Rayonier Inc (RYN) 2008 Q1 法說會逐字稿

Good day, everyone. Welcome to the Rayonier first 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 would like 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 first quarter earnings. Our earnings statements and supplemental materials were released this morning in are available on our website at rayonier.com. I 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 Form 10-K, filed with the SEC list some of the factors may require actual results to differ materially from the forward-looking statements we may make. There are also referenced of page two of our supplemental material. Please familiarize yourselves with them. Also, this conference is being webcast and can be accessed through our home page. With that, let's start our teleconference with opening comments from Lee Thomas, Chairman, President and CEO. Lee?

Thanks, Hans. I going to make a few overall comments now for the first quarter of 2008 compared to the first quarter of last year. Hans will then take you through the financials. After which Tim Brannon, our Vice-President for Forest Resources, Charlie Margiotta, our Senior Vice President and head of our real estate business, and Paul Boynton, our Senior Vice President, Performance Fibers and Wood Products will review those business segments. Overall, we were quite pleased with our first quarter results. Softness in the timber market was offset by strength in performance fibers pricing and HBU rural real estate demand. Timber results reflect the impact of weak housing market on saw log pricing as well as our decision to reduce planned harvest levels. However, our real estate business benefited from strong rural land prices and volumes as well as nonstrategic timberland sales. In addition, performance fibers results were driven by strong pricing which more than offset high raw material costs and lower volume resulting from unplanned downtime as I described last quarter.

Now, during the quarter, we made progress executing the strategy I communicated last quarter. First in timber, we furthered our strategy to grow and upgrade our portfolio through our recent acquisitions of approximately 110,000 acres of timberland in Washington and New York. Washington property is very well stocked. We will substantially increase our holdings of merchantable douglas fir and western hemlock. The New York property is convenient to markets with solid demand and increases our overall species diversity with hard value hardwoods. In both the west and east, we are reducing our saw timber harvest by approximately 20% due to the impact of the weak housing market on saw log demand. Thus preserving our high value grade timber until markets improve.

In real estate, we continue to see interest for our rural HBU lands. In addition, as part of our strategy to upgrade our timberland portfolio, we successfully completed two nonstrategic timberland sales. And finally, we are pleased to announce that we formed a strategic alliance with Cousins Properties, a major southeast developer for our Three Lakes property in Flagler County, Florida. In performance fibers, market conditions are excellent for both cellulose specialties and absorbent materials. This resulted in increased prices during the quarter. We will it continue to manage this high value business with a focus on product differentiation and managing the impact of increasing raw material costs. Now let me turn it over to Hans for a review of the financials.

Okay, let's start on page three with our overall financial highlights.

As Lee noted, our first quarter was above our guidance, driven mainly by the timing of rural land sales. Overall sales totaled $284 million resulting in operating income of $61 million and net income of $41 million or $0.51 per share, well above both comparable quarters' results. On the bottom of page three, we provide an outline of cash resources and liquidity. The overall message here is strong cash flows as adjusted EBITDA of $97 million and cash available for distribution of $61 million remain comparable to last year. Our debt and debt-to-capital ratio declined from year end, reflecting repayment of $55 million of debt at the REIT. We ended the quarter with approximately $147 million in cash. So on a net debt basis, we finished about $548 million, $21 million below year end. Most of the cash was then subsequently applied toward the Western Timber acquisition that closed on April 3. Let us turn now to page four where we prepared a sequential quarterly variance analysis. In looking at this roll forward, the major driver here is the significant increase in real estate operating income due to timing of transactions within the year. Turning on to page five now, we will briefly review the year-over-year variances.

Here we begin with last year's first quarter earnings of $0.45 per share. Our timber income was $14 million below last year, mainly due to lower saw log prices and reduced harvest volume. Next, our real estate results were $7 million above the first quarter of last year, reflecting improved rural price per acre and volumes as well as the sale of about 4000 acres of nonstrategic timberland. Performance fibers results reflect improved prices in both cellulose specialties and absorbed materials, costs were unfavorable driven by higher raw materials and maintenance costs partially mitigated by lower depreciation expense. These amounts bring us to the current quarter's results of $0.51 per share.

Turning now to page six 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 non-GAAP metric of cash available for distribution. As you can see from the standard line items that we include in here, our cash flow remains strong totaling $61 million in line with last year's first quarter. With that, let me turn the conference over to Tim Brannon to cover forest resources.

Thanks, Hans.

For the west, on page eight, as expected volumes are up sequentially reflecting the seasonally low fourth quarter volume. However, volumes declined when compared to the first quarter of 2007 due to weak saw timber demand. Prices declined compared to fourth quarter and first quarter of last year due to the soft housing market and the abundant supply of timber available for harvest due to storm damage. For the second quarter, volumes are expected to be up slightly on a sequential basis, but well below second quarter 2007 levels due primarily to the soft housing market. Prices are expected to be 10% to 15% weaker sequentially. Of course, the northwest is primarily a saw timber market with a current softness in lumber stumpage prices on average for 2008 are expected to be lower by 30% to 35% compared to 2007. Impacted by not only the weak housing market, but also an abundance of wind thrown wood being salvaged from the December 2007 storm event that heavily impacted the Pacific northwest. As a result of the weak demand, we are reducing our 2008 harvest by 20% to 25% from 2007 levels, excluding the recent Washington state acquisition. Based on conservative harvest assumptions, the acquisition is expected to be slightly cash accretive in 2008 and 2009. However, earnings delusion of $0.04 to $0.06 per share is expected in 2008, primarily due to non-cash depletion expense.

Moving on to the east on page 9, volumes were down sequentially as well as compared to first quarter 2007. Prices held when compared to fourth quarter excluding the impact of fire salvage. Compared to first quarter 2007, prices were lower reflecting our shift in product mix in response to the strong demand for lower value pulp wood. We continue to experience strong pulp wood demand due to favorable global pulp markets and the lack of residual chips from saw mills. Grade markets remain depressed due to lumber mill curtailments driven by the weak housing market. As a result, we have shifted our product focus toward pulp wood and our harvest volume to areas of greatest market strength. 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 second quarter 2008, pine volumes in the east are expected to be up sequentially and compared to second quarter of 2007. However, prices are expected to be below first quarter 2008, and second quarter of last year as we continue to focus on the strong pulp wood markets.

For the year, volumes are expected to be down 3% to 5% following last year's surge of fire damaged wood while we have ramped up thinnings and pulp wood sales, we have deferred the harvest of approximately 20% of our normal saw timber volume. Average prices for the year are expected to be down slightly, reflecting the poor saw timber market and strong pulp wood mix. With that, let me turn it over to Charlie to review the real estate business. Charlie?

Thanks, Tim.

Real estate markets in which we operate have remained principally unchanged from the second half of 2007. The southeast coastal corridor development sales continue to consist of sales of small parcels for specialized end uses. Our focus on development area has been on planning, entitlements and partner analysis. As Lee mentioned in his opening remarks, we were pleased to announce we have formed a strategic alliance with Cousins Properties, where together we will master plan and entitle our 6300-acre Flagler Three Lakes property. Cousins will be on site in Flagler County within 60 days.

Turning to chart ten, we had a strong first quarter in rural sales. The first quarter is a prime example of the broad range of transactions that drive this segment. Sales range from a 2500-acre very wet property in Alabama to be used for recreation and hunting for $1900 an acre, a 1400-acre conservation sale in Florida at $3400 an acre and a 525-acre rural Florida property to be used as a power plant site for $15,000 per acre. Overall, it can be seen in chart 11, the average rural property price was nearly $3700 per acre which is generally in line with prior quarters. Chart 12 shows the activity of our nonstrategic timberland sales. First quarter activity consisted of sales of two very low value properties. One was called Big Swamp Creek in Alabama. We expect the bulk of the '08 activity to occur in the second half of the year and plan to sell in the range of $25 million to $30 million for the year. Lastly, we have identified rural HBU opportunities on both of the recent announced timberland acquisitions in Washington and New York state. With that, let me turn it over to Paul.

Thanks, Charlie.

Performance fibers had a solid first quarter despite rising raw material costs and unplanned downtime as reported to you in January. For the year, strong market demand for our high value cellulose specialties fibers and the overall strength of the absorbent materials market will continue to drive improved earnings despite increased costs. On page 13, you see net selling prices for our two performance fibers product lines. Let's first look at the cellulose specialties which represents 65% of our volume. Note the 7% improvement over prior quarter as annual price increases within our long-term contracts took effect January 1. We expect the full impact of the price increases to yield an 8% to 10% gain year-to-year. Looking at absorbent materials which consists principally of fluff pulp, global demand combined with currency valuation and higher raw material costs have pushed prices for this commodity-like product to improve levels over 2007. First quarter prices average 2% over prior quarter and 13% above first quarter 2007. We expect prices to remain flat to slightly up for the second quarter before softening in the latter half of 2008.

Moving on to page 14 and looking at sales volumes, in Q1 2008 you can see the drop of both cellulose specialties and absorbent materials volumes due to both planned and unplanned downtime that we commented upon in January. Issues that continued until our planned maintenance outages at both mills. For cellulose specialties, second quarter volumes should be above second quarter 2007 and we expect full year volume for these products with high value applications at 3% to 5% above 2007. Looking at absorbent materials, we expect a similar second quarter as first quarter and full year volumes slightly above prior year. Not reflected in these charts, but should be commented upon, is the rise in raw material and other costs we have seen in 2008 and expect to bear throughout the remainder of the year. For example, we have experienced a surge in the price of commodity chemicals such as ammonia and sulfur due to their demand in agricultural application increases in soft wood pine prices due to reduced availability of residual saw mill chips and outbound freight rates due to limited shipping container space and increased fuel costs. However, we will continue to work hard to mitigate both the price and usage of these input components.

In summary, we expect to see better results in 2008 than 2007. First quarter operating income improved 37% compared to first quarter 2007. We'd expect slightly improved second quarter compared to first quarter and significantly better latter half of the year as we saw in 2007 due to both increased volume and having the maintenance outages behind us. Now with that, let me turn it back over to Hans.

Thanks, Paul. With that let's turn to page 15 to review earnings trends.

Based on current market conditions, we expect full year 2008 earnings to be below our 2007 pro forma EPS of $2.35 per share with lower timber and real estate results somewhat offset by stronger performance fibers earnings. We expect second quarter earnings to be below first quarter earnings of $0.51 per share due to the timing of real estate transactions and lower timber prices partially offset by slightly improved performance finders results. Before I close, I would like to share a few key statistics to assist you in maintaining your model for Rayonier.

First of all, for 2008 we now expect depreciation, depletion and amortization of $145 million and the non-cash cost basis of land sold of $12 million or approximately $157 million in total. This will be a net $6 million decrease from 2007, but $10 million above previous guidance, driven by increased depletion resulting from our Northwest acquisition and additional pulp harvest levels in the southeast. Capital expenditures, excluding acquisitions, are expected to range between $105 million and $110 million, $8 million to $13 million above 2007, with this increase focused in performance fibers on operational, reliability and environmental related projects. With respect to our investment in New Zealand, we expect 2008 equity income of about $2 million and cash flow in the $6 million to $8 million range. We expect interest expense net of interest income of $42 million to $44 million. Finally, our first quarter effective tax rate was slightly above 20% which is also our expectation of the full year rate. This is above previous guidance as it now reflects our decision to hold more timber off the market this year, thereby reducing our REIT income and increasing the proportion of TRS income to total income. When you put these elements together we anticipate another strong cash flow year, although CAD will be below last year primarily due to higher capital expenditures and slightly lower EBITDA. Overall, we expect CAD to be well above our forecast 2008 dividend requirements. Now let me turn back to Lee for some summary comments. Lee?

Thanks, Hans. Let me conclude here by saying that we will continue to benefit from the diversity, the strength and the balance of our three core businesses in 2008. We had a good quarter and we expect a good year. With our strong balance sheet, tax efficient restructure, we will continue to focus on building shareholder value for the long term. With that I would 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, sir. Ladies and gentlemen, the question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And we'll take our first question from Ross Gilardi, Merrill Lynch.

Good afternoon, thank you. Just had a couple of questions. If you could just comment about the level of harvest discipline you're seeing across the different regions of the U.S., realizing you guys are going to cut your harvest by about 20% this year. It certainly seems that saw timber prices have had another sharp move downward recently, particularly in the northwest.

I'm going to let Tim comment on that. I think one of the things, Ross, you have to take into account is a comment Tim made about the storm damage in the northwest, particularly in Washington and Oregon. That is having a significant impact in that particular marketplace that you probably don't see in some other places. So that, in addition to weak housing, is impacting that saw timber pricing out there. But Tim, why don't you comment on what you are seeing overall?

I think, just in addition to what you said, Lee, I think in the southeast, for example, we are seeing other folks that have pulled their -- some timber off of the market which is not unexpected with the pricing the way it is. Of course, in the south, we generally have mixed stands where you get a certain percentage of pulp and a certain percentage of grade material and people want to protect that grade volume. So we are seeing many other people that are pulling timber off the market as well, as to say with the exception of what Lee pointed out in the northwest with the storm damage, people are, feel compelled to put that on the market as they should over probably the next, I would say, 16 to 18 month kind of time frame.

Do you think the improvement that you have seen in pulp wood prices is sustainable if others are rotating more of their harvest mix towards pulp wood?

Certainly, at this point we have not seen any slackening of demand other than the typical pulp mill maintenance outages that you see, say in the southeast, for example. But other than that, pulp wood demand remains quite strong. And so, as a result, as we said, we are shifting our volume there. In the northwest, problem is exacerbated there had because virtually all of the typical dependence has been on saw mills for residual chips. And they are just not seeing it. So as a result, people have put in some chipping operations and actually that's been beneficial to some folks who have ended up with some storm damage because there is an outlet for some of that the smaller wood that can go to pulp. But the pulp demand out there remains quite strong out there as well.

Okay, thank you, Paul. And then Charlie, if I could just ask one more, you moved a fair amount of rural acreage this quarter at some pretty good prices. Can you comment on the level of land inventory that's on the market in Florida and Georgia, relative to three to six months ago, and are you having to reduce prices to move land?

Ross, we get really focused on price and certainly try not to give up price just to move land. Saying that, I would say the weakest market right now for us is Georgia. Texas, Washington and Alabama are really steady. And I don't see over supply of land there. And Florida -- the Florida rural market for us is sort of turned into a specialized niche market. The Florida market is quite different. A little over supply in Georgia, but frankly our other markets seem to be steady.

I think one thing, too, Ross, that we see is a good bit of our land goes out as unsolicited offers that come into us since it's in the REIT. And I think as Charlie said, in those markets like Florida and Texas and Washington and others, we continue to see good steady inquiries.

Right. Okay. Thanks very much, guys.

Next we will go to Chip Dillon of Citi.

Hi, good afternoon.

Hello, Chip.

Just, first question is on the performance fiber area. Just want to make sure I understood. I think you said you expect the second half to be substantially better income-wise without the downtime. Is that correct? That was a comment versus the first half or versus the year ago second half or both?

Hey Chip, it's Paul. The answer is yes, to both of those. It is going to be stronger compared to the first half and stronger compared to same period second half 2007.

Okay. And I think you mentioned that you saw prices backing off, was that for both specialties and fluff? Or just for one of them?

Yes, that was just for absorbant materials. Our cellulose specialties is really stable throughout the year and right now, we are just anticipating some fall off at the year end on the absorbent material side of the business.

Is that tied to some of the new supply coming on or just conservatism? Because if you look at price of your pulp, it's actually down year-over-year in just about every buyer currency but the U.S. dollar.

And that could be true and is true. But I think overall, what we are just -- we're looking out there and just basing it on analyst comments that they see in the overall market. And again, the absorbent material market is largely driven by the broader paper pulp market. And so, that's what a lot of folks are watching.The fluff pulp is a little bit separate from that, but it tends to reflect it, so we just have put that into our model and think it may just drop off toward the year end.

Okay, and then on the REIT situation. I'm sure you guys are watching this every day. But as the performance fibers numbers come up, and I know you put most of the debt down in that area, what is the rule? I thought there was a 75% rule. Is that something that's spread over years, or is it -- because it looks like that could be, with the harvest reduction, that could be breeched in 2008.

Chip, it's Hans. No, there is two areas we have to look at. We have to look at income test where 75% comes from good REIT sources of income. But I recall, that's done -- first of all, that's done on a tax basis, not necessarily GAAP basis of income. But secondly, really more importantly, that is calculated on a separate REIT taxpayer basis and that's only driven by the amount of dividend that comes from your TRS, which of course, is at our discretion. So we can basically manage that dividend to always come in below the requirement there and still stay above the 75% requirement. We don't anticipate any problem on the income test. Now, on the asset test, that's a quarterly test and the value of your TRS can not exceed 20% as you mentioned. It's calculated on a net asset basis with TRS, so we are able to take benefit of the debt of the TRS to compare that to the gross assets of the REIT. And so, while the value of the performance fibers is obviously increasing, we still have head room there and as you can tell from the recent transactions in the timberland market, certainly the value of timberlands are not declining. So at this point, we don't see any pressure there.

Makes total sense. And last question, just to clarify, I think you said you saw northwest pricing down, I think you said 10% to 15% the second quarter versus the first and 30% to 35% for the full year. If you could verify that and then just again repeat what your volume expectations are 2Q versus 1Q and for the full year versus last year.

I think the comment that we made earlier was that pricing for 2008 is expected to be 30% to 35% below 2007.

For the northwest.

For the northwest, right, right. And --

10% to 15% in the second quarter over first quarter.

Over first quarter.

And the volume expectation for second quarter versus first in full year versus last year?

The volume expectation for -- again you are talking about the northwest?

Just the northwest, yes.

We are down 20% to 25% in volume year-over-year.

And you don't have a second quarter versus first quarter guidance, do you?

Just a sec. We will be just slightly up in second quarter versus first quarter.

Okay, and then last question, in the second quarter here, and then last question is, we were seeing -- you are talking about substantial price declines which shouldn't be a surprise, given the demand trends and yet we were seeing timberland value stay at record levels. And in fact, you all stepped up and bought some lands. When you bought the lands out west, were you -- is there sort of a view that you have toward how fast prices rebound in your modeling to show that to be an accretive deal over time and sort of, how you see that unfolding.

We do obviously make assumptions about pricing for the timber and that is a part of our model. We also take into account the tax advantages we have as far as the ability to move property into our real estate sub on a tax efficient basis. That was -- both of those things were taken into account both in the northwest and in the New York state property. And in both cases they met our hurdle rates as far as investments are concerned.

Got you. Thank you very much.

Next, is Steve Chercover, D.A. Davidson.

Thank you. First of all, I'm sure that the energy project you guys did at Fernandina Beach has exceeded your expectations. Is there any chance to duplicate that?

Hi, Steve. This is Paul. It has exceeded our expectations at Fernandina and we are looking at a very similar type of project at a much larger scale for Jessup. These just take quite awhile to plan and to find the right pieces of equipment and to put in. So, we are working hard on that. We have nothing to talk about at this time. But we hope to come forward at some point within the next six to 12 months to talk about. It will take a while to put together and a while to implement.

Yes, I actually think that as far as fuel oil is concerned, number six fuel oil, it would probably be fairly comparable, wouldn't it, in terms of what we would be able to displace.

Right.

Yes, yes. But we do think there is a good opportunity there, Steve.

Great, thanks. And there is another REIT based in Spokane that has decided to split off their manufacturing. I guess this is kind of corollery to Chip's question. Any thought given to that?

I did see that, and one of the things I think you to bear in mind is our manufacturing business is very different from theirs. We have a, as you know, a very high value niche business. I think also it's -- we view it as very much one of our three core businesses. It's a part of what we consider a very tax efficient structure for the company. So I think that we are probably in a different situation than they are in terms of thinking about our businesses overall.

Okay, thank you for that response. And then finally, and perhaps I should know the answer to these, but the revenues from your other business which is believe is trading has fallen more than 15% year-over-year. Is that just lumber pricing? Or is there something else happening there?

No Steve, we actually closed our Portland based trading operation late first quarter last year.

And secondly, and again maybe I should know this but, the lower depreciation in performance fibers, could you explain what happened there?

Yes, that was just a situation of a number of large pools that had been depreciated over the years and they basically became fully depreciated.

Thank you very much.

Next is Peter Ruschmeier, Lehman Brothers.

Thank you, good afternoon.

Hi, Peter.

I wanted to ask a question if I could of Charlie coming back to the Cousins JV. Any more color you can offer on the structure that JV to kind of capital commitments that might be considered the profit sharing, maybe in status on entitlements, entitlements in Flagler County, expectations of how we should think of it just going forward.

Hopefully I didn't misspeak. We don't have a joint venture. What we have is an agreement with Cousins, a strategic alliance with Cousins to work together to plan and entitle and just work through that property over the next couple of years. They are going to move on-site with a team and we are just going to work through it together and potentially it will lead to a joint venture. But we decided and they decided and we all agreed it was just too early to form a joint venture until the property is actually entitled. So we're really excited about it, they are really a first class company, Atlanta based, public company with a lot of development experience. Real good step for us. But the joint venture is yet to come.

Okay. In the past, I think you said that the entitlement process could literally be a matter of years, still, I think three years plus. Is that still the case in terms of your expectation?

May live to regret this. But we are optimistic in Flagler County that -- I would be disappointed if it took three years. I think we will drive that process. It's not a six month process by any means, but, yes two to three years I think is a reasonable expectation. I hope it doesn't go beyond that.

Okay, that's helpful. And wanted to come back if I could to Paul on the pulp business and better understand if we could, some of the cost pressures. It looks like the revenues per unit were up in the range of $65 a ton. But the EBITDA per unit was barely up. And I assume that's a combination of your outages and then the expenses related to the physical expenses of the outages and then also chemical costs. Any more color you can offer? It seems like given the revenue jump, I was expecting at least a little more of a profit jump in the first quarter.

Peter, I think your observation is correct. Certainly raw material cost as we stated and the unplanned outages, as well as the planned outages, took away some of that potential gain that we had on the price side. I think you will some of that come back in the second part of the year as we run full out without any outages. Mitigating what we can on the rising raw material costs. As far as overall flavor, we are seeing on a cash cost basis about 8% up from 2007. And I think with some potential downside to that.

Okay. That's cash costs overall, or is that just chemicals?

That's cash cost overall.

Okay, okay. Helpful. Okay, and then lastly maybe Hans, can you tell us, help us just adjust the $548 million of net debt pro forma for the April 3 closings as to what the presumably net debt balance is a lot higher today?

Yes, it's around $775 million right now. I expect by the end of the year we will be trending down, absent any other acquisitions, to about $710 million, give or take.

Okay, and the interest expense presumably will be kind of a similar cost of debt on that step up, relative to what you have been running at?

No. The interest rate right now -- we funded the acquisition out west via our revolver. So right now that's at LIBOR plus forty so it's running roughly 3.1%, 3.2%. That was included in the range I gave for interest expense for the year net of interest income of $42 million to $44 million.

Super. Very good. Thanks, guys.

(OPERATOR INSTRUCTIONS We will go next to Hamzah Mazari, Credit Suisse.

Just a couple of questions. Just curious if fluff pricing does back off a bit, how much of an ability do you guys have to swing production from fluff into cellulose specialties?

We actually have a limited ability to do that. Paul, you might want to talk kind of the about the range.

Yes, the fluff pulp is produced on what we call our C-mill in Jessup and it really is dedicated to fluff pulp. We have some ability, maybe in the range of 15 to 30,000-tons potentially to make a lower valued type of dissolving pulp. But for the most part, and then we have done this in the past, just have dedicated it to fluff pulp.

Also, the cash that you're not sending up to your REIT from the performance diverse TRS, the cash that is staying at the TRS level, how much of that are you using for section 10-31s or how much of that cash are you investing back into the pulp business versus what is just sitting there right now?

Well, right now we are in a net debt position, Hamsa. So as cash comes available, we will look at any of those items that you mentioned. We certainly would have -- it's basically funding the increase in performance fibers, capital expenditures this year. If we come across other timberland acquisition opportunities, we would likely, again, use it there and do more some more 10-31 exchange.

Alright, thank you very much.

And we will go to Christopher Chun, Deutsche Bank.

Thanks, good afternoon, guys.

Hi.

I noticed that your '08 EPS guidance has changed slightly from last quarter, gone from slightly below to just below. Should we be reading anything into that or not really?

Well, it certainly has come down a little bit, Chris. One of the things we mentioned on the acquisition of the western timberland is we expect 4% to 6% -- $0.04 to $0.06, sorry, dilution just from pooling of depletion. That's certainly one I have to take into account and I think the second item is we were pulling off a little more timber saw logs particularly out in the northwest than what we had previously indicated in the January call.

Okay. That's fair. And then speaking of timber volumes, I was just wondering from a strategic standpoint, I appreciate that you guys are pulling back volumes by 20%, I think you said. Would it make some sense on some level to pull back volumes even more?

I'll let Tim -- let me just comment on it. One of the issues you have, particularly in the east, is basically a number that stands, your sale of mix stands. So there is certain limits on how much you actually can back off in order to meet your pulp wood demand. Now we do that by trying to select those tracks that we have that are younger and have less saw timber on them. We also do it by increasing the amount of thinning we do on tracks. Tim, you may want to comment more on that.

Right. That is exactly the case. And of course as Lee talked about, staying with the southeast for just a minute, we do see a good strong demand for pulp wood which enables us to then look at stands that are maybe near maturity, but just aren't putting on additional volume and so there is a great opportunity for us to go in and take a stand like that out and replant, get going again. So there is an opportunity. Also, the thinning program, which some years ago we didn't do a great deal of thinning. This gives us an opportunity to do that which we believe is an appropriate slivicultural regime. So we have that opportunity now, and that again is a reason for us to keep some of these volumes up. So it's working out well for us in the southeast. And in the northwest as we mentioned, with the damage, the timber damage that's out there, on our property as well as others all the way down into Oregon, there is the need to get in and harvest that timber because otherwise you will lose value over time. So, I think we were at a good balance right now in the northeast and in the southeast -- northwest and the southeast as well.

Right, I guess I haven't said that we would say that, I think our overall harvest volume in the northwest, we said it would be down 20% to 25%. The majority of that is saw timber because that's what the northwest is all about. Where as in the east our volumes are down some.

3%.

But much heavier mix towards pulp wood than we had historically.

Exactly.

Right. Okay. That's fair. But I guess I was just thinking that, particularly in the northwest, certainly you need to go and salvage the damaged wood before that opportunity passes. But in terms of the standing timber, I was wondering if there was more opportunity to cut back or maybe even cut back completely on your marketing of the standing timber in the Pacific northwest.

Not really, from where we stand at this point. As I say, we've -- there is some timber that we had that was some carry over volumes and volumes that we sold early on. We have got a contractual obligation of volume that we need to supply to one of the major saw mills out there. And then we have the blow down. So we have pulled it back basically about as far as we think is prudent.

Okay. Then another strategic question, if I might, it seems like you guys are taking the capital or the proceeds from land sales and putting it into additional timberland acquisitions. I was wondering if you guys saw any opportunity to, rather than do that, given the fact that timberland valuations are still extremely robust and development land values have probably come off dramatically recently. Whether you have any thoughts of potentially investing some of those proceeds into additional development lands.

Well, we have talked about that internally. We gotten that question before. I think as far as our overall strategy is concerned, we are a timber REIT. We see growing the value of our timber assets. We do that through really, upgrading that portfolio. I have looked at and we talked about whether in fact there was land that may be adjacent to or a part of land we are thinking about developing. If that came available, we would probably consider it. But really, beyond that, just going out and looking for development land is really not a part of our strategy. I mean, our strategy is to really work on the land we've got. We have got quite a bit of land that is available for development. We got a lot of good value to be added by developing that land. So that's primarily what we focused on.

Okay, thanks for your help.

We will go to Claudia Hueston, J.P. Morgan.

Hi, thanks very much. Most of my questions have been answered. But just a couple of little things. One, I think you said the land basis for the year will be about $12 million. Do you have what the land basis for the quarter?

Hang on, Claudia, I think I have that somewhere. I have about -- yes, it's about $1.6 million.

Okay. Thanks. And then just sort of looking at the acquisition environment, I just wondered if you seen any real change in the last couple of months, particularly given sort of the changing credit markets? Are there sort of more willing sellers or has the appetite for land, maybe from some of the alternative investors changed at all?

I don't think we seen the demand change. I think we have seen and continue to see a good bit of discussion about land on the market. My impression is, I'm hearing about people putting land on the market or putting it on the market. Because we take a hard look at property on a fairly continuing basis. But in terms of the demand side, anything that would suggest a weakening there, I have not seen that. Tim, you seen anything?

No I have not.

Thanks very much.

(OPERATOR INSTRUCTIONS) And we have a follow-up from Chip Dillon, Citi.

Hi. I know with the nonstrategic timberland sales, they were big in this last quarter. What is the acreage at this point that you consider to be in this category and how much time over what period of time would you guess it would be sold?

I will take it. We have a prospectus out if you'd like to bid, in Alabama for approximately 13,000 acres in three parcels. We've got a little out west, but the majority of it is in the south and it just so happens this year, what we identified as nonstrategic happened to be in Alabama. That doesn't necessarily mean that'll be the way it goes forward. We were hoping to get some or all of that sold -- executed and sold in and around the third quarter.

And not radically different or not dramatically different from the kind of levels you saw in the first quarter? Or would that be better land or not quite as --

I would -- the properties we sold in the first quarter, and you have to remember we have to sell this so I don't want to drive it down. But the properties that are on the market now are better. They are not, certainly not our prime properties. Non-strategic, just the opposite. But on average, they are better properties.

Than what you sold in the first quarter.

Correct.

Well, if I could find a bank that is lending money these days I might take you up on the prospectus. (laughter)

Well, just give me your address and we will get a prospectus out.

Then the second question I have was, just to review for us and stick it in my model, gave us the basis for land sales for this year. Are you still looking for, I think something in the neighborhood -- neighborhood of what, $75 million, $80 million for that number. You might have mentioned it, I just missed it. What sort of the gross land sales -- you said $12 million would be the basis. What would be sort of the gross revenue that you would see?

Well, we didn't really give a range on that one.

Okay.

That's just the basis, what you'd expect to see.

Okay. And then do you have any -- a view as to how that would -- I guess you mentioned it's mostly back end loaded.

Correct. Right.

Thank you.

And we have a follow-up from Ross Gilardi, Merrill Lynch.

Thanks, guys, I just have one more. Think there has been some capacity in the cellulose acetate market that's come on over the last several months and maybe some more that's coming on now outside of the U.S. Can you comment and if those projects have actually come on and if they are, having any impact on the supply demand balance. Realizing, obviously, your price is locked in for 2008.

Project (inaudible) of ones and both in southern hemisphere. And the one in South America we understand is coming on. Yet this quarter, maybe June sometime frame is what we are hearing and the one in Africa is coming on in the third quarter from what we hear. So right now, we haven't seen impact from that. We don't expect to see any in this year. And I don't know that we will see much -- a lot of that is going to be focused, we believe, towards the lower value viscous market which we don't play in. So at some point it has a push or a pull on overall market but we don't see that directly.

And have there been any additional capacity, new capacity announcements in the last couple of months in the cellulose acetate market?

I think the only one has been the announced sale of the Cosmopolis mill by Weyerhauser which, as you remember, was a mill that was closed by Weyerhauser and I think Evergreen as well as the utility district out there have announced a joint effort buying that mill. That's the only other one I'm aware of.

That's right. And I would imagine that could come on in the back half of this year at some point.

Okay. Thanks very much, guys.

Sure.

And Mr. Vanden Noort, at this time we don't have any further questions in the queue. I would like to turn it back to you for additional or closing remarks.

Okay, thanks. I would just like to thank everybody for joining us and then please contact Carl with any follow-up questions. Thanks.

Ladies and gentlemen, that concludes today's conference. You may now disconnect.