton respond to that.

Hi, Chris. I think over the medium term, we can expect to see pretty steady results that we've already seen today. Even with competitive activity coming on, in the broader dissolving pulp market, you've got a viscous pulp market out there, much larger than our market. And the market for products made from the viscous pulps is very strong right now. Everything that we look at in the industry, analysts look at -- that's going to stay strong as we see it for three to five years on out. And we believe that will help keep our business and our markets strong, as some players can switch in and out to some degree of viscous market. So we think the outlook is good. We feel positive about it. We continue to work on things things to differentiate our products in the marketplace and raise the bar against the competition. We'll continue to work on those going forward as well as work on the cost side of our business so that we can remain competitive as well from a cost standpoint.

I think the point that Paul makes about that broader viscous market is an important one. A good bit of the capacity that's going to be coming on over the course of next year is from competitors who primarily compete in the viscous market, in that broader viscous market. Because of the strong demand in that market, with spot pricing in places above the acetate market, which typically has been significantly higher, we think a lot of that capacity is going to go to satisfy that demand. So given that as well as the kind of long-term volume contracts we have with our customers, we feel we're well positioned over the course of the mid-term as you say with our acetate business.

Great. Thanks for your help.

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

Thanks, good afternoon. Maybe following up, if I could, on the pulp price question. I'm curious if perhaps Paul could remind us on what percentage of the pulp that you sell is on a longer term contract basis versus quarter by quarter spot basis?

Yes, Peter. Virtually all of our cellulose specialty business is in longer term contract. Therefore, when I say longer term, I'm talking not just a year or two, but up to five years out, a large percentage of that anyway.. The majority is under long term contract. The other part of our business, the absorbent materials or fluff pulp that we talk about, tends to be shorter term. Even there, the contracts tend to be one to two years out. So even both sides of our business are relatively steady in terms of volume and contract periods.

And can you remind us when you typically have -- I believe you have annual pricing negotiations, especially on the specialty cellulose pricing? Is that discussion coming up and can you share with us any preliminary expectation for 2008?

I can't give you any 2008 outlook other than the fact we have been in those discussions for months now with our customers and we'll continue to do so and we'll give you that guidance when it comes to the January call.

That's helpful. Lee, if I could follow up, I want to make sure I understood your answer on the developmental lands and the opportunities you have. It sounds like if you look at Nassau County, Flagler, you've got some real opportunities, but it seems that the timing is perhaps centered around the market and the land absorption rates. And I was curious if maybe Charlie could comment on -- based on the land absorption rates you see, if demand doesn't pick up from the current run rate, what kind of overhang are we talking about? Are we talking about several quarters, several years? What kind of period of time is needed to chew up the land that's out there so that we can start to get into the front end of Nassau County and Flagler?

Let me make a comment and we'll let Charlie jump in. I think first you have to understand that in some cases we're looking at two to four years to go through the entitlement process and then with the joint venture partner be prepared to go forward with actual development, particularly on a property like Nassau. And probably 1 to 2 years on the Flagler property. Shorter time frame on Georgia, but when you look at something like -- we'll take Nassau, you're talking about once you begin development, multiyears of development on that property. Nassau, that 24,000 acres is closer to the size of Hilton Head. That's been developing for 50 years. So those are long-term properties with long-term value. The front end is a time-consuming process, but then the actual development is a long-term value proposition. Charlie, you want to talk some about it? Because you spent a lot of time looking at it.

I really can't add that much. I will point out that these three projects are in three different counties, one in Georgia and two in Florida. But we will continue to make small sales or other sales in other counties, particularly on properties that don't compete with these. I think that's the critical point. We don't want to complete with ourselves or development absorption or market absorption. So there are several counties where we've got ownership, more fragmented ownership where we'll continue to sell and they'll make up the bulk of our development sales over the next one to two to three years. As Lee said, these projects which are tremendous value-added activities will take time to get into the ground and lots to be sold. So we're pretty excited about these projects, but it does take time. As I said, we'll continue to make other development sales.

Okay. That's helpful. One last question, if I could, and maybe coming back to Paul, I'm curious now that you've had a couple quarters on the Jesup energy project, I'm curious if that project stacked up to its expectations and whether you look at that as an opportunity for other energy projects, given that energy seems to be a one-way bet in recent years?

That's a great question, and I think the project you're referring to is our Fernandina biomass powerboiler.

I'm sorry, that's right.

We got it up and running at the beginning of this year. That was a great project. Came in on budget on time and it's proved out to be very good to us through the course of the year and it will for years to come. The question are we looking at things like that? And the answer's definitely and particularly at our Jesup facility. We think there may be a model similar to that that we can put into Jesup. We also have some other opportunities for energy-related cost reductions in Jesup. We have commissioned a couple teams to continue to look at that and see if we can't bring those home. Likely in 2009 and beyond when we'll actually implement those.

What kind of capital might this be? Order of magnitude, what kind of capital would be required to repeat what you did in Fernandina?

It's real early to say what that capital would be. But I think Fernandina's a base number. And building on that's probably a good comparable.

Thanks very much.

We'll go next to Tyler Old with JPMorgan.

EBIT margins in the Southeast timber business have been declining pretty significantly over the past several quarters. I know you had some fire-related activity there in the third quarter, and mix has changed a bit, but what else has been driving those trends?

Those are the two big things. In other words, the salvage wood actually drove down margins substantially and then the mix from saw logs to thinnings and pulp wood as well. Tim, you want to comment on that further?

Right. Obviously what's happened to us is with the lumber market being down as much as it is, people are reluctant to get in and harvest very much saw timber or chip and saw or what's referred to as canterwood and prefer then to be harvesting pulpwood which is in greater demand. And so that, of course, has been a detriment to us as we've gone into 2007.

One other thing, if I could comment. As we make acquisitions, those come in typically at a much higher cost basis than some of our traditional timberlands. So you typically will have a higher depletion cost. I think it was referenced earlier in the call. Someone was talking about that, some of these acquisitions not necessarily accretive, and that's part of what you're seeing here as well is some of those newer acquisitions coming online with a much higher depletion basis. So we're typically evaluating our timber basis on an EBITDA basis versus just an EBIT basis.

Great. Thank you. Can you just talk briefly about some of the opportunities you may be seeing in biomass and cellulosic ethanol? Obviously it's still early days but how do you see the ramp up curve for some of these projects?

It is early days, and as you know, there's a good bit of interest and good bit of discussion about it. We've seen interest and some activity on things like wood pellet plants for fuel. We also saw the announcement of a major cellulosic ethanol plant in Georgia that's supposed to break ground shortly. My own sense is we still may be early on from a technology point of view in cellulosic ethanol. But that will be a good plant to watch and actually see if they are able to move into full production. That's certainly their plan. If a lot of what we hear comes to fruition, I think several years down the road we'll certainly see increased demand for our timber products. But at this point in time, I think it's pretty early to see that.

Can you break out DD&A from the land basis? I think they're combined on the cash flow you provide.

Yes. On the year-to-date, let's see if I got that for you handy. On the year-to-date, we're looking at about $8 million of noncash cost of land.

Great. Thank you.

You're welcome.

And we'll go to Chip Dillon with Citi. Mr. Dillon, your line is open.

Chip Dillon? Hello?

Chip, is that you?

Yes. Hi there. Good afternoon. First question is as I'm looking here at the fourth quarter, I'm having a dickens of a time getting you down to $0.42 unless you, I guess, sell I mean -- I don't see how your performance fibers margins will go down given the price guidance you gave us. And if they stay in the 22.5% range, it looks like you're going to clearly have up income there, and even if your land sales come way in, am I missing something? I mean, do you expect to have less than, say $4 million or $5 million sequential income improvement in specialty pulp, I mean, performance fibers?

Yes.

So then your land sales income must be in single digits?

That's right.

That's helpful. And then the other question I had is I think you said that for the year that the land basis would be about $9 million?

That's correct.

I might be missing something but it looks like in the nine months that the EBIT is about $87 million but the EBITDA is $99 million. So I think that means the basis if I'm not mistaken is $12 million.

We had some depletion that came through on some of those sales as well in addition to the land basis per se.

Okay.

So that's the difference that you're looking at there, Chip.

How much was that depletion so far?

That depletion was about a little under $5 million on the year-to-date basis.

Okay.

Noncash in total on the year-to-date should be about $13 million including depletion and the noncash cost of land.

Okay. Usually the depletion and the noncash costs of land is, like, what 15 to 20 to 25% of the total revenues?

It's typically 10 to 15%.

Okay. All right. That gets me. Next question is if I just sort of eyeball next year, one could envision -- I'm not going to hold you to this -- but one could envision a $200 million type income year in performance fibers, which is a great circumstance for you. As we do our models, obviously you're protecting that by the bond issue. And you explained that pretty well, but do we -- at least for reporting purposes, will you sort of accrue that the taxes at that level on the income statement we see, even though it won't be -- it won't really affect your REIT status?

Yes, I mean, our taxes are always computed -- basically we have two separate tax paying entities. It will go through the calculations and every month we update our forecast for the year what the tax expense is going to be on a consolidated basis. We basically have to apply that ratably based on the overall effect of rate to the income that's been earned to that point in time. But you have two separate tax paying entities. That's absolutely correct.

In that sense then it would seem like you're going -- I don't think you gave us guidance. You're going to look like a regular company. You're going to have close to a 30% effective tax rate in the fourth quarter, I would think.

The four discrete items are about 14.5% and that's what we would expect to come in for the full year.

Right. Okay. Well, I just -- I see, because of the year impact. I understand.

Right.

But if you extrapolated the fourth -- as we look at next year, I mean, if you look at this year, I know in the first, I see where you're coming from. That's really saying you're going to have about 19 or 18% except for that third quarter where you had the big land sale gain. Next year could clearly be in the 20s, right -- if we assume real estate's not up any and the timber business stays under pressure.

We haven't even begun to put together tax rates so I wouldn't want to make a guess now, Chip. As Lee mentioned, we haven't even completed the budgeting process on a pre-tax basis, much less after-tax.

Okay. And then as we look at the bond issue you just did, which seems to really be a smart thing, your interest expense is $15 million in the third quarter. From my read it would seem like it could go down, I don't know, maybe by more than a third on a quarterly basis going forward in a full quarter like in the first quarter of '08.

I would say with the debt that we're paying off on a full-year basis, because we're paying off debt from the REIT which didn't have a tax shield of about $113 million plus the $65 million from the revolver, you're probably on a pro forma basis around $8 million of interest savings.

Per quarter?

Full annual.

Oh, annual. Oh, just $8 million?

From those two issues. That's right.

Okay. And why just $8 million? Because I thought the rate was much lower on this debt because of the converting feature. Is there something I'm missing?

No, it's just the coupon's 3.75%.

And what you're retiring has a rate of?

Of 8.3% and the revolver borrowings are around 5.6 or 5.7. So on an after-tax basis, you net all that out.

Then when you look at the -- I've got one more question here. I forgot what I was going ask you -- what I was going to ask you here for a second. I'll come back into queue if I remember it. Thank you.

It appears there are no further questions at this time. Mr. Vanden Noort, I'd like to turn the conference back over to you for additional closing remarks.

I'd like to take this opportunity to thank everybody for joining us. Please contact Carl Kraus with any followup questions. Thanks again.

This concludes today's conference. We do appreciate your participation. You may now disconnect.