Rayonier Inc (RYN) 2009 Q2 法說會逐字稿

Welcome and thank you for joining Rayonier's second quarter analyst conference call. (Operator Instructions).

I will turn the meeting over to Mr. Hans Vanden Noort, CFO, you may begin.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference covering second quarter earnings. Our earnings statements and presentation 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 in pursuant to the Safe Harbor provisions of Federal Securities Laws. Our earnings releases 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 forward-looking statements we may make. They're also referenced on page two of our presentation material.

With that, let's start our teleconference with opening comments from Lee Thomas, Chairman, President, and CEO. Lee?

Thanks, Hans. I'll make a few overall comments and then Hans will take you through the financials, after which Tim Brannon, our Senior Vice President for Forest Resources, and Charlie Margiotta, our Senior Vice President and head of our Real Estate business, and Paul Boynton, Senior Vice President Performance Fibers and Wood Products will review their business segments.

Overall our second quarter results were good. Strength of our performance fiber segment, continued interest in our nonstrategic timberland's helped balance the softness in our timber business. In Performance Fibers, as anticipated, the results reflect higher Cellulose Specialty prices offset by decline in sale of specialty volumes as customers responded to the difficult global economy by reducing their inventory levels and delaying orders to the second half of the year. Orders have picked up and the majority of our Cellulose Specialty customers are on track to meet their volume commitments for the year. Additionally, chemical costs in this business, which increased so sharply in the second half of last year, have returned to more normal levels. Real estate business continues to see good, steady demand for nonstrategic timberlands, as well as our rural properties. The quarter profited from nonstrategic timberland sales of over 30,000 acres, which generated $34 million in revenue. In timber, based on the strength of our other two core businesses, and our strong balance sheet, we condition to hold off harvesting our sawtimber until pricing improves. Overall, we generated good cash flow, well in excess of our dividend, and expect second half cash available for distribution to be even stronger.

With that, let me turn it back to Hans for review of the financials.

Thanks, Lee. Lets start on page three with overall financial highlights. As Lee noted, we had a solid second quarter, sales totaled $279 million, while operating income totaled $134 million, and net income was $108 million or $1.35 per share. Note that the results include the year-to-date benefit of the alternative fuel mixture credit, which increased second quarter operating income by $86 million, and net income by $79 million, or $0.99 per share. Without this benefit, operating income was $48 million, and net income was $28 million, or $0.36 cents per share. These pro forma amount will be used for the comparisons throughout this call.

On the bottom of page three, we provide an outline of cash resources and liquidity. Our year to date cash flow remained relatively strong with adjusted EBITDA of $183 million, and cash available for distribution of $95 million. Our debt and debt-to-capital ratios were comparable to year-end levels. We ended the quarter with approximately $60 million in cash, so on a net net basis we finished at $690 million. Note that our current quarter year-to-date and comparative periods reflect our New Zealand results back into continuing operations as we, along with our joint venture partners decided to discontinue the sale process.

Let's run through the variance analysis. On page four, we have prepared a sequentially quarterly variance analysis. In timber, operating income improved by $3 million. Volumes in both regions increased about 30%. In the eastern region, our mix was about 80% pulp wood and 20% saw logs, which resulted in lower average pricing. This impact was effectively offset by lower costs. Real estate income increased $10 million, due primarily to increased nonstrategic timberland acres sold. Moving to performance fibers, you can see the most significant item was a volume decline in cellulose specialties. This was expected as a number of customers had indicate made would be reducing inventories this quarter. We expect second half volumes to increase such that full year 2009 volumes will be comparable to 2008.

Let's move now to page five and the year-over-year variances. The second quarter and year-to-date variances to last year generally reflect similar drivers. Our timber results reflect softening prices, and the mix of lower saw log volumes versus pulpwood. Again we were able to offset some of this negative impact through reduced costs. The real estate variances were driven by greater non-strategic timberland acres sold, albeit at lower per acre prices. In performance fibers increased cellulose specialty prices improved as expected, but were still adversely affected by lower Cellulose Specialties volumes, higher input cost and reduced Absorbent Materials prices.

Turning now to page six. On this page, we reconcile from Cash Provided by Operating Activities, the GAAP measure to our non-GAAP metric of Cash Available for Distribution. Our cash flow was strong with CAD of $95 million, comparable to last year, well above our dividend requirement.

Turn now to page seven, which is our debt maturity schedule. Our next major maturity is $122 million installment note due on December 31st, 2009. We're currently evaluating options to refinance this debt and expect to access the debt markets sometime this quarter. Our $250 million revolving credit facility has $145 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 position us well to take advantage of future growth opportunities. With that, let me turn the conference over to Tim Brannon to cover Forest Resources.

Thanks, Hans. The strength of Rayonier's Performance Fibers and Real Estate businesses has given Forest Resources the flexibility to reduce our harvest during this cyclical downtown in the housing & timber markets. We have the luxury of allowing our timber to grow in size and value as the markets recover. Timber is one of those rare asset classes that increases in value over time due to organic growth.

In the west, on page nine, you can see that our sawtimber harvest this year is intentionally at historically low levels due to market conditions. Year-to-date, our volume is down 44% from 2008. We have a limited volume that we are supplying into the export market, which remains solid and much of the balance of the harvest goes to fulfill a contractual timber supply agreement. In 2009, we are harvesting at a level 40% to 50% below what we would expect to harvest under more normal market conditions. We estimate that in 2008 and 2009, we have held off the market about 215 million board feet of timber, or over $65 million at 2007 stumpage prices. In the west, prices for 2009 will be down around 15% year-over-year, due to weaker saw log demand, as well as species and market mix. Having said that, we are encouraged by the modest log price improvement we have experienced over the last month, potentially indicating a bounce off the bottom.

On page 10, demand for pulp wood was good in the east during the second quarter, as pulpmill operating rates improved, so we continued our aggressive thinning and pulp wood harvest program. Our second quarter pine volume was 43% above first quarter 2009, and 10% above second quarter 2008. While our normal clear cut harvest mix is 50% pulpwood, the second quarter 2009 volume reflects an 80% pulpwood mix, up from 69% in the second quarter of 2008, as we hold back harvest of our valuable sawtimber. We estimate that for the years 2008 and 2009, we will have preserved as much as 1.3 million tons of pine sawtimber for future harvest when markets recover. At 2007 stumpage prices, this conservatively represents over $30 million of deferred revenue. As you can see, pine stumpage prices are reflecting this higher mix of lower value pulpwood and are down 8% sequentially and down 17% from the second quarter of 2008. For the year, our pine volume will be down 13% from 2008, and prices will be 15% to 20% lower year-over-year due to weak sawtimber markets and our higher proportion of lower value pulpwood.

As an update regarding the sale of our joint venture estate in New Zealand, Rayonier and our partners have decided to end the sale process. While we had significant interest in the estate at what we considered fair value, the joint venture partners felt the current turmoil in the capital markets put execution of the transaction at risk. The partners agreed to continue ongoing operations and therefore it is business as usual in New Zealand. Regarding Australian/Asian markets we have been encouraged by current log export opportunities particularly to China and India. There has been significant substitution of New Zealand Radiata Pine for Russian Red Pine as Russian costs have escalated and Indian demand is improving.

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

Thanks, Tim. Overall the real estate market is relatively steady from the prior quarter and the back half of 2008. Development sales opportunities are limited, the rural market is steady and we continue to execute our nonstrategic timberland sales program. Interest from conservation groups in purchasing land across our ownership is certainly positive.

Page 11 details rural and development acres sold. The second quarter rural sales of nearly 2,800 acres were spread across our entire ownership with several sales in Alabama and Georgia. We also completed sales on our New York state property. We expect rural acres sold in the second half to be well above the first half based on anticipated closings. Page 12 is the price per acre chart. The reduction in rural per acre prices was driven primarily by mix of location. As I noted, the New York sales, which averaged approximately $850 per acre, represents a good value, but reduced the overall average price for the segment. We expect the second quarter sales mix to be consistent with the balance of the year, and, therefore, per acre prices will likely be flat. Page 13 details the nonstrategic timberland acres sold and prices per acre. The second quarter results consisted of sales in Georgia and Alabama at prices in line with our first quarter transactions.

Overall, experiences that timberland prices for our sales, while off the highs of 2008 are steady, and interest remains positive. We expect second half acres sold to be well below first half due to the time of transactions. With that, let me turn it over to Paul.

Thanks, Charlie. For the second quarter, Performance Fibers results were in line with expectations, and as we look at the full year, we are now projecting results to be above 2008. On page 14, you will see net selling prices for our two Performance Fibers product lines. Cellulose Specialty prices increased $31 a ton or 2% over prior quarter and more meaningfully 19% over same quarter prior year as our 2009 price increase took full effect.

As a reminder, our Cellulose specialty business typically has fixed prices for the year. However, last year, we made an exception and asked our customers to support a price surcharge due to rapidly escalating costs. Now as we see these costs falling, we will essential give back last year's surcharge that was built into the price increase for 2009 on the second half volume. As a result, cellulose specialty's annual year to year price increase should average about 12% to 13%. As an example of moderating cost, we previously projected that caustic costs for 2009 would increase approximately $80 million over 2008. Currently we expect the year over year increase to be less than half of that amount. Looking at absorbent materials, which consists principally of fluff pulp, as noted here, prices dropped $81 a ton, or 11% sequentially, and 16% below same quarter prior year. We anticipate year over year price declines for absorbent materials to be roughly 15% as previously guided.

Moving on to page 15, and looking at volumes. You can see our second quarter Cellulose Specialties sales were down sequentially as anticipate as key customers completed inventory destocking efforts. For the year, we expect Cellulose Specialty sales volumes to be comparable to prior year. Absorbent Materials volumes of 65,000 tons was comparable to the prior quarter and 26% above the same quarter prior year. We expect total year sales for Absorbent Materials to be approximately 10% above prior year.

In summary, performance fibers second quarter results were there in line with our expectations, driven by lower Cellulose Specialty volumes, but aided by reduced raw material costs, principally caustic, due to solid demand for our Cellulose Specialty products and costs moving towards trend line, we look forward to a full year financial results above 2008. Now let me turn it back over to Hans.

Thanks, Paul. Before I update our full year guidance, I would like to briefly review the alternative fuel tax credit. Through the second quarter, the alternative fuel credit totaled about $86 million. We are claiming the alternative fuel mixture credit as a refundable income tax credit which will offset our 2009 TRS income tax liability, such that we expect to have no cash taxes payable at TRS this year or next. Through June 30th, we had applied about $8 million against estimated tax payments, and we expect to apply about another $10 million by year-end. Any excess credit above our tax liability will then be realized as a refund in 2010 after filing our 2009 tax return.

Now I would like to update some key statistics to assist you in refining your model for Rayonier. As mentioned previously, I'll only be touching on full year statistics and guidance, and this guidance does not include any benefit from the alternative fuel mixture tax credit. We expect depreciation, depletion and amortization of $150 million and the non-cash cost bases land sold of $8 million, or approximately $158 million in total. This is $8 million below our previous guidance, driven primarily by lower depletion due to the reduced harvest levels. Capital expenditures excluding acquisitions are expected to range between $87 million and $90 million. We expect interest expense net of interest income of about $51 million versus $48 million in 2008. Finally, our effective tax rate is expected to be approximately 20% consistent with our prior guidance. This reflects the increase in the mix of income of our TRS businesses, resulting from the planned volume reductions in timber. When you put all of these elements together, we continue to anticipate strong cash flow despite the adverse conditions facing our timber business and are increasing our full year guidance as follows. We expect EBITDA to be five to 10% below 2008, versus our previous guidance of 10 to 15% lower. We expect CAD to be comparable to 2008, reflecting the increase in EBITDA and reduced cash taxes due to the alternative fuel credit, versus our prior guidance of 10% to 15% below 2008. Finally, we expect EPS, excluding the fuel credit, to be 15% to 20% below '08 versus previous guidance of 20% to 25% lower.

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

Let me conclude here by saying that we anticipate generating strong cash flows in 2009, comparable to 2008, and well above our $2 per share dividend. The unique mix of businesses that we have in Rayonier, our strong balance sheet, and our conservative debt levels, provide significant operating flexibility, and position us well for growth opportunities in our timber business in the future. In timber, we are encouraged by the recent improvements in the housing sector. However, we'll continue to reduce sawtimber levels to allow the trees to continue to grow until we see demand and pricing improve. Also, we're pleased with the increased demand for timber from the western US and New Zealand for export to Asia. We also see increasing activity in biomass demand for energy across our timberland ownership. In this regard, we have active discussions under way with both domestic and foreign power producers who are seeking wood supply agreements for planned facilities in several of our timber regions. In real estate, we anticipate ongoing interest for nonstrategic timberlands as prices continue to hold up reasonably well from 2008 peak levels, and we see steady demand for rural HBU properties, especially some of our unique conservation assets. In Performance Fibers with our global presence, we're seeing signs of emerging growth, especially in China, as their economy rebounds. Our global leadership position and unique high-quality products have produced strong profit margins through the business cycle and 2009 results will be above 2008. We continue to carefully manage our cost and capital spending and are well positioned to take advantage of market opportunities that develop. As always, our focus is on building shareholder value for the long term.

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

Thank you. (Operator Instructions). Your first question comes from Mike Roxland of Bank of America. Your line is open.

Thanks very much. Good afternoon, guys. Congrats on a very good quarter.

Thanks.

Going back to one of Lee's last statements in terms of emerging markets improvement. We've heard some commentary regarding emerging market demand improvement, primarily for commodity. What have you seen with respect to the specialty pulp, and if you could provide color on the trends you've seen thus far in 3Q?

I might let Paul respond to your question on commodity viscose. We did see earlier quite an increase as far as pricing is concerned in commodity viscose, I think particularly in the emerging markets throughout Asia, but Paul do you have anything further on that?

No, Lee, just to comment. It was obviously very high last year, $1600 a ton, dropped off severely the beginning of this year, it's $600 a ton, and now it has kind of rebounded and stabilized around $900 a ton. And certainly some of the opportunity that we see coming out of China or something that may not hit this the third and fourth, but looking out into the future, looking forward to some of the developments in the high value area.

Any particular read through though with respect to what we are seeing out of commodity viscose, I know that you don't really participate in it, but in terms of, emerging market demand, particularly from China, you're seeing an improvement in that as we progress through 3Q?

You know we see very good growth and demand for our products from China, and we are a major supplier of the high value of viscose products into China. One of the things that does affect us is as commodity viscose demand moves up and we see pricing move up, we particularly saw this last year, those producers who periodically try to move into the specialty category move out of that, and I think our customers are aware of that, and it's one of the reasons I think we have such steady demand from long-term customers.

Got you. Just moving quickly in terms of your harvest. Obviously you and your competitors are deferring are a shift with the hopes of better future pricing. How do you think all of that extra harvest will impact an eventual recovery?

I think first you have to recognize that a tremendous amount of the available wood supply in the US is from private landowners, smaller landowners, many of whom are not necessarily testing harvest. And the second thing is, you have a -- quite a length of time as to when you want to harvest your solid timber. It's not like you have inventory that is going to spoil. You've got years in which to determine when you want to bring that to market, and from our point of view, we'll bring it to market as pricing justify bringing it to market, and I think that's where many people, the way many people will look at the timing for bringing timber to market.

And just lastly, who are you currently seeing as timberland buyers?

Charlie, you want to respond to that?

Sure. The -- we continue to see Team O interest, and somewhere wealthy individual type interest, particularly for sales of our size. The 10,000 to 35,000 acre tracts continue to be of interest, and we continue to have success.

And on the conservation, I know that you've made mention of the conservation acres and how you've had interest there. Who has been looking at those acres, or has it actually resulted in any transactions, or to you expect it to going forward?

I would say we're optimistic that we'll have conservation transactions. I don't want to be specific. It's both governmental and private conservation groups.

Charlie, you may want to mention historically, Rayonier has done numerous conservation transactions.

Yes, we're one of the largest conservation sellers, certainly in Florida. And we don't quite quote me, but I think we've had a sales to conservation almost every year for the last five or six years. So, yes, we've added a lot of success. We have a team that works on that, and we are seeing some positively surprising interest, yes.

Thanks very much. I'll turn it over. Good luck in the quarter.

Thanks.

Your next question comes from Chip Dillon of Credit Suisse. Your line is open.

Good afternoon, gentlemen. The first question is on the black liquor credit. To me, if my math is right, but it looks like -- well, I'll cut to the bottom number, that if it lasts all year, you're looking at basically $161 million, and the way I got there is, looks like if you're getting about $14 million a month, and you, you know, recognize $8 million of, you know, already in the second quarter, $10 million in the second half, then you would, again get a total of about $161 million, and, again, you would get -- of you already realized $8 million of it, and $10 million in the second half, and I'm seeing, I guess, a total next year of about $145 million would be recognized as an offset to your taxes. Is that sort of in the ballpark?

Let me just walk through a couple of things and make sure we're talking about the recognition versus the actual cash utilization. So we're running roughly $20 million a month of credit earned. Okay? So if we run, let's say through September 30th, which looks very likely right now, on a gross basis, we'll be somewhere, let's say around $150 million. So we'll apply about $18 million of that against current years estimated tax payments. Effectively then at the end of September, we'll have $132 million receivable from the government, and we would expect to correct that about a year from now. We'll have to file our '09 tax return, and obviously we'll be trying to file that as quickly as possible, but my guess would be somewhere early in the third quarter next year we have realized the remainder of that cash.

Okay. I got you. But I just -- what confused me is if you got $79 million for five and a half months, that looks more like $14 million a month. Were you running slowly, or just not mixing as aggressively as you can going forward?

No, probably the big issue there was we had our scheduled downtime that both mills, in February and in April, and so that's probably the large effort impact that would have on your numbers. So right now we're running at about a 20 run rate.

And so if you went through year-end, and not trying to jinx you or anything, but you would have -- or the industry, you could see a total of 210 million, and, therefore, that receivable would expand to, say, 192. Would you be able to take advantage of that 192 in '10, or would some of that carry over to your '10 tax return you file in 2011?

No, we would get the entire refind August or September of '10.

Got it. And even if the total credit turns out to be over 200 million?

Yes, there's no to magic limits on whatever the amount is. And don't jinx us, Chip.

I won't. I hear you. Now, let me make sure I have the volumes right. You talk about in the west, and I might have just misheard you here, but I think you said that by with holding saw timber, you were basically keeping off 215 million board feet, that would be saving you, if you will, $65 million, because you're not selling it at below '07 levels. Were you referring to western saw timber there, and just for this year, right, this year's deferred harvest?

Yes, Chip, this is Tim. We were trying to estimate, basically, what happened in 2008 and 2009, total years. Okay? And we have kind of ballparked it at that 215 million board foot level, and then we made that comparison with 2007 pricing, yes.

Got you. Which is consistent with the measurement you gave us for 30 million in the south. And then when you gave your guidance, you said you expect western prices to be down 15% year over year. Was that for the full year, or the third quarter, or the second half, just so I'm clear on that?

That's year-over-year, right, total years.

For all of '09 versus all of -- 08?

That's right.

Got you. And what do you think the volume will be for the year, for all of '09, versus '08? In the west?

In the west, we'll be down around 40% year-over-year.

Okay. And that's consistent with in the south, you said I think you're volume would, if I'm not mistaken, did you say up 13%

That we'll be down 13%.

Got you, and pricing down 15 to 20. Got it. Got you. Okay. Thank you.

Your next question comes from Claudia Hueston, JPMorgan. Your line is open.

Thanks very much. Just a couple of questions. First, did you give the land basis in the quarter?

We didn't give the land base in the quarter.

Could you?

But we can. Let me see if I can find that. Roughly -- one second here, Claudia. For the quarter, our land basis looked to be about $1.7 million.

Okay. Thank you. And then I was just wondering, on the caustic quota side, is it possible to give us an idea of how much of the year-over-year it possible to give us an idea of how much of the year-over-year increase you've felt already in the first half of the year, just as it seems that cost ex-starting to ease a bit now. If you sort of born the brunt of the caustic increases now?

Yes, Claudia, just to be consistent with the guidance we've given in the past. In the first quarter, ran roughly about an $80 million annualized run rate, and the second quarter, that shifted down a bit, and currently if you look at what we've run year-to-date if annualized, that would be roughly in the $40 million year-over-year increase.

Okay. That's helpful. And then just finally, Lee, I I didn't know if you wanted to update your thoughts on the balance sheet and priorities for cash in this environment. Thanks.

Well, I think that we're quite well positioned, there's to question that the refund from the tax credit that Hans talked about, it's another strong infusion of cash that we'll be getting next year. I think as we look at uses of cash going forward, and bear in mind, I've always said that, particularly during this economic environment, we're going to be conservative, but I think that we always pay attention to our dividend. It's important to our shareholders. We also pay attention to our debt, and we maintain, I think, a conservative approach, as far as debt is concerned. But beyond that, I think we'll look at investment opportunities, and I feel like we're well-positioned, and I anticipate that over the next period of time, we may see some good opportunities for investment, as far as timber is concerned, and part of our strategy longer term is the same as it has been in the past, and that's to grow our timber reef. So I think that's one of the things we would pay attention to as well.

That's helpful. As you think about further growth, is the south more appealing than the west at this point, or does the west still have some attributes that maybe are more compelling for growth at this point?

I think there are attributes of beat that are appealing. I will say the Southeast, and I take -- I define the Southeast as pretty broad, well out into Texas and across the country in the south. Does have an a number of attributes that are alike, particularly as I see bioenergy coming on as a stronger bee hand. I think it's a whole new demand for pine fiber in the Southeast. I also think that as we have seen in this particular down turn on housing, we did have more flexibility as far as our pulp wood is concerned and the ability to go in and thin, and particularly I think the Southeast has had some real attractive attributes.

Okay. Thank you very much.

Your next question comes from Steve Chercover of D.A. Davidson. Your line is open.

Thank you. Gee, one of my questions already have been answered, but given what's happened in caustic, it was really gave us heart burn at the beginning of the year, is there an opportunity to re-enter into longer-term contracts at attractive rates, or at least rates that are more attractive than you thought you would be dealing with?

Steve, this is Paul. We do have contracts now that go out, we have built them in such a way they're fairly flexibility, and I think we'll be able to take advantage of the market as it moves downward and hopefully stays down. So I think we are well positioned. We had some contracts that expired at the end of last year that were very favorable, and now we have repositioned ourselves. I think we're in pretty good shape.

Good. Thank you. And you guys have been in the fortunate position where you really haven't had to sell timberlands, but there have been some fairly innovative deals recently. If you were in a position to sell forward your logs, and look in 2007 prices, would you consider a transaction of that nature?

I think we would certainly take a look at that. We have traditionally sold quite a bit of our timber on stumpage contracts, and that is a -- at least one I saw recently, is a very long-term stumpage contract, bit I think when we think about selling timber, we look at price, be and if it looked like we could get favorable prices, we would consider it.

You gave us a list of your priorities with cash, and I think it's well prioritized. Assuming you can re-fi it beneficial terms in the near future, how soon might we see you act on any of those priorities?

Well, Steve, I think we, as I said, are coming out of a very difficult recession. Our expectation is it's not going to be a quick recovery, and so we want to maintain a fairly conservative posture coming out of it. On the other hand, I think we're going to be very well positioned as a Company to look at opportunities that are presented to us. And I think if we see opportunities, particularly at attractive pricing, then I think we're going to be well positioned to take advantage of them. So it's a balance between those two things that we'll just be aware of as we go forward.

Understood. Thank you very much.

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

Thanks. Good afternoon, guys.

Hey, Chris.

Hey, Paul, I noticed that in the performance fibers, you guys raised your annual outlook a little bit to be improved year-over-year, rather than about flat year-over-year, which I think was the previous outlook. Can you talk a little bit about the trends that developed over the last three months that causes you to have a more optimistic outlook?

Yes, Chris, we've been pretty consistent on a guidance in terms of volume on both cellulose specialties and absorbent materials, as well as on pricing, so I think that part has not changed very much. What has changed a bit is certainly this moderation of input costs, and of course we've made some changes to our pricing structure as a result. I commented on that. But I think that's what we're seeing as the main driver and the benefit there.

Okay. Were there any other key factors that caused you to be more optimistic, and, also, were there any other factors that acted as offsets the other way?

Not that I'm aware of, no.

Okay. And then, Lee, you mentioned that, you thought that the potential demand from energy producers might be attractive in the Southeast. Can you talk a little bit about what you think is the potential scope of the opportunity there?

Chris, we really haven't quantified it, but it's interesting to me how many companies have approached about potential supply agreements. Primarily power companies. Now, some of them are actually in the planning stages for pellet plants, for instance. These are typically European producers that are interested in bringing pellets over to Europe, but we've got domestic producer as well. It's not just in the Southeast. we also see the same thing out with our Washington state properties. So I see that there's a range of planning underway. Some have gone as far as actually purchasing property for their plants, and are in the design stage for their plants. The thing I think that is really going to energize it will be federal legislation. That will move it forward much more quickly and probably much more aggressively. My sense is we may well see that legislation either later this year, or the first part of next year. As you know, substantial bills already passed the House. But at this point in time, it's very hard for me to try to quantify. I have seen some studies that people have worked on trying to quantify, and it looks like it could be quite a significant demand for both residuals in the field, as well as pulp wood.

Okay. Fair enough. And then on the real estate side, Charlie, we saw that the per acre prices were a bit lower this quarter than in recent quarters, and you talked about how that was mix related, but can you talk about what the per acre price trends were on a mix adjusted basis? Were they flat mix adjusted, or was there some erosion there?

Yes, I don't -- we didn't really see any erosion on an apples to apples basis. We sell in about 7or 8 states. So there is a bit of mix that goes on, but on an apples to apples basis, rural acres, the rural market seems pretty steady.

Okay. And then in terms of the -- the annual guidance, can you tell us how many -- how much in roll estate sales are sort of baked into that guidance?

Yes, for the annual guidance, all I would say is that probably rural would be comparable to '08, but I would say the nonstrategic, where we previously talked about 50,000 acres, we're just about there already, so we're likely to push closer to 60,000 acres this year.

Okay. Thanks for your help, guys.

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

Thanks. Good afternoon, and congratulations on the quarter.

Thanks, Peter.

Wanted to follow up on the question about demand from some of your energy customers potentially. I'm curious on what's important to you as a supplier. If you were approached by a consumer, are you interested in take or pay contracts, or what's the nature of the kind of relationship you see evolving as we go forward?

Well, I think the first thing we're interested in is location of the facility. Location near our timberlands, obviously, is an advantage. For us, and it is an advantage for them. So that's one of the -- I think one of the reason we're probably approached as much as we are, is a substantial holdings we have in pretty key locations. So that location is one thing. Then I think the second thing is, trying to establish some kind of supply agreement in terms of both time, as well as pricing. The -- the customers are particularly interested in a longer term supply arrangement. They want some guarantee, as far as availability of supply. And we're particularly interested in how we can insure that it is good, fair pricing over that time frame. Those are the kind of things we are really looking at. I would say, also, normally you're very interested in the stability to of the customer themselves. And people who are talking to us are very strong companies, so that has not really been an issue, as far as the discussions are concerned.

Okay. All right.

Tim, you may want to comment more on that.

Lee, I guess I would just ad that the security of supply is really important to them, because obviously they're going to be investing a lot of money in bricks and more tar to put these facilities in, so they want a long-term commitment from us, and we're certainly interested in that possibility, but, as Lee says, a lot of it's about that relationship that we'll have with that customer, and what pricing, escalations will be building in, and things like that. So we're still a bit away from something hard, but we're certainly talking to a lot of folks right now.

And it sounds like on the price question that potentially you could diverge from, say, timber mart south for publication price and enter into more of a specific contract or can you share your thoughts on that? If traditionally you've either opened things up for bid, or you've, potentially gone off some list prices, to that what we're talking about, or we're talking about a different kind of pricing mechanism?

Well, it's a bit difficult to say how this is going to work out, quite frankly, because, as you know, normally we're bidding or selling our timber on the stump, and we might have a 10, 12, maybe even 18 month kind of an agreement. Here people are talking about years of supply. And so it's very different, and I guess as we're getting into this and talking to some of these potential generating companies, we're learning as we go, and so we're not quite clear on exactly how that's going to look when we're ending, but we're working on it.

All right. Good. That's helpful. A question for Hans. I didn't see it. Did you supply or could you supply the depreciation and amortization for the quarter?

Oh, for the quarter? Yes, I can give you that. Our D&A for the quarter was about $34 million. And $14 million for depreciation, so $48 million total.

So 48 million total?

Right.

Okay. And just a question, against, about the cash flow statement. If I'm doing my math right, I think you're backing out the first quarter cash flow, I think you're second quarter cash from Ops was $62 million. So if I add your net income and the D&A, it's a net income of $28 million, D&A of $48, and bases of 2, that's $78 million. Just curious if there's any other puts and takes in the cash items.

No, I -- the one thing I would comment on is we have an increase in our working capital this quarter, and we typically do, because we have our -- as I minced earlier, we have our shutdowns, so we spend a significant amount, and that's going up as a prepaid on our balance sheet, and we basically write that off over the year until we get to the next series of scheduled shut downs. So not a was certainly an increase, and then as Paul mentioned, of the low shipments,, we obviously kept producing, and so had about a $10 million increase in inventory, the majority of which is at performance fibers. Also had a bump up in receivables. So that's probably another element on the cash flow.

That's helpful. And then maybe lastly, perhaps a question for Charlie. I'm curious about the status of some of the real estate opportunities, and whether it's national county, Savannah, Flagler county. I would imagine that things are quite slow, you know, quite slow at this point in time, but I'm curious on, you know, hat the strategy is in this period of down time, to position properties and evaluate whether its master plans or evaluate JV partners, how do you position yourself in these opportunity the future?

Well, it's clearly a good time to move forward with planning and entitlements. So wire working hard. Wire not spending an enormous amount of money on it. Consultants are quite hungry right now, but we're moving forward with our entitlement projects, both on our flagler property, and our Nassau property, and our property outside of Savannah has received all of it entitlements. So we're moving forward. We've got a small team working on it, and we're real pleased with the progress. So it's actually a good time in the regulatory variety. Obviously a difficult time in the housing environment, but we're moving forward, and making real progress.

And I think the one in Flagler, Charlie, we're actually now publicly talking about the community plan, which really is a great plan down there.

Right. In fact the -- the application for development was submitted this week. So we're actually pretty excited about it.

Oh, okay. But you haven't moved forward yet on plans to partner up with additional partners?

We've got discussions underway, but nothing to report right now.

Okay. Very good. Thanks very much.

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

And thank you. Maybe following first on the entitlement situation. How much acreage at this point do you have entitled for residential and/or commercial?

We have about 8,000 acres in Georgia, 7 of which for residential, and a thousand acres for industrial commercial, and we've just filed entitlements for 6500 acres in Flagler county. So that's the status.

Okay. So those are filed, not yet received in Flagler?

Correct.

And how many lots is that on the 7,000 acres?

Actually on both projects, it's about net net about one unit per acre.

Okay.

Mark, you realize that the plan includes a variety of different type of units.

Right.

As Charlie says, when you net it all out, it's about 1 per unit.

One unit per acre, and then, in addition to that, on all the projects, there's a fair amount of commercial space that would -- entitlement that we'll receive.

And are all of these projects still in to a holding pattern because of the housing market situation, or are there actually situations where because of the unique attributes, et cetera, they're actually in go forward mode. And related to that, I've been hearing there was some increasing demand for some class A properties, be and are you seeing that in any of your areas?

I would say in order of interest, industrial is probably the highest, commercial second, and frankly residential is very difficult now. I mean there are just not a lot of developers, except there's some existing developers that are expanding existing developments, so we've sold some property to those folks, but there are not -- we just don't see much to be -- to be perfectly honest, much new development, new development capital going in yet.

For residential.

For residential. We will, but not right now.

Okay. And then shifting gears, on the -- I guess it was in the Wall Street Journal, I read an article about China potentially raises taxes on cigarettes, and is that -- I assume that's something that you follow pretty closely. And can you tell us what the status is what potential implications that would have for your chem sale business?

Yes, I can't tell you the status of that, so I can't answer the question on that part of it, but we've had plenty of conversations with our customers in China, and, don't believe there's a significant change at this point in time in the near to mid-term that would have us think anything differently about then strength of the business there.

Yes, I was over in China about a month ago meeting with our customers, and they were quite positive about the growth of their business. As a matter of fact, it seemed quite substantial growth in the first half of this year.

Okay. Well, fair enough. Thank you.

(Operator Instructions). Your last question comes from Chip Dillon, Credit Suisse. Your line is open.

Hi, I just had a couple of follow ups. First one is could you just -- I was doing the numbers during the question and answer, and actually on slides 10 and 23, maybe I'm missing something, but it looks like you're giving us different numbers for the volumes in the, for timber. I think slide 10 says 1864, and slide 23 says 2019. Which one of those is the one we should go with, and is there some reason for that difference? Sorry to be nitpicky.

Chip, this is Hans. I think the difference is the bar charts are just pine, whereas on the page 23, that's going to include our hardwood as well.

Got you. Okay. That makes sense. And then the last question I had was, if you, and I know this is a big if, but if we see the credits come through at year end, what I measure is, is that again, you would get 210 overall, and since you said you would get -- you've gotten 8 through your tax return offset, I think you mentioned 10 million in the second half. So then that would mean you have something like 184 next year, if I did my math right. I'm sorry, 210 overall, minus 18, sorry, 192 next year, and either way, however you look at it, it looks like your net debt, if you adjust for this, would be actually under $500 million. So I guess my question is, if you see your operations covering your dividend, you know, well into next year, you're going to have quite a -- and you refinance this maturity, you're going to have quite a bit of cash next year, and is that something you're uncomfortable with, and you do you think maybe some of these opportunities could arise that soon, that you were talking about?

Well, we are not uncomfortable with that amount of cash. And, yes, I do think opportunities could arrive that soon. But, no, we are pleased to think about that amount of cash and the flexibility its going to give us.

Got you. Great. Thank you.

You're welcome.

And we will turn the meeting back to Mr. Vanden Noort. Sir, you may continue.

Thank you. Appreciate you because on the call. With any follow-up questions, please contact Karl [Kraus].

This does conclude today's conference. You may disconnect at this time.