Rayonier Inc (RYN) 2008 Q4 法說會逐字稿

Welcome, and thank you for joining Rayonier's fourth quarter analyst teleconference call. (Operator Instructions). Now I will turn the meeting over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

Thank you, and good afternoon. Welcome to Rayonier's investor teleconference covering fourth quarter earnings. Our earnings statements and supplemental materials were released this morning and are available on our website at rayonier.com. I would like to remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

Our earnings release, as well as our Form 10-K filed with the SEC, lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page Two of our supplemental material. Please familiarize yourself with them. Also, this conference is being webcast and can be accessed through our home page. With that, let's start the teleconference with opening comments from Lee Thomas, Chairman, President and CEO. Lee?

Thanks, Hans. First, I will make a few opening comments and then Hans will take you through the financials. At that point, Tim Brannon, our Senior Vice President for Forest Resources, 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 review those business segments. First, let me make a few comments on 2008. I think that despite the challenging economic conditions, our results were good. In our timber business, we limited our saw timber harvest, took advantage of the strong demand in the pulp wood market. We also successfully executed our strategy to upgrade our portfolio by acquiring 110,000 acres of high value timberlands while our real estate group was selling 50,000 acres of non-strategic properties.

Lastly, our Performance Fibers business with our strong cellulose specialty segment generated solid earnings in 2008 despite unprecedented cost increases. The results in 2008 leave us well positioned with ample liquidity, conservative debt levels, and a solid balance sheet. This gives us the ability to manage through the current recession and turmoil in the credit markets, continue our $2 per share dividend, and continue to execute our strategy. Now, with that, let me let Hans take you through the financials.

Thanks, Lee. Let's start on Page Three with the overall financial highlights. As Lee noted, we finished the year with a quarter that was largely in line with expectations. Sales totaled $354 million, resulting in operating income of $61 million, and net income from continuing operations of $42 million, or $0.53 per share, which was above the prior year and the prior quarter. On the bottom of Page Three, we provide an outline of cash resources and liquidity.

Our 2008 cash flow was strong, with adjusted EBITDA of $406 million and cash available for distribution of $210 million. Our debt and debt to capital ratio increased slightly from year end 2007, reflecting additional debt proceeds to fund a portion of our $213 million Western Timberland acquisition that closed in the second quarter. We ended the year with approximately $62 million in cash, so on a net debt basis we closed at $709 million. Turning now to Page Four where we prepared a sequential quarterly variance analysis, starting with timber, we benefited from increased volume in our eastern region, driven by favorable pulp market demand. Our other income, which is primarily recreational licenses, is largely recognized in the fourth quarter, but also reflected improved pricing.

In real estate, the improvement was driven by the increase in non-strategic timberland acres sold. Moving to performance fibers, you can see a price improvement due to the cost base surcharge that was implemented. However, the benefit was more than offset by increased input and transportation costs, as well as a $4 million loss on fuel oil hedges. Finally, our taxes are unfavorable, as last quarter we recorded two discreet benefits, which totaled about $7 million. Let's move now to Page Five and the year-over-year variances. I won't go through both of these periods variances in detail, but the following themes are reflected in the numbers. In general, the timber results evidenced lower volumes and price in the western region, a mix change to lower margin pulp wood in the east, and higher depletion expense from our timberland acquisitions. These items were partially mitigated by improved realizations on hunting license and other recreational income. The real estate results reflect the strong demand for our nonstrategic timberlands, offset somewhat by lower rural HBU price per acre. Finally, in Performance Fibers, increased prices and the cost-base surcharge were essentially offset by significantly higher input, transportation and maintenance costs.

Let's turn now to Page Six. On this page, we reconcile by cash provided by operating activities which is a GAAP measure to non-GAAP metric of cash available for distribution, or CAD. Our cash flow remains strong with CAD totaling $210 million or about $2.67 a share. And, although below last year's CAD, it's well above our dividends of $157 million, or $2 per share. Turning now to Page Seven. On this page, we have prepared a debt maturity schedule. Given the continuing credit crisis, we thought it was timely to revisit this. Note that we have no near-term refinancing needs. Our next major maturity is $122 million of installment notes, not due until December 31 of this year. Also, please note that we have a $250 million revolving credit facility with $144 million of remaining capacity, which is available at an interest rate of LIBOR plus 40 bps. This facility does not expire until August, 2011. All in all, we believe our strong balance sheet, conservative credit profile and strong and consistent cash generation provide liquidity, which will position us well to manage through the continuing turmoil in the credit markets. With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Thanks, Hans. Timber markets remain very challenging. Housing starts are depressed and in the fourth quarter, we began to see a slowdown in the commodity pulp and paper industry, resulting in lower demand for pulp wood. In the west, we have continued to restrain our sales of high value saw timber, as shown on Page Nine. As you know, we acquired an additional 56,000 acres of high value timberland in Washington state in early 2008, but we have intentionally withheld harvest to volumes comparable to third quarter, 2008 and fourth quarter, 2007. Lingering impact from the December, 2007 storm event is still adversely impacting the Pacific Northwest saw log market, which was already under pressure from the housing market crisis. Northwest commodity pulp and paper markets softened in the fourth quarter, which also reduced demand for pulp wood. Prices in the fourth quarter remain depressed, comparable to the third quarter.

In the east, on Page 10, pine volume was robust and up substantially over the third quarter, 2008 and fourth quarter, 2007, as we continued to successfully sell more pulp wood thinning volume. Pulp wood demand was strong for much of the fourth quarter, as the availability of residual saw mill chips diminished and the threat of winter weather and poor logging conditions approached. However, by late in the fourth quarter, pulp wood inventories were replenished at area mills and the slowdown in the commodity pulp sector became evident. Prices in the fourth quarter remained relatively flat sequentially. The outlook for 2009 remains challenging. Demand from saw mills is depressed, so in all regions we will continue to hold off the market, many of those timber stands which have a high component of saw logs. Although demand for commodity pulp is slowing throughout our eastern market areas, we will continue with our sales program of thinnings, which meets pulp wood market demand today and will improve the value of our timber stands tomorrow by growing more saw timber in the years ahead.

As we enter 2009, stumpage prices in the west are down by about 20% from fourth quarter. Volume for the year is expected to be down about 20% from 2008 harvest levels and as the year progresses, we will determine whether or not to hold even more saw timber off the market if demand softens further. In the East, pine stumpage prices are currently about flat to third and fourth quarter, 2008. Pine volume in the East for total year 2009 is expected to be down 6 to 8% from 2008 and we will monitor the commodity pulp industry closely this year and may adjust our harvest volume, depending upon pulp wood demand. With regards to the sale of the joint venture estate in New Zealand, we have received indicative offers and have now moved into Phase II due diligence with several interested parties. With that, let me turn it over to Charlie Margiotta to review the real estate business.

Thank you, Tim. The real estate market remains challenging with little change expected in the near term. Demand for development properties today is primarily for specialized end uses, often commercial or industrial. Rural property sales interest is steady, particularly in Alabama, Texas and Georgia. We continue to be encouraged by the competitive response and interest in our nonstrategic timberland sales offerings. On the entitlement front, we received approval for industrial use of 1100 acres adjacent to Interstate 95 outside of Savannah. We now have approximately 8,000 entitled acres in the Savannah area.

Page 11 shows in the fourth quarter we had a relatively minor amount of development sales, which were located in southern Georgia. We expect 2009 development sales to continue to be quite limited and similar to 2008. Rural sales of nearly 1100 acres in the fourth quarter were relatively low, driven by contract closing dates. 2009 rural sales acres, at least as we look out today, should be on par with 2008. Page 12 details selling prices per acre. Development sales were of entitled property and averaged nearly $18,000 per acre. Rural prices improved from prior quarters due primarily to several sales in Florida at excellent per-acre prices. We expect 2009 rural prices on average to be somewhat lower than 2008 due primarily to location. That is we do not expect much acreage to sell in Florida, which traditionally generates higher per acre prices.

Page 13 is our nonstrategic timberland sales program. We are pleased with the fourth quarter sales results, nearly 30,000 acres in Georgia and Alabama at an average price of about $1400 -- $1440 per acre. We were particularly pleased with the level of competition in this bid process. Our expectation is that the 2009 sales will be comparable in acres to 2008 and dependent on the market, could exceed last year. With that, let me turn it over to Paul to review Performance Fibers.

Thanks, Charlie. Performance Fibers finished 2008 with a challenging fourth quarter. On Page 14, you'll see net selling prices for our two Performance Fibers product lines. We previously announced the implementation of a surcharge on our cellulose specialties volume effective September 1, 2008 for the balance of the year. As a result, fourth quarter prices were up 6% sequentially and 15% above the same quarter prior year. The surcharge was a necessary action to help mitigate some, but certainly not all, of the unprecedented cost increases we've experienced in raw materials, chemicals, fuels, and transportation. Looking at absorbent materials, which consists principally of fluff pulp, as noted here, price has held relatively stable, despite pressures in the global economy. Prices were 2% below the prior quarter, but 5% above the same period prior year.

Moving on to Page 15, and looking at volumes, you can see our fourth quarter cellulose specialties volume finished slightly down sequentially due to our need to build additional inventory as we prepare for our early 2009 maintenance period at our Fernandina facility. Volume was essentially flat to the same quarter prior year. In total, 2008 sales were 1% above prior year. As planned, absorbent materials volume of 79,000 was significantly above prior quarter due to strong production and timing of customer orders. Total 2008 volume was 2% below prior year. Despite increased prices and comparable volume for our cellulose specialties, fourth quarter operating income declined from prior quarter, principally due to high raw material input costs. While we provided guidance that added cost would exceed incremental revenues during our last call, we didn't anticipate the precipitous decline in oil prices, which resulted in $4 million of fuel oil hedge losses.

In summary, for the year, 2008 produced record operating income due to exceptionally high demand for our high value cellulose specialty fibers and the overall strength of the absorbent materials market, a great result given the unprecedented cost escalation. As we look into 2009, we expect and are starting to see many of our raw material input prices drop from their peak levels in 2008. However, our largest single chemical cost, caustic, is expected to increase more than $80 million year-over-year, as a set of very favorable four-year contracts expired at the end of 2008. Due to the fact that this chemical is a co-product of chlorine, and chlorine is heavily used in materials for new housing construction, global operating rates for caustic have been reduced to 50 to 60% of previous levels, creating this inflated price environment. Fortunately, demand for our cellulose specialty fibers continues to be strong.

While we see some softening in smaller segments, such as applications for engine filtration, additives for automotive paint coatings and plastics, the majority of our products are used in applications that are relatively stable through these challenging economic times, such as food, pharmaceuticals, and filter tow. With more consistent production in 2009, we expect sales volumes to be above 2008. Cellulose specialty's prices should average substantially above 2008. In our absorbent materials business, annual volumes are expected to be similar to 2008. Prices could drop as much as 15 to 20% year-over-year due to downward pressures created by the overall economy. In summary, we're anticipating a solid year in our Performance Fibers business, although we expect operating income to be below our 2008 historic high. Now, let me turn it back over to Hans.

Thanks, Paul. Before I close, I would like to update some key statistics to assist you in refining your model for Rayonier. I'll only be touching on full year statistics and guidance. Given the uncertainty around the economic environment, the variability of our timber harvest volumes and the timing of our nonstrategic timberland sales, we will not be providing any quarterly guidance. However, we will update our annual guidance each quarter. So for 2009, we expect depreciation, depletion and amortization of $172 million and the noncash cost basis of land sold at $11 million, or approximately $183 million in total. This would be a net $4 million increase, 2008, driven by increased depletion. Capital expenditures excluding acquisitions are expected to range between 95 and $98 million, which would be 7 to $10 million below 2008, with the decrease primarily in Performance Fibers. We expect interest expense net of interest income of about $50 million versus $43 million in 2008. This increase primarily results from required accounting change for convertible debt, whereby additional interest expense is accrued to represent what interest expense would have been without a conversion feature. This $6 million increase would have about a $0.05 per share negative impact on EPS, but no impact on CAD.

Finally, our effective tax rate is expected to range between 10 and 11%, which would be comparable to the '08 effective rate of 11.3%. The effective rate can vary significantly based on the mix of income between our REIT and TRS businesses, and like-kind exchange benefits. When you put all these elements together, we continue to anticipate strong cash flow, despite the adverse conditions facing our businesses. EBITDA is expected to be 10 to 15% below 2008, which will affect the CAD by about the same proportion. Even so, we still expect CAD to be well above our current dividend of $2 per share. From a GAAP net income basis, we expect earnings per share to be well below 2008, with the decrease proportionately greater than the EBITDA and CAD decrease noted earlier. Some contributing factors include higher noncash cost basis on our expected nonstrategic timberland sales, the $6 million interest expense increase due to the accounting change for the convertible debt, and pension expense of about $12 million, which is approximately $6 million above our expected cash contribution in 2009. Now, let me turn back to Lee for some summary comments.

As you just have heard from Hans and our business unit leaders, we anticipate that due to the recession, 2009 results will be below 2008. In timber, with a weak economy, we've planned significant reductions in our harvest volumes for 2009 and as Tim said, we may make further reductions if conditions don't improve. Therefore, we can see volume changing quarter to quarter, which makes it challenging to give quarterly guidance. In real estate, we see continued interest in our nonstrategic timberlands. Quarterly earnings will be impacted by the closing dates of real estate transactions.

And in Performance Fibers, earnings are expected to be solid, although below 2008, as strong demand for cellulose specialty products is more than offset by weakening fluff prices and higher costs, especially chemicals. If the global recession deepens beyond our expectations, fluff prices could decline more than we projected. Cost control and capital preservation are two near-term priorities for us. For example, we recently imposed a hiring and pay freeze for all salaried employees and reduced 2009 capital expenditures by $10 million year-over-year. Despite these uncertain economic times, we expect our diverse mix of businesses to generate strong cash flows in 2009 well in excess of our $2 per share dividend.

In addition to our substantial timberland portfolio and HBU real estate properties, we remain the global leader in cellulose specialty products, with conservative debt levels, manageable debt maturities and a solid balance sheet, we should have significant operating flexibility to continue to execute our strategy. I would be remise if I didn't acknowledge the decline in our share price. It was a brutal year in the stock market and although many companies in the forest products and REIT sectors suffered more severe share declines than us, we're clearly not satisfied with our current share price. We believe that our shares are significantly undervalued and will remain focused on creating long-term value for our shareholders. Now, with that, I would like to close the formal part of the presentation, turn the teleconference back to the conference operator for questions from the audience. Operator?

(Operator Instructions). Your first question comes from Claudia Hueston, JPMorgan. Your line is open.

Hi, thanks very much. Good afternoon.

Thank you, Claudia.

Just a couple of questions. First, Lee, you mentioned where the stock's trading and that you feel it's undervalued. Has that changed the Company's priorities for cash, any thoughts of a buyback in this situation?

It has not changed our priorities, Claudia. I think particularly given what our economic conditions are, focus on debt, focus on dividends, those are our priorities. I think at a point in time when we look at excess cash, we would clearly have to take a look at our stock, but, the only thing I think that could potentially change that could be the results of the sale of our New Zealand properties. But let's just wait and see how that closes.

Okay, thanks. And then just a couple of questions on the Performance Fibers business, in terms of the surcharges that were pushed through, obviously some input costs have eased, but your caustic costs are up. So how do we think about pricing and those surcharges as we think about 2009 trends?

Claudia, this is Paul. Thanks for the question. You know, our cellulose specialty prices have all increased, but this year, at probably various levels more so than in prior years, ranging anywhere from single digits to above 22, 23%. So I guess I would estimate on average we would be in the neighborhood of about 15%.

And that's sort of excluding any potential roll off of the surcharges, or are the surcharges pretty much done now?

Yes, the surcharges ended December 31, 2008.

Okay, that's helpful. And then you had mentioned that there were some hedges that hurt you in the quarter. Where are hedges now? Do you have any hedges in place going forward?

Claudia, it's Hans. We still have hedges in place for about 50% of our '09 usage and we're slightly favorable now versus year end.

Okay. And then just finally, do you have your land basis in the quarter?

In the quarter?

Yes. Or for the year.

Yes, land basis -- make sure I can -- land basis for the quarter looks like about 3.5 million and for the year was about 11 million.

Okay, thank you very much, guys.

You're welcome.

Your next question comes from Hamzah Mazari of Credit Suisse. Your line is open.

Thank you. Just a couple of questions. On your fluff business, how do you guys think about how exposed that is to commodity pricing? How much does it lag the commodity pulp market?

Hamzah, it's Paul Boynton. It certainly does lag. I don't know exactly the time period, but it could be up to a quarter behind. But typically we see as the market goes down while it may follow and get pressure that way, it certainly doesn't correspond directly one for one at all. So you won't see us go to the levels that you'll see commodity pulp out there, so they are de-linked to some degree.

Got you. And then, on your-- you guys mentioned that pulp wood demand is holding up, was holding up pretty well in the beginning of the quarter and then dropped off towards the end as inventories were replenished. How much of a drop-off, I'm just curious, have you seen in pulp wood demand and do you see in the month of January or so far?

Tim, do you want to take that one?

Pulp wood demand is certainly slacking as we're going into 2009. Fortunately as we have seen, our pricing has been reasonably steady at this point, but pulp wood demand is coming down and I think it's really being impacted more by this inventory flux that we're seeing. In other words, in the inventory that was built as we closed out the end of the year and then some, some temporary shutdowns that took place over the holidays. So it's a little bit difficult to say exactly how much is coming out, but definitely we've seen a bit of a softening at this point.

Okay, and just lastly, why -- I'm just curious why -- are you guys thinking of placing new hedges on fuel right now in Performance Fibers, given where oil prices are?

It's Hans. We're pretty well set at least for the near term, but basically we don't try to guess the market one way or another. We're just going through, we would typically like to have anywhere from a third to a half of our next 12 months usage locked into place and so we're on top of it now. But no, we're not looking at doing anything at least imminent here.

Okay. Got you. Thank you very much.

Your next question comes from Ross Gilardi of Merrill Lynch. Your line is open.

Yes, good afternoon. Thanks, guys. Had a question for Paul Boynton. Paul, just on the Performance Fibers business, I mean certainly cellulose specialty's pricing's got to be one-- really the only products in the entire forest products chain that's still going up and I'm just wondering, do your competitors, do you think, have the financial capability to convert existing facilities or install new facilities to enter this market and within any reasonable timeframe, what's the earliest you might begin to see competitive pressure in the cellulose specialties area to the extent that it could unfavorably impact pricing?

Ross, let me take that. This is Lee, and then Paul can add to it. I think there are two things here. One is, it is a substantial capital investment. But beyond that, it's capability beyond capital that's required to get into the cellulose specialties business. The second thing is, there is a very high switching cost as far as customers are concerned. This is a product that is engineered for each individual customer and the customers are very demanding in terms of their product specifications and the consistency of meeting those specifications.

So it is not a product like other products you may be familiar with in the forest products industry, where somebody with capital can move into it. It's just a very different product and that's why it's called a specialty business. So I think that the -- I think you've got two factors. You've got the capital and talent demands to actually get into the business. Then you got the reluctance of customers to switch to a new supplier from a tried and true supplier. Many of our customers-- we've been a supplier for 70 and 80 years.

Got you. Thank you. And I had a question for Tim Brannon as well. You mentioned, Tim, I believe in your comments that you're going to continue with your program, for pulp wood thinnings in 2009, despite the fact-- sounds like that pulp wood demand is easing. Are you worried that in doing that, you might further exacerbate the pricing situation, which up until now is, held up very, very well.

Ross, it's Tim. No, it's a situation where, as I said in my comments, we're going to be watching this market very closely as we go into 2009. And as we do, we'll judge as to whether or not we want to continue to be pushing our thinnings and pulp wood into that market. And if it does indeed soften, then we would pull back if need be. At this point, we think that this thinning strategy does two things for us. One, there still is a good demand for it-- a good market for it. Secondly, long-term, it provides us with stands that will have more saw timber on them. So we'll continue to sell into this market and use our thinnings. But as I said, we'll watch it very closely and if need be, we certainly would pull back.

Sure, thank you. And then, Lee, I'm sorry. I just have one more question. You mentioned several times in your formal remarks that CAD is still well above your dividend requirements and it sounds like with the 10 to 15% decline, that could still be the case in 2009. Sounds like the dividend, you feel, is safe here, but how would you-- would you actually consider raising the dividend in this environment?

You know, Ross, our board looks at the dividend on a periodic basis. It's a very important of the returns for our shareholders, so I think insuring that we maintain a strong dividend is very important. I do think, though, that consideration of increasing the dividend this year would certainly have to be balanced against where we are in the economic recession that we're all facing. So we'll be very very cautious about doing that until we get through the kind of economic conditions we're seeing around the world.

Sure, sure. Makes a lot of sense. Okay. Thanks very much, guys. Good luck to you.

Thank you..

Your next question comes from Chip Dillon, Dillon Investment Research. Your line is open.

Hi. Good afternoon, guys.

Hey, Chip.

First question, make sure I understood the caustic increase. What was that going to be year over year?

Chip, this is Paul. It's going to be over $80 million as we expect it right now.

8-8-0 million dollars?

8-zero

That would be roughly half of what you earn. I don't have it right in front of me, so that's a pretty big nut to overcome.

That's a big number.

Okay, and then also could you talk a little bit about -- I noticed you were mentioning that the basis for land sold in '08 was $11 million and yet, on the release it shows operating income was 80 and EBITDA was 113, which would suggest there might be something else noncash in there, to get to that $33 million difference. Could you just refresh our memories what that could be?

Chip, it's Hans. On the-- certainly on some of the nonstrategic timberlands, we will have some timber basis on there which will come through as depletion expense as well, as opposed to our typical, let's say rural HBU type properties, which typically has, very little timber value on them.

Got you. So that might have been roughly 20, $22 million last year.

Yes, last year was about $21 million.

Okay, and as you look at 2009, you mentioned there's still a lot of interest in your nonstrategic timberlands. Could you just give us sort of an idea of how much that might come on one hand from individuals or small partnerships? And on the other hand, endowments and pension plans?

Charlie, why don't you take that.

Sure. Chip, it's hard to predict where the next sale's coming from, but in '08, I think it would be fair to say in the south where the majority of our timberland was sold, it was purchased exclusively by TIMOs we had a very good competition of mostly southern-based TIMOs. I'm not going to speculate on '09. But the '08 was almost exclusively TIMOs.

And you know these guys. Would you say most of the money behind them were -- was from, again, pensions and endowments, or more, wealthy individuals? Was it -- or can you say?

I really can't say. We don't -- as long as they pay in cash on the day of closing, we don't really get too much into where they get their funds. But there were a number of TIMOs that purchased, so they might have different institutional partners.

Got you. And last question, just getting back to Performance Fibers, I know a couple years ago there was a big announcement about where a lot of the specialty dissolving, I believe that you guys sell goes to China and I just didn't know how -- have the shipments of that pulp been uninterrupted, just given some of the incredible volatility we see with the [Baltic] dry index and other factors in China? Are the shipments there going as planned?

Yes, our business into China's very stable and strong and we expect it to continue so.

Got you. Thanks very much.

Thank you.

Your next question comes from Christopher Chun, Deutsche Bank. Your line is open.

Thanks, good afternoon, guys.

Hi, Chris.

You know, it seems that there's quite a bit of uncertainty nowadays about timberland valuation. Given the fact that we really have not seen a large transaction announced in the last several months, I'm wondering if, you guys can add any insight into what's going on in that market these days.

I think from everything we've seen, there is good competition out there for timberlands. Even the latest ones we've seen come forward, beyond our own, have all maintained basically the value we would have expected and consistent with the value we've seen last year. The latest one we saw was the Potlatch announcement, which was good valuation and what we would have expected. So I mean I don't really have anything other than that to add, Chris. I mean everything we've seen is timberland values are holding up quite well.

Okay. That's fair. I mean the Potlatch deal certainly was a positive data point. It was a relatively small one, though, and I was wondering if, you might have had any insight into what sort of the depth of demand at the price points of last summer was in light of some turmoil and financial markets.

Well, the experience we've had has been good, strong competition, a lot of interest in the properties we've put on the market. So I have -- and in all the conversations we've had with folks there seemed to be continued good, strong interest. Matter of fact, I read a very nice article in the "Wall Street Journal" yesterday that seemed to confirm my suspicions that indeed timberland continues to be an investment of choice for a lot of people.

Right. Okay, and then I guess I would ask the same question on the-- on the rural land side as well as the nonstrategic land side. Have you seen any sort of slowing or reduction in the demand there, in light of the credit crisis?

Sure. This is Charlie. As I mentioned in my comments, somewhat mixed, no doubt in Florida it has slowed down. The rural market has slowed down. But I think we're in six or seven states with active programs and Texas, Alabama, Georgia, to some extent even Washington, we're seeing relatively steady demand. So it is mixed, but in some states, certainly better than other states.

And we see that change over time.

Absolutely.

I mean as we have over the last couple of years. But overall, I think your comment, Charlie, is pretty steady.

Right. That's right.

Okay, great. And then, Paul, just following up on the-- on the cost side, you talked about how much caustic was going to rise, but overall, it seems like some other types -- other cost elements might be easing this year. So do you have an outlook as to what your overall costs are going to do in '09 versus '08?

Yes, Chris, unfortunately we still see a dramatic rise in our overall cash cost position. We saw it 2007 to 2008 in the 16% range, which was obviously quite high. And we see at least that going into 2009 at this point as we're sitting here today.

Okay. And then, Tim, in terms of your volume outlook for '09, you talked about this a little bit already, but I'm wondering, given where the housing market is and everything, in terms of your saw log volumes, if you can think of what your '09 outlook is relative to what you would consider sort of a normalized year, can you tell us how that would compare?

Well, in the west, of course which is a saw log market, as you know, just at the tops that end up going primarily into the pulp wood market and the residual chips going into that market, but we're probably, as we look into '09, in the 60, 70% kind of range in terms of what we might produce on a more normal basis, something like that, just to give you a sense as to how much we're down, if you will, and how much we're trying to protect that good, high value saw timber that we've got.

Right. What about in the east?

In the east, again, we're doing the same type of thing there, where we're looking at harvesting stands which are heavy to pulp wood and probably not going to produce much more saw timber if we were to let them grow longer. So we're going ahead and taking those out that would have a high percentage of pulp wood probably in the 78 to 80% kind of range. And then on the thinnings of course, that product that's coming out is in the 90 to 95% pulp wood and again, trying to protect some of that saw timber or grow more saw timber in the years ahead.

Okay. Thanks for your help, guys.

Your next question comes from Peter Ruschmeier, Barclays Capital. Your line is open.

Thanks, and good afternoon.

Hello, Peter.

Have a couple questions. Maybe if I could start with Lee, I'm curious if you could share your thoughts on what the Obama administration may mean for the timber business, maybe how you think about it, in particular some of the topics like biofuels and carbon credits. I'm curious if that's died down at all in light of energy rolling over or if that's still a hot topic and how you might think about that.

Well, Peter, I think it's just the opposite of dying down. I think you're going to see this administration -- we are already seeing, move ahead with a number of things President Obama talked about during the campaign. So I think we're going to see in the stimulus bills things related to energy and in energy legislation we're going to see things related to energy and specifically climate change and I think that a big part of that is going to be in bio-mass. I think whether it's going to be R&D and demonstration products for cellulosic ethanol or whether it's going to be a component of a renewable portfolio standard. I just think you're going to have now an administration that in fact is going to move forward with that.

I was just reading a memo that the new administrator of EPA sent to all employees and she talked about climate change. She talked about what they were going to be doing as far as EPA is concerned, and I think we're going to see now a much heightened interest, whether it's legislation or regulation, and moving forward with it and I think it's going to have a major effect down the road for demanded for bio-mass.

Very good. That's helpful. Maybe a question for Charlie, if I could. I'm curious on the transactions that we saw in the marketplace for timberland in 2008. Charlie, could you venture a guess as to how much leverage you think may have been used in those transactions, what the trends have been in terms of leverage and timber deals.

I could certainly venture a guess. I don't know how valued my guess would be. I think no doubt there's less and less leverage and more and more either equity or private individual wealth that people still have in this economy. Three or four years ago we were hearing and knew about highly -- reasonably highly leveraged transactions and, again, this is just my view. I just don't believe there's much of that right now.

Okay. And then lastly, maybe also for Charlie, I'm curious if you could share any thoughts you may have on the spending projects that are coming for the Port of Savannah, or Jacksonville. Does it impact Rayonier at all? Any thoughts you could share on how that may evolve over time.

Well, clearly the expansion in the Port of Jacksonville is going to help us. The recently expanded project for Mitsui and the Hengin Project , both are new shippers into the port, is going to have some direct effect on us. Maybe container traffic's down a bit now, but I think we'll get a lot more industrial interest and we're very pleasantly surprised with what's going on in Savannah and the growth, again, subject to this poor

One other point in Jacksonville is the Navy just authorized the movement of a nuclear aircraft carrier from Norfolk to Jacksonville. It's going to result in significant increase in personnel in the Jacksonville area, particularly in the port area, for the Navy.

Interesting. Okay. Thanks very much. I'll turn it over.

Your next question comes from Mark Weintraub, Buckingham Research. Your line is open.

Thank you. First, just wanted to follow up on this big caustic. Is the new contract something that's going to be in place for several years like it sounds like the prior contract was? Or is this something that's going to go up and down more with the markets?

Mark, it's Paul. It's -- the new contracts in place January 1. There's more than one, there's several, both domestic and international suppliers. And they will move with the market, as our other ones did as well. But the other ones hit a ceiling and this will probably just move more freely. It's still favorable. We're a large user of caustic, one of the largest in North America, so we think we got good pricing, but unfortunately the last contract's just expired.

Okay, and then-- I was just thinking through that 15, 16% increase in cash costs in the business, by my back of the envelope, that comes to roughly $80 million or so, so that could largely be from just the caustic. When you look at all the other expenses and net them out, were they -- are you expecting them to work against you or for you in the Performance Fibers business?

There's additional costs in their overall, but certainly caustic is a major component of that.

Okay, and then switching gears, if you could just help us out on the New Zealand properties, remind us, if you would, what they are on the books for and when they were acquired.

Yes, Mark, it's Hans. They were acquired I guess starting back in 1992 and then we went into the venture-- we actually sold the properties to the venture and actually repatriated some of the cash in 2005 from that particular move. As far as on the books, looking around here to see where my latest and greatest assets. We have about -- net, about $50 million or so of net investment related to that.

And would have they been effectively marked to market in that 2005 transaction?

To the extent that we had cash proceeds coming back, there was a portion that was mark to market. But under the accounting rules, the remaining amount could not be marked to market and was still kept at historical.

And was -- would the majority therefore have been marked to market or not?

It would have been -- let me think about that. I think it was the minority of it, not a majority. I think it was about -- I don't think it was a majority.

Okay, and then in terms of the nonstrategic land sales, a comment was made that 50,000 or so acres were sold last year, and then there was a reference it could exceed-- and I wasn't sure if that was referring to the amount of acreage or the values per acre.

Yes, this is Charlie, the acres, the acres.

The number of acres, okay. And, Lee, you had talked about on share repurchase that one variable, which would need to be monitored would be the New Zealand properties. Presumably also what you might decide on the nonstrategic timberland sales could be another variable that could influence what you chose to do or not to do vis-a-vis share repurchase. Is that fair?

I think that's fair. I think, we're going to take -- we will always take a look at cash proceeds coming in and as I said, insuring that we're in good position as far as our debt repayment is concerned, insuring that we're in good position with our dividend, those are clear priorities. We're still making good investments in our businesses, and then I think we take a hard look at things like share repurchase.

And I guess I just wanted to take your temperature on a competitor of yours has been selling timberlands and using proceeds to buy back stock. The share prices of both that competitor and yours have gone down subsequently, so in theory even if the price you received on the timberlands wouldn't necessarily be quite as high. It might still, using that line of reasoning, make a lot of sense and be very value accretive over the long-term to be more aggressive on timberland sales and using those proceeds to buy back stock. How does that ring to you?

Well, we clearly-- we clearly see your logic there.

Okay. And then I promise I'll stop after this. So what would be the limiting factor on your desire to be more aggressive, to sell more land and use those proceeds to buy back stock, which is quite depressed?

I think really the limiting factor for us is taking a look at the value of the timberlands we've got, the overall strategy we've had, of how we upgrade our overall portfolio. So we're looking at -- when we talk about nonstrategic timberlands, we're looking at those that really we feel are not necessarily well fitted -- suited for our portfolio, but may well be of more value to someone else. At this point, we haven't felt like we wanted to go in the market beyond what we've been talking about to bring in additional cash. As I indicated, though, if in fact -- I mean we've put our New Zealand venture on the market and in fact, that New Zealand venture goes to close and we have that cash come in, well, clearly we're going to take a hard look at how we use that cash and one of the options we've got is share repurchase. And I'm sure our board will take a hard look at it.

Okay, thank you.

(Operator instructions). Your next question comes from Steve Chercover, DA Davidson. Your line is open.

Thank you. Perhaps beating a dead horse, but with respect to the caustic situation, which is a pretty remarkable number, and I think you said net-net we're going to see 16% increase in costs. Can you just remind us, Paul, how much you think you might get in pricing versus the fourth quarter, now that the surcharges have rolled off?

Let me just clarify, when I mentioned cash costs going, and I said in 2007 to 2008, you saw them go up 16%. I said from '08 to '09, you'll at least see that, so I didn't say that was the number, but I gave you that as guidance. So just as aware. And I'm sorry, Steve, ask me a question again on the price of that.

And then we had the pricing increase in Q4, which was a, evidently a surcharge or, you know, an add or given the cost of increases and I think that rolled off in December. But do we still see prices going up substantially on specialty fibers from 2008 to 2009?

Yes. we do. We still see prices going up substantially.

And can you quantify, is that a 10% increase or--

I indicated before that, in one of the questions I think from Claudia that the range is pretty significant from single digits all the way above 23%. But if we had to put a number just on the cellulose specialty side, it would be in the ballpark of 15%.

But that's a year-over-year average.

Average, right.

Not from a point in time there, Steve.

15 %, yes. Okay, got it. And my only other question, it appeared to me that that depreciation on a per unit basis in specialty fibers was also higher. Can you explain that?

Which, which period are you comparing to?

In the fourth quarter.

In the fourth quarter, the only issue I can think the top of my head is we had about a million dollar write-off, if you will for a particular asset that's being taken out of service. But other than that, that should be it.

So there were no investments that are being amortized that would cause what appeared to me to be a bump-up in the per-unit depreciation?

No.

No. Paul is right. We took some assets out at the end of the year.

Okay. Thank you.

At this time, there are no further questions.

All right. Well, I would like to thank everybody for joining us and for follow-up questions, as usual, please contact Carl Kraus. Thank you.

This does conclude today's conference. Thank you for attending. You may disconnect at this time.