Rayonier Inc (RYN) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Rayonier second quarter earnings results conference call. Today's conference 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 turn the conference over to Senior Vice President, Mr. Hans Vanden Noort. Please go ahead, sir.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference covering second quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our website at rayonier.com. I'd like to remind you that in these presentations we include forward-looking statements made pursuant to 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 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 two of our supplemental material, please familiarize yourself. Also, this conference is being web cast and can be accessed through our home page. With that, let's start teleconference with opening comments from Lee Thomas, Chairman, President and CEO. Lee.

Thanks, Hans. First, I'll make a few overall comments here for the second quarter of 2008 compared to the second quarter of last year. Hans will take you through the financials after which I'll review our Forest Resources since Tim Brannon is traveling this week. Charlie Margiotta, our Senior Vice President and head of our Real Estate business, and Paul Boynton, Senior Vice President for Performance Fibers and Wood Products, will then review those business segments. Overall, we are pleased with our second quarter results. Continued interest in our non-strategic timberland and strong demand in Performance Fibers was only partially offset by ongoing softness and saw log markets and higher cost in Performance Fibers. First in timber, saw log prices remain depressed due to the weak housing market and an abundance supply of blow-down timber in the northwest. As a result, we continued to limit our saw timber harvest in both the west and the east to preserve our high value grade timber until markets improve. In the east, demand for pulp remains strong and we continue to adjust our harvest to take advantage of this favorable market.

Second, in Real Estate, we continue to shift emphasis from sales of development lands to rural HBU and non-strategic timberland sales. In particular, demand for a non-strategic timberland remains strong and we sold over 6,000 acres in the second quarter as part of our strategy to sell timberlands that don't meet our investment criteria. And third, Performance Fibers, Market conditions remain very strong for both cellulose specialties and absorbent materials. We have solid pricing for both products; however, we are seeing unprecedented increases in our energy, wood and chemical cost. Now with that, let me turn it back to Hans for a review of the financials. Hans.

Thanks, Lee. Let's start on page three with our overall financial highlights. Our second quarter was in line with our guidance. Sales totaled $305 million resulting in operating income of $54 million and net income of $37 million or $0.47 per share which was below prior year second quarter pro forma results. On the bottom of page three we provide an outline of cash resources and liquidity. Cash flow remains strong with adjusted EBITDA of $191 million, cash available for distribution of $97 million despite challenging market conditions. Our debt and debt-to-capital ratio increased from year end reflecting additional debt proceeds to fund a portion of our $213 million western timberland acquisition that closed on April 3. We ended the quarter with $21 million in cash. So, on a net debt basis we finished at $774 million, $205 million above year end. Most of the cash on hand at year end was applied towards the western timber acquisition.

Moving now to page four, we prepared a sequential quarterly variance analysis. The major drivers here are reduced timber income due to softness in saw log pricing and lower Real Estate operating income reflecting a per acre price decrease in our rural HBU sales due to a change in the geographic mix of property sold. We also reflect a more favorable tax rate driven by a projected mix change of income between our taxable REIT subsidiary and the REIT.

Let's move to page five to briefly cover the year-over-year variances. Here we begin with last year's second quarter pro forma earning at $0.55 per share. Our timber income was $12 million below last year mainly due to reduced saw log prices and a mix shift to more pulp in the southeast. Next, our Real Estate results were $9 million below the second quarter last year reflecting the absence of any development property sales and lower rural prices partially offset by increased non-strategic timberland and rural acres sold. Performance Fibers results reflect improved prices in both cellulose specialties and absorbent materials. However, costs were unfavorable driven by higher raw materials and maintenance costs partially mitigated by lower depreciation expense. Finally, taxes were below second quarter last year for the same reason noted earlier. These amounts bring us to the current quarter's result of $0.47 per share. These drivers also were applicable to the first half comparison shown on the right side of the chart.

Let's now turn to page six to look at cash available for distribution. On this page we reconcile from the cash operating activities which is a GAAP measure to our non-GAAP metric of cash available for distribution. As noted earlier, cash flow remains strong. Overall, CAD was about $10 million below 2007 primarily due to increased capital spending. With that, let me turn the conference back over to Lee to cover [timber].

Forest resources. For the west, on page 8, volumes were up sequentially and when compared to second quarter 2007 as we concentrated on harvesting lower value salvage timber from the December 2007 storm event. Prices declined compared to first quarter 2008 and second quarter of 2007 due to the soft housing market and two effects from the storm damage. First, additional supply to an already saturated market, and second, salvage wood that went primarily into the pulp market.

For the third quarter, volumes were expected to be down on a sequential basis and flat to third quarter of 2007 levels due to seasonal effects and the soft housing market. Prices are expected to be reasonably flat sequentially but down considerably from third quarter '07. Stumpage prices on average for 2008 are expected to be lower by 30% to 35% compared to 2007. During quarter four, stumpage will be predominantly salvage wood as we complete our clean up operations and result in prices 15% to 20% below quarter two. As a result of weak demand we reduced our harvest of our mature standing saw timber. However, we decided to advance our salvage operations and now estimate our overall harvest will be down approximately 8% from 2007.

Moving on to the east, volumes were up. That's on page 9. Volumes were up sequentially as well as compared to second quarter of 2007. Grade markets remain depressed due to lumber mill curtailments driven by the weak housing market. However, we continue to experience strong pulp wood demand due to favorable global markets and the lack of residual chips from saw mills. As a result, we've moved aggressively on harvesting stands with a high proportion of pulp wood and advance our thinning program. This significant product mix shift resulted in sequentially lower prices when compared to second quarter 2007.

For the third quarter of 2008, pine volumes in the east are expected to be down sequentially and comparable to third quarter of 2007. However, prices are expected to be in line with second quarter 2008 as we continue to focus on the strong pulp wood markets. With the strength in the pine pulp wood market, we are now expecting 2008 volumes to be flat to 2007 volumes. While we've ramped up thinnings and pulp wood sales, we've deferred the harvest of 20% of our normal saw timber volume. Average prices for the year are expected to be down slightly, reflecting the strong pulp wood mix. Now with that, let me turn it over to Charlie to review our Real Estate business.

Thank you, Lee. The second quarter Real Estate results were driven by the sale of both rural properties and non-strategic timberlands and, as expected, there were no development properties sold during the quarter. Our focus in the development area is primarily on our Flagler Three Lakes and Nassau projects. The Flagler property will be annexed into the city of Palm Coast likely in August. The 5,400 acres sold in the second quarter, as shown on page 10, were in part the result of the successful auction of scattered rural parcels in the Florida panhandle. The sale was managed by a national auction company. There were over 100 registered bidders and all parcels were sold. Just prior to the auction we negotiated to sell approximately 1,000 acres to The Nature Conservancy to expand a Florida state forest. I believe this had a positive impact on the bidding.

As can be seen, on page 11, average sales price of approximately $2,300 per acre was below prior quarter; however, this was a function of location of property sold. Per acre prices range from approximately $2,100 per acre for The Nature Conservancy property to $5,000 per acre for some Florida rural tracks. As I mentioned, the auction parcels which influenced the quarter results were relatively lower value scattered parcels in the Florida panhandle.

During the second quarter we sold approximately 6,200 acres of non-strategic timberlands in Washington State and Alabama as shown on page 12 at an average price of $1758 per acre. The Washington State properties consisted of about 30 small scattered parcels with little merchantable timber. The parcels were purchased by a number of local buyers. The Alabama property was acquired by TIMO in what I would describe as very competitive bid process at nearly $1600 per acre. As a result of our success, we plan to sell an additional 20,000 to 30,000 acres which, when completed, could total 40,000 to 50,000 acres of non-strategic timberland sales for the year. Offsetting these sales, we expect lower rural acres sold in the second half versus the first half. Overall, at this time we continue to expect operating income from Real Estate in '08 to be 10% to 15% below '07 primarily due to last year's sale of a high value industrial property. With that, I will turn it's over to Paul.

Thanks, Charlie. Performance Fibers had a solid second quarter despite rising saw material costs and the completion of a substantial and yet successful planned maintenance shutdown. On page 13 you will see net selling prices for our two Performance Fibers product lines. Looking first at cellulose specialties prices, which represent 65% of our volume, sequentially you'll see a slight improvement due to our January 1 price increase taking full effect, partially offset by mix. As stated at our last analyst call, we expect year-to-year cellulose specialty prices increases of 8% to 10%.

Looking at absorbent materials prices, which consists principally of fluff pulp as noted here, global demand combined with currency evaluation and higher raw material cost have pushed prices for this more commodity-like product to improved levels over 2007. Second quarter prices average 2% above the prior quarter and 11% above the second quarter of 2007. We expect prices to improve for the third quarter resulting from movement in the overall market price.

Moving on to page 14 and looking at volumes, you can see the increased sales of our cellulose specialties products as planned due to improved operations and timing of customer orders. Absorbent materials volume of approximately 51,000 metric tons was off from the prior quarter due to the maintenance shutdown at our Jessup, Georgia facility where these pulps are produced. For cellulose specialties, third quarter volume will increase relative to second quarter and full year volume for these high value applications will increase 3% to 5% over 2007.

Looking at absorbent materials, we expect significantly greater sales volume in the third quarter 2008 compared to the second quarter 2008 and a comparable amount to third quarter 2007. It is also important to note that we continue to see rapid and unpredictable rises in nearly all of our input cost, including wood fiber, chemicals, transportation, and fuel, and in many cases to unprecedented levels. As such, we will continue to explore all options to protect our margins. In summary, as a result of strong demand for our high value cellulose specialty fibers and overall strength of the absorbent materials market, we expect to see improved operating income results in 2008, compared to 2007, despite the cost environment. 2008 second quarter operating income was similar to the first quarter and 19% above the prior year comparable quarter. We expect our third quarter to be significantly improved over the second quarter 2008 and comparable to prior year. Now, let me turn it back over to Hans.

Thanks, Paul. With that, let's turn to page 15 to review our earnings trends. Based on current market conditions we expect full year 2008 earnings to be below 2007 pro forma EPS of $2.35 per share with lower timber and Real Estate results somewhat offset by stronger Performance Fiber earnings. We expect third quarter earnings to be somewhat below second quarter of $0.47 per share due to lower timber volumes partially offset by the improved Performance Fibers results.

Now I'd like to share a few key statistics to assist you in updating your model for Rayonier. First, for 2008 we expect depreciation, depletion and amortization of 158 million and a non-cash basis of land sold of $12 million or approximately $170 million in total. This would be a $7 million increase from 2007 and $13 million above previous guidance driven by additional depletion resulting from increased non-strategic timberland sales. Capital expenditures, excluding acquisitions, are expected to range between $105 and $110 million, $8 million to $13 million above 2007 with this increase focused in Performance Fibers on operational and reliability improvements and environmental projects.

Looking at our New Zealand investment for the year, we expect about $1 million of equity income from the joint venture and cash flow of approximately $6 million. We expect interest expense, net of interest income, to range between $43 and $45 million. Finally, our full-year effective tax rate is expected to be approximately 16% to 17%. The effective rate can vary significantly based on the mix of income between our REIT and TRS businesses and like kind exchange benefits. This effective rate is below previous guidance and now reflects the impact of higher costs in our Performance Fibers business thereby reducing the proportion of TRS income to total income. When you put all of these elements together, we continue to anticipate a strong cash flow year, although CAD will be below last year primarily due to the higher capital expenditures and slightly lower EBITDA. However, we expect CAD to be well above our forecasted 2008 dividend requirements. Now let me turn it back to Lee for some summary comments.

Thanks, Hans. Let me conclude by saying that we continue to benefit from the diversity and balance of our three core businesses and we'll continue to benefit from that over the course of the remainder of this year. We anticipate strong demand in Performance Fibers and continued interest in our non-strategic timberlands. As Charlie mentioned, we expect to sell additional non-strategic timberlands, especially in the fourth quarter, take advantage of this robust market. These factors will be somewhat offset by softness in the housing market which continues to put pressure on our saw log business. We also anticipate further cost increases in Performance Fibers. However, our strong balance sheet, 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 operator for questions from the audience.

Thank you. (OPERATOR INSTRUCTIONS). We'll go first to Hamzah Mazari with Credit Suisse.

Yes. Good afternoon. Just a couple of questions. First, there's quite a bit of land coming to market in the near term from a couple large TIMOs that we can think of as well as one of your competitors. Curious to see if you would look at any of that land and what your view is on how that additional supply may affect evaluation timberland values.

Hamzah, we take a look at property on a continuing basis to see if it fits our overall criteria for acquisition. As you know, we acquired two pieces of property earlier this year. I must say though that given some of the pricing we continue to see, it's difficult for us to reach a point of deciding to acquire unless it really hits not only the kind of return criteria we want but fits with our overall strategic location criteria as well as giving us like-kind exchange opportunities. So I think it would probably be difficult for us to reach the kind of numbers that I would anticipate in some of that auction based property. The properties that we've acquired have been more negotiated sales. At this point, as far as supply and demand is concerned, is evidenced by what we saw for our own non-strategic timber lands that we put on the market in the quarter, we've seen no diminishing demand and we've seen excellent pricing.

Okay. Also, just wanted to get your thoughts. Is it fair to say that properties between $1,600 to $5,000 an acre are moving pretty quick, but anything higher than that, you are seeing a slowdown in terms of land sales in the markets that you are operating in?

We are not seeing any development sales and on the other hand periodically we see pieces of property, for instance the industrial land sales that we've made that as you know went from $15,000 an acre. That was at the end of last year. Periodically you see, depending on the location and the intended use of the property, higher sales. But in terms of sales of development property for residential housing, that's just not happening.

Just one last question. On your Performance Fibers division, the lower absorbent volumes during the quarter, your mills ran pretty well, but is that just a function of the market or are you focusing more on swinging tonnage from cellulose to absorbent, from absorbent to cellulose - sorry?

That was a function of the shutdown. The maintenance shutdown which is where we make all of our absorbent material volume. That was just purely as a result of the plant maintenance shutdown.

Got you. Thank you very much.

We'll go next to Chip Dillon with Citi.

Yes. Good afternoon. My first question, and I might have just missed this number, you mentioned that you expected the performance -- the special dissolving pulps, the cellulose specialties to be up 3% to 5% in volume for the year and you mentioned fluff to be up bit in the third versus second quarter. What do you expect fluff volumes to do for the full year '08 versus '07?

Chip, this is Paul. I think you look at our volume for absorbent materials year to year would be roughly comparable from '07 to '08.

Got you. Okay. And then I remember on the last call that Charlie had mentioned that the non-strategic sales would be about what you now, I think, said the second half would be. I think you were looking for 20 to 30, and now it looks like it is going to be 40 to 50 for the year, if that's correct. What caused that to accelerate? Is it just that there's more receptivity in the marketplace or is it more to offset the cash you might not be getting from selling saw timber this year?

Sure, Chip. We expected to have a good result on our second quarter sale and the result was even better than we thought. And the way I would describe it is that a fair amount of TIMOs went home from our sale without any timber, any timberland. So we decided that as strong as the market appears, we don't have to sell it. But as strong as the market appears, it just seems like the prudent thing to do. So we decided to sell. We are in the process of identifying it now, another 20,000 to 30,000 acres some time in the late third or early fourth quarter. So we are just taking advantage of what appears to be a very vibrant market.

And let's say you get these deals done. Are you also in the market to buy more? Do you need to buy more for section 1031? 1031 purposes?

The like-kind exchange opportunities that we have really we got quite a good advantage from the purchases we did the first part of this year. So we are not at a point where we feel we need to do that. We are in good shape in that regard. We've always got additional opportunity there but there's no compelling reason in that regard for us to look to acquire additional properties.

Okay. And then the last question is when you look at the development part, obviously with the headlines it makes total sense to not push TerraPointe too hard here but what is your current on-the-ground experience in southern Georgia and northern Florida? Is it getting worse in terms of the pricing or the environment for real estate or has it shown any signs of flattening out yet?

I'd say it's flattening out. This is predominantly a primary home market so in that regard we are fortunate that we didn't have a lot of speculative buying and we don't have a lot of second home buying. It's certainly not a great market like anywhere else, but I would say it's flat. We can't predict how long it will be flat and we are waiting for the turnaround.

Got you. And one last question again. I noticed two of the other specialty cellulose producers out there have announced surcharges and my understanding is generally pricing is set at the beginning of the calendar year. So this is something that is extraordinary. Have you all followed or done an announcement like that, a freight surcharge, and how or are there other ways that you can get your prices to reflect what the costs are?

Chip, it is Paul again. Our cellulose specialties business is fairly unique and we do adjust pricing as you noted on an annual basis with significant advance notice, direction and magnitude of the change. Our customers really appreciate the stability this pricing mechanism gives them. So we do everything we can to maintain that stability; however, we've been experiencing costs in this past year that we haven't seen before and, as you noted, we said year-over-year on the last analyst call that we would be about 8% in cash cost and now this time we are looking at about 13% up in cash cost from year-over-year.

Per ton?

Per ton. So we are working with our customers and having that dialogue with them currently.

Got you. Thank you.

We'll go next to Ross Gilardi with Merrill Lynch.

Thanks, guys. Good afternoon. I just had a couple of questions. You touched on some of these issues in your formal commentary. I was surprised to see your harvest up as much as it was, particularly in the southeast but also in the northwest. If you can just comment a little bit more there, and then I have a follow-up to that.

Ross, really two reasons. In the northwest it is blow-down timber, the hemlock that blew down in the December storm. We've advanced our salvage. We decided to try to get all of our salvage work done this year. That would account for a lot of what you are seeing as far as volume in the northwest. As I've indicated, we've actually backed off on our sawlog harvest in the northwest. In the east it is all about pulp wood. We had an overall thinning program that we began over a year ago as part of our normal harvesting regimen and had a lot of opportunity there. Because of the strength of the pulp wood markets and the fact that we didn't want to harvest saw timber, we've really gone after not only thinning but our primary pulp wood tracks. So it's blow down salvage work in the northwest and it's the strength of the pulp wood markets in the east.

Can you give us a little better sense as to how much your pulp wood harvest was up year-over-year in the south versus what happened with your saw timber harvest?

Yes. Typically in the south you would expect about 50% of pulp wood and we are up to 70% pulp wood. So up 20% from where we would normally expect.

Okay. Thank you. Could you guys just talk about the dividend? Is it out of the question that we might see an increase this year or is it still a possibility granted realizing you are operating under very, very challenging conditions right now?

We look at the dividends. The Board takes a look at it periodically. We particularly look at it in the context of the annual review of our long range plan. Obviously we want to ensure sustainability on dividends. So that will be done over the course of the third and fourth quarter look that we'll be taking with our Board.

Thank you.

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

Yes. Thanks. Good afternoon, guys.

Hi Chris.

On the Real Estate side you talked about how the reason for the slightly lower per acre realization on the land was due to mix and you touched on that. Can you talk a little bit more about where this land was and the qualities of this land compared to some of the higher priced rural land that you sold in the past?

Sure, Chris. As I mentioned we had that auction which represented about 60% of the acres for the quarter, and those were acres that were sold in the Florida panhandle. We had that property a long time, small scattered low value properties and then we had a very positive auction but relatively low value properties. About 20% of the properties were in Florida which were relatively solid prices, but that's the mix. So Florida panhandle was an unusual high percent and 20%, 25% came from Alabama, Georgia and Texas which tend to average lower than our Florida rural property. So it was just skewed towards non-Florida rural properties.

Okay. And then you actually got what seemed like a good price for the large block of non-strategic land that you sold, and actually the realizations weren't that different between those two categories. Can you talk a little bit about what land belongs in each of those two buckets?

Yes. I'll try. In non-strategic timberlands are properties -- we pretty much use two criteria. One criteria is properties where clearly the returns don't meet our expectations but based on our view of the market they'll reach someone else's. So that is one. Second is the nature of the properties just don't fit operationally what works for us. So that's what goes into the non-strategic bucket. The rural bucket tends to be smaller scattered parcels that we can directly market to people. We probably have potentially somewhat different end use, recreation and so on. So non-strategic are generally sold to buyers who are going to continue to manage it as timberland. Rural you just don't know. It is a bit of a subtle difference, but we pretty much define them separately.

Okay. And then in terms of the relationship of those two categories to the amount of land that you have in total, is there any way at this stage to give us an idea of approximately how much acreage might be in each of those two buckets?

There really isn't. On the non-strategic it is just an ongoing identification process, and in the rural -- remember some portion of our rural sales are unsolicited offers. So it's somewhat hard to define where that next sale is going to come from, so I really can't. We have not completed a full assessment of every non-strategic acre we have.

That's fair. And then moving on to Performance Fibers, Paul, you touched on the second half outlook a little bit, but I was wondering if you might be able to sort of define or estimate how you think the second half is shaping up relative to last year on an EBITDA basis.

I think looking at the second half of the year, I think we should look at relatively comparable on an EBITDA basis if you look at year-over-year. Hans, do you want to add anything to that?

That's probably a fair assessment.

Okay. And would that assessment depend on whether or not you decide to go for any fuel surcharges or anything like that?

I think that is part of the consideration out there. We'll have to continue to look at that.

Okay. Thanks for your help.

We'll go next to [Jonathan Litt] with Land and Buildings Investment Management.

Hi guys. A couple of questions on the non-strategic land. What's the dollar amount of that that you guys have that you think you might sell over time?

We haven't completed an overall assessment of our property to determine exactly how much will be in it. We have identified property we are going to sell this year. We actually have pulled some additional of that property that we were thinking about next year into the third and fourth quarter of this year, but we haven't finished a full assessment.

And can you comment on the yields that those assets are selling at or the amount of income that goes away, let's say, what you sold in the second quarter, the amount of income that will go away as a result of the sale?

This is Charlie. I would say it is certainly not significant. One of the criteria for non-strategic is that it generally doesn't have much timber on it, much merchantable timber. So not a lot of short-term financial impact. And I guess the other thing I would tell you is we were surprised by the allocation of the dirt value, at least based on our analysis, in other words how much people are putting in the underlying dirt for these properties. So not a lot of negative -- very little negative short-term financial impact outweighed by the benefits you get from selling it. All I can say on discount rates is they are in the low single digits.

That would be like a cap rate?

What we think people are using to acquire -- we think these TIMOs might be using to acquire these timberlands. It has got to be pretty aggressive discount rates.

Are they getting financing to buy this land or are they paying all cash? Is there financing available to buy this type of land?

All I can say is that sales are cash at closing. So we don't really get into their financing. We have no terms. It's just cash and so we don't. That's really transparent to us.

You had mentioned that your CAD is sufficient to cover your dividends. I guess I have two questions. One, when you calculate taxable income, what percentage of your CAD is taxable income or the amount that you have to pay out under the REIT reg?

Right now really under the regs we don't -- we basically have an ordinary loss. Unlike most REITs, the nature of our taxable income is all capital. We are typically in the 95% bucket of payout before we run into the excise tax.

Right. So you are paying out well over the minimum you need to payout to maintain your REIT status?

Yes.

And then I guess the timberland sales get replenished when the trees grow, but when you sell some of this land, whether it is HBU land or non-strategic land or rural, that's gone permanently. When you calculate your CAD, are you including the income from the Real Estate sales in CAD?

Yes, we do. Basically what we are looking at is -- we look at our holding as a total portfolio and we are continuously looking to upgrade the portfolio so via non-strategic timber sales but also acquisitions, buying higher quality holdings and obviously others move into a higher and better use category. So it's pretty much a continuous cycle for us as part of a regular business.

Okay. That's great. Thank you.

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

Good afternoon.

Hi Pete.

I was hoping you could elaborate a little bit on your comment about the dirt values rising and, if you could, help us with some reference points in the East and the West in terms of recent dirt values that you think you've seen and how that might compare to a number of years ago.

I think if you look at the average price we achieved in the Southeast and you assume that there's not a lot of timber in pre-merch on the property or some pre-merch but not a lot of timber. We are seeing dirt values over $1000 an acre and five years ago it was probably closer to $500 an acre or less. So dirt values, obviously timber values, haven't gone up that much in the last few years. So the escalation in timberland prices, we believe, is attributable mostly to the dirt. Out West maybe not quite as much run up but also a substantial run up.

And can you help us with the 6200 acres? I think you said it was a split between Washington and Alabama, and were Washington lands primarily dirt value and can you help us with the split of the acres?

The split was pretty close to 50/50. Can't give out much more than that. The dirt values I think in the South a bit higher. I think the property out West had maybe a slightly higher component of pre-merchantable timber with that long rotation. You get a lot more pre-merch. I think that's about as much information as we can give out.

Okay. That's helpful. I guess on log markets I'm curious on your New Zealand operation, if you can help us to better understand what you are seeing there in terms of demand in price trends and whether there's still some transportation challenges but what are you seeing in terms of end market demand and pricing trends for that business?

I think overall we haven't seen big changes there over the course of this quarter over the first. Demand is fairly steady. As you know, most everything there is exported whether it's logs or whether it's the lumber from the logs. And the biggest challenge we've had has been transportation cost and availability of ships. We have begun to see inquiries coming in from Asia I think as a result of the Russian tariff. And so we are anticipating potentially that demand picking up as it appears Russia is intent on going forward with an increase in that tariff next year. But the big challenge we have had in New Zealand has been the transportation cost, shipping cost.

Okay. That's helpful. One last question if I could, Lee. I'm curious, in the East your pulp wood volume is clearly very strong. I'm curious if you can comment, in order of magnitude, how much of your pulp wood would be selling today to some of the pelletized wood operations and, for that matter, maybe even cellulosic ethanol. How do you see that evolving if we look out two to three years from now?

Peter, I think today it is a very small part of our volume and over the next two to three years I think the potential is significant. It has developed in the last year, even the last six months, much faster than we anticipated, not particularly things like pelletized fuel, although that is developing with a lot of plants under construction and some under operation, but with demand from utilities and others that are looking at coal firing boilers that they fire with coal. We are beginning to see some increased demand for slash ground up in the field after we harvest, which is really good news for us. Cleans that field up quickly, but I think a lot of that is being driven by just the increased cost of fossil fuels, particularly coal. And so we are beginning to see quite a demand of inquiries coming from a range of sources that I think over the next several years have the potential of being a substantial demand for our pulp wood.

Okay. That is helpful. Can I just finish up with a clarification maybe for Hans? I think you said for the third quarter your chart says you'll be below year ago levels which is $0.90. And I think you said it would be below the third quarter level -- I'm sorry, the second quarter level of $0.47, is that correct?

That's correct, Peter.

Thanks guys.

We'll go next to Steve Chercover, D. A. Davidson.

Going to have to be a little faster on this game show. First question for Paul, please. If I recall properly, your expectations were that fluff pulp prices were going to erode in the second half. So this is nice that the bigger players have raised prices. Do you expect it sustainable?

A good question. I kind of lead you along that thought process last discussion. I think with what we are seeing out there and the input costs that I am less pessimistic and we should probably see prices hold pretty firm and steady through the balance of the year.

So there's nothing on the supply demand spectrum that has changed. So is it cost push do you think that has justified it?

I think a lot of it is cost push. I think there's a healthy demand out there for the product, but there is also cost push just keeping those prices where they are at.

Great. And just following on specialties. Am I correct that the depreciation has dropped by around $3 to $4 million per quarter?

Per quarter, yes. About $16 million on the year, $15 million.

Great, so if you are going to have the same EBITDA, the earnings is where it's coming from. That's great. And then one for Hans, please. If the inflation that is impacting your taxable business does not subside, is it reasonable to think that in '09 the tax rate might be below 20% as well?

Oh, boy. I wouldn't want to speculate on that. There are a lot of things that could affect our tax rate in '09. It is going to depend on what the timber markets are, and what we do with harvest levels. REIT property can depend on the maximum properties, on the Real Estate side about what is coming from the TRS versus what is coming directly from the REIT. So we are a little far off from that right now I think for me to kind of guess on that one.

Thanks very much.

(OPERATOR INSTRUCTIONS). We'll go to Mark Weintraub with Buckingham Research.

Thank you. If you were not to use 1031, would you have to be paying any taxes on the non-strategic land sales that you are doing?

Yes we would. If you look at our CAD reconciliation, you'll see where we are recognizing about $5.7 million on a yearly basis. So effectively we are reducing our CAD saying if we hadn't made these investments then we wouldn't have had that benefit. So that gives you a rough -- basically that's the 6-month result.

Okay. I know this is a tough one for you. It's a question for the TIMOs who are doing it. But any thoughts as to why there's been this escalation in dirt values that is taking place over the last few years?

That's the $100 million question and everyone has their own opinion. Our view is there's just a lot of liquidity out there chasing what is a very stable investment, an asset class that has become quite attractive and a lot of TIMOs. And so, as I've said, I'm not going to give out the number but we had very nice competition on our sale and one TIMO bought it but there were a number of other TIMOs that bid and the bidding was very tight.

Great. Thanks very much.

Having no further questions, I'd like to turn the conference back over to management for any additional or closing comments.

Nothing additional. Please contact Carl Kraus with any follow-up questions.

This does conclude today's conference. Thank you for your participation. You may now disconnect.