Rayonier Inc (RYN) 2007 Q4 法說會逐字稿

Thank you for standing by. You're currently on hold for today's Rayonier Fourth Quarter earnings Conference Call. Currently we are admitting additional participants and should be starting momentarily. We appreciate your patience and ask that you please remain online. Please stand by, we're about to begin. Good day, everyone and welcome to the Rayonier Fourth 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 expressed permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded.

At this time for opening remarks and introductions, I'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 fourth quarter and full year 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 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 list the factors which may cause actual results to differ materially from the forward-looking statements we may make. They're also referenced on page 2 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. First I'll make a few overall comments. Hans will then take you through the financials, after which Tim Brannon, Senior Vice President, Forest Resources and Charlie Margiotta, Senior Vice President and head of our real estate business, will review those two business segments. I'll then take you through performance fibers since Paul Boynton, our Senior Vice President for Performance Fibers and Wood Products is traveling.

As expected, each of our three core businesses contributed to a strong 2007 performance, despite the challenges from soft timber and residential real estate markets. In particular, results were driven by significant contribution from our Performance Fibers business, which capitalized on strong global markets to achieve record results.

As I finish my first year as CEO at Rayonier, I feel good about our results in '07, the capability of our management team, and the position of our businesses going into 08.

In Timber, our strategy is to grow and upgrade our portfolio. We will continue to pursue timberland acquisitions with a disciplined approach. As part of our strategy, we'll initiate sales of non- strategic timberlands which Charlie will describe shortly. We have flexibility to adjust our timber sales mix and reaction to varying market conditions. Currently, we see weakness in saw log markets but demand for pulp wood remains high.

Accordingly, we plan on selling timber tracks with a high proportion of pulp wood, while preserving our high value saw timber until markets improve.

In Real Estate, we're staying the course with our strategy of entitling our strategic development properties to drive long term shareholder value. In addition, we see continued interest in our rural properties from a wide variety of buyers. in performance fibers, our strategy focuses on product differentiation and operational excellence. We expect even better results in 2008 due to favorable market conditions for both sale of cellulose specialty and fluff pulp as well as our cost reduction efforts. Overall, we expect another good year in 2008.

With that let me turn it over to Hans for a review of the financial results.

Okay, let's start on page 3 with the overall financial highlights.

As Lee noted, we finished the year with a quarter that was essentially in line with our guidance. Sales totaled $290 million resulting in operating income of $43 million and net income of $34 million or $0.44 per share on a GAAP basis. There was one special item this quarter which is a $0.01 per share charge for a final true-up of the write down of timber damaged by the second quarter wildfires in Georgia and Florida that we've previously reported on.

On the bottom of page 3, we provide an outline of cash resources and liquidity for the full year. The overall message here is strong cash flows. Adjusted EBITDA of $419 million was $49 million above the prior year driven by strong real estate and performance fibers results. In cash available for distribution, up $241 million, was well above last years $178 million. We'll look at CAD a little bit later. Our debt and debt-to-capital ratio were slightly above last year due to the $300 million of fourth quarter 3.75% convertible debt notes the issued from the TRS and $55 million of temporary debt at the REIT which has since been repaid. We ended the quarter with approximately $181 million in cash , so on a net debt basis, we finished at $569 million, $50 million below last year.

Let's turn now to Page 4. Here we prepared a sequential quarterly variance analysis. The major drivers here are a significant reduction in Real Estate operating income due to timing of transactions within the year. Moving down to Performance Fibers, you can see a $7 million negative variance in the cost of mix line with the bulk of this due to operational issues that resulted from unplanned down time. Lee will comment further on this a little bit later.

The last item of note is on our tax line which includes $4 million of favorable tax benefits primarily from deferred tax and FIN 48 adjustments.

Now move to Page 5 to briefly review the year-over-year variances. Here we begin with last year's fourth quarter pro forma earnings of $0.59 per share. Our Timber income was $7 million below last year, mainly due to lower saw log prices and sales mix. Next, our Real Estate results were $24 million below the fourth quarter of last year which benefited from two significant development property participation transactions as well as more rural acres sold. Performance Fibers' results reflect improved prices in sale of cellulose specialties and fluff, somewhat offset by the impact of the unplanned down time noted earlier. These events bring us to the current quarters results of $0.45 per share.

Turning now to the full year comparison, the right side of the page, the major drivers just noted for Timber and Performance Fibers apply to the full year results as well. In Real Estate, our 2007 operating income exceeded prior year due to very robust rural property sales, despite a comparatively soft fourth quarter due to transaction timing within the year. All in all, the $2.35 pro forma earnings per share for the year were quite strong given the weakness in the timber and housing markets and are a testament to the benefit of our business mix.

Let's now turn to page 6 to review cash available for distribution. On this page, we reconcile from cash provided by operating activities, which is a GAAP measure, to our non-GAAP metric of cash available for distribution. For 2007, our CAD totaled $241 million, substantially above last year's $178 million. This 35% improvement was driven by improved EBITDA from each of our three core businesses, as well as lower capital expenditures. CAD per share was $3.08, well above our current annual dividend rate of $2 per share.

With that, let me turn the conference over to Tim Brannon to cover Forest

Thanks, Hans.

For the West, on page 8, as expected, volumes were down sequentially as well as versus year ago levels reflecting the impact of a strong first half and somewhat softer demand in the second half of the year. Prices, however, improved compared to third quarter due to the mix of tracks harvested but declined when compared against fourth quarter 2006.

For the first quarter, volumes are expected to be up slightly on a sequential basis but well below first quarter 2007 levels due primarily to the soft housing market. Prices are expected to be weaker sequentially as well as compared to first quarter 2007. Of course, the Northwest is primarily a saw timber market. With the current softness in lumber, stumpage prices on average for 2008 are expected to be lower by 15% to 20% compared to 2007. As a result, we plan to reduce our 2008 harvest volume by 10% to 15% from 2007 levels but will continue to monitor selling prices and make further volume adjustments as is prudent.

Moving on to the East, on page 9. Volumes were up sequentially as well as compared to fourth quarter 2006. Prices, as expected, were higher compared to third quarter as we completed our fire salvage operations in Georgia and Florida. Compared to fourth quarter 2006, prices were lower reflecting our shift in product mix in response to the strong demand for lower-valued pulp wood. We continue to experience strong pulp wood demand due to favorable global pulp markets and the 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 have shifted our product focus towards pulp wood and our harvest volume to areas of greatest market strength.

Our 2006 timberland acquisitions performed well and that mix of volume helped buoy our overall average pricing in 2007. Our larger operating area provides us with flexibility to shift into markets that are more favorable and reduces the need to sell wood into poor markets. For the first quarter 2008, volumes in the East are expected to be down sequentially and compared to first quarter 2007.

Prices are expected to be below first quarter 2007; however they are expected to move higher from the fire salvage impacted prices in the fourth quarter. For the year, volumes are expected to be down 12% to 15%, reflecting the additional 680 thousand tons of fire salvage volume that was harvested in Georgia and Florida in 2007 and a generally softer saw timber market. Average prices for the year are expected to be about flat to slightly up as compared with our fire impacted prices for 2007.

With that, let me turn it over to Charlie Margiotta to review the Real Estate business.

Thanks, Tim. I'll make a few overall comments on our Real Estate business, review charts 10 through 12, and then offer a review on the 2008 real estate outlook.

The strength of our results is driven by the quality and geographic diversity of our holdings and our ability to sell properties in a number of markets for a variety of end uses. However, our Real Estate business is very much a tale of two markets. While weak housing has impacted and will continue to impact the sale of development acres, the rural market remains very active.

As we have discussed in the past, our strategy for highest value development property is to pursue and obtain entitlements and enter joint ventures rather than sell that land in bulk. Currently, we sense that the climate for obtaining entitlements is favorable.

Turning to chart 10, fourth quarter development sales were relatively low and primarily to regional developers; however, price of nearly $17 thousand per acre was strong. For the year, we sold approximately 4,400 acres at an average price of $8,600 per acre.

Chart 11 describes the activity on our strategic development projects. For the fourth quarter, we received entitlements on a 3,300 acre property south of Savannah, Georgia for 10,700 residential units and 6.9 million square feet of industrial and commercial. This property has I-95 and rail frontage and we recently completed a 90 acre school site donation which will be a catalyst for residential development.

Chart 12 is rural sales. The fourth quarter was very light driven entirely by the timing of transactions within the year. As you can see, per acre prices were very good. For the year, we sold 11,700 acres at an average price of $ 6,300 per acre, which was positively impacted by the large third quarter industrial sale; however, even without that sale the average price for the year was a solid $3,200 per acre.

Regarding our 2008 outlook, our focus will be on pursuing entitlements for our strategic properties. Reflecting this strategy and the overall weak housing markets, we plan to sell significantly fewer acres -- development acres -- in 2007. In our rural program on the other hand, we are planning an increase in acres sold at prices comparable to 2007 excluding the impact of a significant third quarter industrial transaction. We continue to be optimistic regarding the sale of rural properties.

Finally, as Lee mentioned we have initiated a program to identify and sell non-strategic timber land as part of our strategy to continually upgrade the quality of Rayonier's timber land portfolio. In 2008 we expect to sell approximately 20 to 30 million of non-strategic timber land properties. We will report these sales separately from rural since we expect more timber land-like prices.

With that let me turn it over to Lee who will review Performance Fibers.

Thanks, Charlie. Performance Fibers had a very solid year as I said earlier, and we expect to see further strengthening of the business as we move into 2008.

On page 13, you can see the strong pricing for sale of cellulose specialties, which represented about 64% of our volume. For the first quarter, we should see the average price for these products move up 6% to 8% sequentially. For the year, we expect prices to be up in the range of about 8% to 10%. Looking at absorbent materials, or fluff pulp, shown in the lower part of the graph, the average price in the fourth quarter reflects continued improvement due to favorable market conditions. For the first quarter, we expect fluff prices to be up about 1% to 3% sequentially as the worldwide market remains tight. For the year, we expect an overall slight improvement over 2007.

Moving on to page 14 and looking at volumes, you can see the sequential improvement but a decline from the fourth quarter last year due to unplanned down time related to operational issues. These issues included recovery boiler problems at both of our mills as well as a major power supply disruption from our public utility at our Jesup Mill. The recovery boiler problem at our Jesup Mill continued into the first week of this month as well. We initiated corrective actions including additional capital expenditures and plan to fully resolve these issues during our planned maintenance shut downs.

For the first quarter you should see the typical sequentially lower quarter compared to the first quarter of 2007, we expect sale of cellulose specialties volumes to be 6% to 7% down due to an unusually high first quarter last year and the impact of our unplanned down time. However for the full year, we expect sale of cellulose specialties volume to be 3% to 5% above 2007 and absorbent materials volumes to be comparable. In summary, we expect to see even better results in 2008 and as I mentioned, we'll increase our capital investment in this business and focus on reliability and operational excellence.

Now let me turn it back to Hans.

Thanks, Lee. Let's turn to page 15 to review earnings trends.

Based on current market conditions, we expect full year 2008 earnings to be slightly below 2000 pro forma EPS of $2.35 per share with stronger Performance Fibers earnings essentially offsetting lower Timber and Real Estate results. We expect first quarter earnings to be comparable to prior year's first quarter pro forma earnings of $0.45 per share as improved Performance Fibers and Real Estate results are expected to offset lower Timber volume and prices.

I now would like to share a few key statistics to assist you in developing your model for Rayonier. First, for 2008 we expect depreciation, depletion and amortization of $135 million, and the non-cash cost basis of land sold of $12 million or approximately $147 million in total, which would be a net $16 million decrease from 2007. DD & A is expected to decrease $19 million driven mainly by Performance Fibers and lower planned volumes in our Timber segment. The non-cash cost of land sold is expected to increase $3 million over 2007. Capital expenditures, excluding acquisitions, are expected to range between $105 million and $110 million, which is $8-$13 million above 2007 with this increase focused in Performance Fibers on operational and reliability improvements and environmental projects.

With respect to our investment in New Zealand for the year, we expect $2 million of equity income from the JV, and cash flow in the $6 to $8 million range. For interest expense, net of interest income, we expect that to range between $42 million and $44 million.

Finally, we ended 2007 with an effective tax rate of 13.5% before discrete items. As we've seen throughout the year, the effective rate can vary significantly based on the mix of income between our REIT and TRS businesses and lifetime exchange benefits.

With that said, we expect the 2008 effective tax rate to be up significantly to the 17% to 19% range, reflecting the increased contribution of Performance Fibers. When you put all of these elements together, we anticipate another strong cash flow year, although CAD will be below last year primarily due to higher capital expenditures and cash taxes. Overall, we expect CAD to be well above our forecasted 2008 dividend requirements.

Now let me turn it back to Lee for some closing comments.

Let me conclude here by saying that we continue to benefit from the diversity and balance of our three core businesses. Despite a challenging economic environment, we're well positioned to generate favorable results. That, combined with our strong balance sheet and tax efficient REIT structure, will allow us to continue to focus on building shareholder value for the long term.

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

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our first question from Claudia Hueston with JP Morgan.

Hi, thanks very much. I was just wondering if you could talk a little bit about the volumes in the Southeast in the quarter. They were a little bit higher than expected. Just wondered what happened there and what really drove the increase?

Tim?

Well, the volumes in the Southeast part, of course, was due to the fire related damage that we have a bit more volume that we picked up as a result of that. And also, the push that we had, the good demand that we saw from pulp wood, additional thinnings and pushing product into that market worked out quite well for us. So that was basically the addition you saw in the fourth quarter.

Okay, and then just in terms of the Performance Fibers business and the unplanned down time there. I think you mentioned that the Jesup boiler issue is still persisting but are the other issues pretty much taken care of there and is there any way to sort of quantify the impact of that down time?

You know, actually, the issues at both mills have been resolved in terms of operation of the mills. They're both operating quite well. We will, during the annual maintenance shut downs, do some additional work on the boilers at both mills. We had planned to do that anyway. As far as quanitfying the effect, we did have an effect on both our sale of cellulose specialties and our absorbent materials and I think it was about 8,000 tons in each, 15 to 16 thousand tons total.

Great. That's really helpful. Thanks a lot.

Thank you. We'll take our next question from Chip Dillon with Citi.

Yes, good afternoon.

Hi, Chip.

Hi there. First question is on the fire and drought situation. I know and by the way if you addressed this I apologize. I came on a little bit late, but I know that there's still tough conditions down in Georgia, Florida, in particular, and is this affecting your plan or your ability to get wood out of the forest this year?

You know, it is not and actually, the rain in Northern Florida and Southern Georgia has been somewhat better than it has in Northern Georgia or Northern Alabama. We still clearly have a drought situation but it has not affected our ability to get wood and I would say on hardwood, it actually improves the situation for hardwood, but Tim do you want to add anything to

No, I would agree with you, Lee. The moisture that we have gotten of late has actually been beneficial to us in terms of our planting season this year so that's favorable and as far as getting wood out of the forest is concerned, it's been relatively normal December and January, so we're in good shape.

And then when you look at the, you mentioned you're going to sell about 20 to 30 million of non-strategic timberlands this year. I'm just curious, is that why this would be a good time to do that? Are these lands that are just more strategic to others, are they closer to people with other paper mills or other timber owners or what's sort of driving this?

It's a part of an overall strategy of looking to upgrade the portfolio of timberland. So we look at classifying our timberland and as we look to acquire timberland, we also look to sell what I would consider fourth quartile timberland. In other words, the land we don't feel really meets the kind of return criteria that we want on our overall timber land so as we go through that process, and it really is a continuing process that we have begun, I think you'll see us on an annual basis not only acquire new timberland, which we feel upgrades the portfolio but move some timberland out that we feel isn't really hitting our investment criteria -- our return criteria.

And just so I understand it, why would someone pay a price that would make it at a level that for land that's not such a great quality land? Is it because you're trying to balance the maturity and annual growth, I mean, you're trying to make consistent the growth and cut rate of your land, or is there some other consideration?

You know, I think different people have different criteria. It may be location as it relates to their land and how this fits in with it. It may be the age class on the property and how it fits with the buyer versus how it fits with us. There are a variety of reasons that we feel it may be more valuable for a buyer than it is for us to hold it.

And then as you look to buy on the other side and upgrade the portfolio, what -- what's the marketplace like right now, I mean, we've now been through a year or two or at least a year where the end markets, certainly, at least for lumber, have been very weak and we're starting to even see some of the paper guys complain about the lack of lumber production, therefore the lack of chips, and yet, it just doesn't seem like we've seen that much impact on the actual price of timberland itself. Is that the starting to change and maybe that could be an opportunity for you as a potential buyer?

I have not seen it change so far. We've looked at a lot of timberland, and continue to look at a lot of timberland. I think we're disciplined in the way we look at it and the kind of returns we expect from that. Of course, we have the opportunity through like kind exchanges to get additional benefit, often times, when we're buying timberland, but I have not seen a lack of demand for timberland, and therefore I've not really seen a change in the kind of high prices that we've seen over the last couple of years.

Gotcha, and lastly just one last quick question. I know this is quickly evolving, Lee, but what are you seeing -- are you seeing more and more interest and more and more potential, tangible interest from these new sources of demand in the biofuels areas? Are we actually seeing plants being built in places that could actually benefit you? Has that started yet?

You know, I think, Chip, we see a continuing interest in biofuels. I -- we see announcements like a sale of an ethanol plant in Georgia that was announced this past year. I think that's a technology that's still going to require a real technical breakthrough before we see much more of it. We have seen -- matter of fact I saw today -- a biofuel facility that's being announced over in the panhandle of Florida, a small one, so I mean, we still see some of those things but it's not at a point yet that I think is having any kind of real impact as far as demand for our product.

Okay, and I'm sorry, I just thought of one quickie. The Performance Fibers business, which is just, I'm sure is a delight and especially in these times on the wood side, is there any concern, have you stress tested sort of how good could it get where would you have any question about having to take more structural steps to maintain your REIT status?

No, and I think a key issue there is our ability to look at two things. One is the net asset value in our REIT subsidiary, so in other words, it is both, and that's where we have quite a bit of our debt, and it's also our ability to control the dividend from the subsidiary up to the REIT, and in both cases, we don't feel we will see any problems as we look forward, even though as you stated, our Performance Fibers business is doing very well and we anticipate it will continue to do very well.

Gotcha. Thanks very much.

Thank you. We'll take our next question from Ross Gilardi with Merrill Lynch.

Good afternoon. Thank you. Lee, yes, I had another question on the Performance Fibers business. From looking at your press release it looks like you operated at full capacity, despite the outage. The market is sold out and seems to have been sold out for awhile now. Prices are rising. Are you considering a major capacity expansion at your existing facilities or abroad and if not, just curious why.

We're not considering capacity expansion, Ross. We continue to work on incremental improvements by de-bottlenecking as well as mix improvements between our absorbent materials and sale of cellulose specialties and we'll do that in 2008, but when we look at the strategy for the company, we really feel like within our REIT structure, and with the ability we've got of good, steady, long term gains from our Real Estate and Timber business, that we're better, we will provide better value for our shareholders by investing in timber and continuing to insure good returns from that, and maintaining a good, strong performance fiber business with the capacity we've got.

Okay, and then if I could just ask Charlie a question. Charlie, I mean, you talked about continued strong demand for rural land and I know this is a lumpy business and the timing of transactions could impact quarterly numbers quite a bit, but it seems you're being very selective in where you sell land. You sold only 500 acres of rural land during the quarter, albeit at a very good price. Still, where, if anywhere are you seeing softening demand in that market and do you think it's a risk that we finally will see a slowdown if consumer spending does really ease into 2008 as a lot of people are obviously worried about?

Yeah, Ross, I mean, there's always a risk and I would say the softest market is probably Georgia where a lot of people bought timberland and are going to try to turn some of it, but we continue to see surprisingly good interest in Florida, Alabama, Texas, got a small and growing program at Washington State, and so we have not seen a slowdown in demand and prices seem to be holding right around that. I think I indicated prices similar to '07 without that one major sale we had in the $3,000 an acre range, so no, we're pretty confident in spite of this terrible housing market that the rural program will hold up really well in '08 and we're off to a pretty good start.

So the low volume of acreage that you've sold is really purely a timing issue.

It is entirely a timing issue.

Okay, all right thanks a lot.

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

Thank you. Lee, a couple questions. First, on the $20 to $30 million of non-strategic land sales, are those going to be relatively low-basis lands or relatively high-basis lands or could you give us a sense as to what type of profit contribution you're anticipating to get from that? I assume that is included in your earnings number when you gave us the '08/'07 thinking?

It is. Charlie, you want to comment?

We really don't have much high basis land, so it's I'd call it average basis, but saying that we expect "timber land" like prices, not rural prices so the margin or operating income contribution would be less than a typical land sale but still meaningful.

Yeah, that's correct. There's not much difference in the basis.

We're not here to predict what those are going to sell for. We're optimistic about that program also, but again, it will be more timberland-like prices.

So is 50% type of operating margins a reasonable starting point for something from the outside to be using?

Yes, I would expect slightly north of that. Yes, there will be some depletion associated with these as well but hopefully it would be north of that.

Yes.

Okay, great. And then separately, Charlie, you had indicated how I believe you mentioned that it was actually a favorable entitlement environment when you were going over that page 12 in the presentation. I was hoping you'd expand a little bit on that and maybe more specifically where you stand on those three projects that you listed and what are, well I certainly understand you can't know specifically when things are going to happen. What are time ranges for these projects?

Well, we have three major projects that we're working on entitling. One in Georgia and two in Florida. I will point out that particularly in Florida it's a multi- year process. The comment about more favorable, it's frankly related to the housing market. It's a very weak housing market. There are not a lot of projects coming forward right now and it's just that kind of climate where I believe at least in some counties they're looking more favorably at growth projects, so the climate, although I can't predict when we'll have entitlement, again in Florida it's a multi-year process, we just feel a little better today than we did say a year ago about our ability to get our properties entitled.

I would say just a little bit specific on that, as you know, Mark, we did receive the entitlements on the Georgia property this past year, so we're now at a point of working through the development of that property and working to identify partners for that. We also were in the midst of working through a joint venture approach on our Flagler property and continuing to pursue the entitlement process there and we are making good progress on both fronts and in 08, I would say on the Nassau property which is the biggest and most complex of the three projects, we'll be working through a joint venture approach, should have that completed this year as well as making additional progress. We finished a good comprehensive planning process for that property and I think we'll make more progress on the entitlement process there but I'm anticipating that's another two to three years to get through the final entitlement process on the Nassau property.

Okay, great and just following up on a couple. In the case of Georgia, are you primarily now -- the pace of things going to be dictated by your sense of the market as opposed to red tape or entitlement issues?

The market and our ability to put together some sort of partnership arrangement, those two are the factors, now obviously no longer is it our ability to get entitlement since we've gotten it.

Got it. And then on the case of Nassau, is it fair that you would likely enter a JV arrangement prior to gaining entitlement?

Yeah, very likely we would like to enter the entitlement process there with our partner at our side.

Great, okay. Very helpful, thank you.

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

Thanks, good afternoon.

Hi, Peter.

Just a couple -- most of my questions were answered but on the DD & A guidance you gave, the $135 million plus $12 million of non- cash, I wanted to make sure this is apples-and-apples so $147 million is consistent with with the $163 million I believe you did in 2007. Is that correct?

That's correct, Peter.

And remind us if you could just the variance, the $16 million variance between '07 and 08?

Yes. There was about $19 million less DD & A and $3 million of additional non-cash cost of land.

Okay and I'm sorry, the reason though for the $19 million of DD & A is down?

Yeah, that's going to be, it will occur in both our Timber and Performance Fibers segments. Performance Fibers is strictly some older assets coming off being fully depreciated and in Timber, on the UOP basis essentially is that lower volume we spoke about.

Got it. A question on the pulp business if I could. Can you refresh our memory without getting into all of the specifics, just the nature of how you typically do the pricing? I believe you have a slug of your business that is contractual and if I'm not mistaken, I think it's kind of year end isn't it? When you have some of those annual talks and so do we expect kind of a step change as we go through the year on pricing or should we expect it to be more gradual?

We do, Peter. We do most of our business through long term contracts, particularly on the sale of specialty side but we use contracts on both, and we do generally, on most of those contracts, have an annual price negotiation. You can expect as I indicated most of the price increases taking place in the first quarter on the sale of cellulose specialties, and you'll see it realized. I think I used an 8% to 10% increase for the year, slightly less than that in the first quarter but most of it will take place by the end of the first quarter and on the absorbent materials, it is more fluid than that, largely based on how the market price of that fluff pulp fluctuates during the year.

Okay, that's helpful, and just to confirm, maybe a hypothetical question. If we were to get into a softer pulp market, is it fair to suggest that the cellulose at least, we basically know what we're dealing with for the next four quarters or is it possible that a different pulp environment could, in fact, impact the pricing of cellulose in 2Q, 3Q, 4Q?

No, I don't anticipate it would. I think we pretty well know what we're dealing with for the year.

Okay, and maybe last question if I could. On the pulp business as well, is it reasonable to look at the 725,000 tons in '07 maybe add back the 16 thousand tons for the outage and call it flat? So is that a reasonable expectation going into '08 for 740,000 tons roughly give or take performance?

No. I'm expecting a little better than that. '07 was lower actually. We had an extended outage at Fernandina in '07 so your number would need to go up a little. Matter of fact, I think I indicated about a 3% to 5% improvement in volume.

Okay, and that's on the base of what you reported as opposed to pro forming that number, is that correct?

Yes.

Got it. Very helpful. Thanks, guys.

Okay.

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

Yeah, thanks, good morning, guys -- or good afternoon, I should say.

Hi, Chris.

Hey, Hans, can you explain to us why there was an income tax benefit in the quarter?

Yes. Basically, as we went through the final quarter, we had a couple of items come through. We had a -- some deferred tax adjustments coming from the reduction in our what we call our built in gains tax reserve and that just relates from our conversion to REIT, so we had a trueup I think of about $2 million and we had some other miscellaneous kind of FIN 48 adjustments based on final settlements with the taxing authorities for closed audits, so those were kind of the discrete items, about $4 million in the quarter. And now the second part really came through is because Performance Fibers results for the fourth quarter were lower than what we expected at the end of nine months, we had a little bit of a rate shift, if you will, and that was the other part of the benefit that came through.

Okay. And then on Real Estate, Charlie, could you talk a little bit about the location, where you had both the development sales and the rural sales and talk about the, maybe the land attributes that were involved that allowed you to get fairly good per acre capitalization?

Sure. The development sales, well actually, there was some sales as I said regional developers both in Georgia and Florida and it was just the nature -- nature of the property, so the relatively small sales to regional developers, so all I could say is we've got an excellent price. These small, regional developers who want to continue to build can pay an awfully good price. On the rural sales, no, I mean, there wasn't anything real special there. We had a sale in Alachua County for instance to a utility, a small sale to a utility at a very high price so it averaged up. That's about all I can say.

Okay, but for example, the development sales wasn't on water fronts of any type?

No, no, not -- no, it's just when you think about what a developer can convert this into, and it's obviously why we want to do more joint ventures in development. They'll put two to three units per acre on some of these properties and so on a lot price, these kinds of per acre prices make a whole lot of sense.

Okay, and what county was that in?

One of the sales was in -- was a small sale in Brian County and another was a small sale in St. John's County in Florida. Okay, great.

And then turning to Timber. Tim, did you say that in the West you're expecting prices to be down like 15% to 20% this year?

Yes, that's right. Year-over-year.

Right, and then looking at the slide of the price trend over the last couple of years it really seems like despite the fact that wood products markets have been weak now for well over a year. Prices have held up reasonably well for now. Can you talk about why it suddenly is starting to collapse a little bit?

Well, if you look back to last year, our method of selling on the stump, selling predominant share of our volume on the West on the stump, markets were still pretty good as we were looking during last winter, let's say, and so we were selling a fair amount of our volume. So as that volume was cut over the year then, we benefited from the fact that people had basically locked into prices earlier in the year. The other thing that helped us was that the export market had taken a bit of resurgence in the latter part of 2006, early 2007 and that helped again to kind of buoy prices up and give us more competition from the stumpage that we were putting on the market and what we're seeing now is that while export markets are okay, they're not probably as good as they were back in the early part of '07 and certainly housing is far worse than it was at that point. So as a result, as we are getting into our selling season now, we're not seeing that price support. So as a result, we're pulling back on our volume and we're just not putting as much out there, don't intend to put as much out there as we had last year.

Okay, and in Performance Fibers, Lee, thanks for the detailed guidance on both price and volume expectations. I was just wondering if you had much visibility on the cost side in performance fibers though.

Well, clearly we see the input costs going up on commodities, chemical cost, energy cost, so we're anticipating and including in our expectations cost increases on those items.

Okay, do you have sort of an order of magnitude that you're expecting?

Probably in the 3% to 4% range.

Okay.

Year-over-year.

Okay, that's fair and then just in terms of looking at the 4Q results, I know that there was that unplanned outage , but just looking at the slide does it seem that the mix was relatively weak in the sense that it was more weighted for fluff as opposed to cellulose specialties? Can you talk about

It largely had to do with the particular down time we were taking. As you know, Fernandina is all cellulose specialties and so the Fernandina down time which was heavy in the fourth quarter was all cellulose specialties, and then the power outage at Jesup affected both cellulose specialties and fluff, so between the two, you had more -- more impact, really, on the specialty side.

Okay, great. Thanks for your help, guys.

Yes.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our next question from Steve Chercover with D.A. Davidson.

Thanks, I guess I'll have to be a lot quicker on that Star 1.

[LAUGHTER].

My questions I guess are kind of perhaps knit-picky, but on the sales line, starting with other operating income, that $2.7 million, is that from New Zealand?

Yeah, that's got some New Zealand in there.

Should we look at that kind of as a run rate we'll see something in that vicinity every quarter more or less?

Yeah, I think you'll see roughly that rate.

Okay, great.

That's also got some of our income that we generate like hunting leases, fill dirt, things like that.

Gotcha, and then skipping down a few more lines, the interest and other income also was up substantially sequentially. Was that just a function of refinancing and therefore you had some cash balances?

That's exactly it. We had the $300 million offering and we couldn't pay down the $112.5 million until December

Got it. So it's going to go back down?

Yes. When you net those two out you'll be in that $42 million to $43 million range I mentioned earlier.

Okay and to the extent that you know in advance that you'll have like a positive tax rate, can you give us a heads up on that? Is that something that you know?

Actually, we alway have to just look to what we expect the rate to be for the year and so through nine months, that was what was -- had been recorded and as I mentioned we had some real pretty specific fourth quarter discrete items that came through and then because of the problems we had in Performance Fibers, the taxable income went down and of course, that changed the mix so you had quite a change there that came through in the fourth quarter. So we try to predict as well as we can but there's a lot of moving pieces.

Switching gears, a follow-up to one of the earlier questions, on the Performance Fibers, does there come a point where your internal capacity creep is just not enough to satisfy your customers and you've either got to bite the bullet and do something big, or cede some of the market? Are we close to that?

I think what we do is we really work with our customers to insure that we can match their growth so it means that our overall portfolio of customers doesn't expand that much, but the volume with individual customers does as their volume grows and as you know, we've had long term relationships with customers, some as long as over 75 years. So I think that it is a, not a sale strategy of trying to increase the large volume of customers but in fact to work with the customers that we've got and we've been able to do quite well with that.

Great. Thanks very much.

We'll take a follow-up from Mark Weintraub with Buckingham Research.

Real quick. Do you make no assumptions on LKE's when you're giving those tax rate assumptions?

Well, we assume a certain level of LKE's but that's again one of the items that can be quite fluid during the year, so you could see this year we had about $4 million of benefit and it's really going to depend on how successful we are as we look at various acquisition opportunities.

Sure, presumably you're saying you are looking at acquisitions so if you end up doing more acquisitions and given that you've got the non-strategic land sales and other things going on then that would have an impact beyond what the you've laid out? Is that --

Yes, we've assumed a certain level of LKE's so we do more than that, yes, we should have a benefit and if we don't, we have a slight detriment.

Fair enough, okay, thanks.

Thank you.

And we'll take another follow-up from Ross Gilardi, with Merrill Lynch.

Lee, do you have a sense to where viscose rayon on pricing is these days?

Yes. It's very strong, as a matter of fact, the overall viscose market is very strong, it's got continued steady increase in demand over the last few years which, at least as we look forward at the demand drivers, it looks like it will continue to be very strong. As you know that some additional capacity coming on which we think will go right at that commodity viscose market because it's very strong.

Is it actually at a premium to the acetate? Is pricing actually a premium at the acetate market right now?

I'd say in some places, particularly on a spot basis it probably is.

Given that, would you actually have had the ability to raise prices? I mean, because my understanding is that acetate prices are usually a premium by at least a couple hundred dollars a ton over viscose. Was there anything preventing you from raising prices even more than you did this year?

Well, you know, we have long term contracts with our customers where we work through an overall volume commitment with our customers and an overall pricing approach, and we feel like that indeed is the preferable approach both for us and our customers in terms of real value for both, as opposed to trying to go up and down dramatically as the market changes.

Okay, thank you.

And we'll take our next question from Richard Paoli with ABP Investments.

Hi, guys. Just a couple quick ones. Could you give me a quick update on the balance sheet? What was the fixed charge coverage ratio for the quarter and then with respect to any type of major debt maturities in 2008 and then I have one other follow-up.

Hey Rich, yes, we have about $23 million coming due in October and that's really it for debt maturities. I don't have the fixed charge coverage.

The approximate rate on that debt that's maturing?

That's low cost, probably around, I think it's around 4%. And tax exempt if I remember right.

Okay, and then the other question is there seems to be a pretty considerable, I guess coverage ratio on the dividend over CAD, and what is the intent with all of that sort of retained cash flow and I guess maybe you could seek the dividend policy. I know it's sort of tough, but just kind of give me what the mind of management is with respect to all of this retained cash flow and then the dividend.

Well we're continuing to look at timberland acquisitions and as you know, that's a key part of our strategy. We feel there is some good opportunities there as we look at that. Second thing is, our board takes a look at our dividend on a frequent basis and they will do that again this year, but I would say the primary view at this point in time is not different than we've had for the last couple of years which is, we feel additional timberland acquisitions is where we should focus.

Okay and then just my last question and I guess for the less savvy REIT people, what level do you get to when you statutorily, in order to maintain your dividend, your REIT status, have to just bump up the dividend more aggressively? Do you know that number off hand?

Well it's going to be fluid every year, Rich so it's just going to depend on the characteristic of the REIT income in any one year, so most, in our case, our income from a REIT perspective is not ordinary but it's capital, and so typically, you have to distribute 95% of that otherwise you run into a 4% what we call excise tax and so far, we haven't bumped up against that but again it's something, it's going to be a year-to-year calculation.

Okay. Thanks again.

All right, thanks.

And, with no further questions in the queue I'd like to turn the conference back to Mr. Vanden Noort for any additional or closing comments.

Okay, well thanks, I'd like to thank everybody for joining us and please contact Carl Kraus with any follow-up questions. Thanks again.