Rayonier Inc (RYN) 2010 Q2 法說會逐字稿

Thank you for joining Rayonier's second quarter 2010 teleconference call.

(Operator Instructions.)

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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 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 pursuant to the Safe Harbor Provisions of federal securities laws. Our earnings release as well as our Form 10-K filed with SEC list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our presentation material.

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

Thanks, Hans.

Well, I feel like we really had a good solid quarter, good performance from each one of our businesses. I had a eye procedure last night; and as a result, I'm not able to read for the next couple of days. Or at least, the doctor asked me not to. But I did have a statement. And I'm going to ask Hans to read that.

And when Hans finishes that, we're going to turn it over to Paul and Charlie and Jack, to talk about their businesses. And then I'll come back and participate in the Q and A session.

Go ahead, Hans.

All right. Thanks, Lee.

We're pleased to report earnings per share of $0.48 in the second quarter, and continued strong cash flow, which not only reflected our operating results but also included receipt of the [$189 million] (corrected by company after the call) tax refund for the alternative fuel mixture credit.

Markets remained dynamic throughout the quarter, as customers restocked inventory and the housing industry cycled through the impacts of the homebuyer tax credit program. While we've seen sustained improvement in many of our markets, we are particularly proud of the actions we took to capture the value of these opportunities in this quarter and for the rest of the year.

In Timber, we pulled forward a number of stumpage sales to lock in higher pricing created by supply/demand imbalances. We'll see the benefits in future months as these tracts are harvested. We also took advantage of strong export markets in the west and steady pulpwood markets in the east by adjusting our harvest plans to meet demand.

In Performance Fibers, we continued to focus on operational excellence to increase reliability and improve our competitive cost position. As a result, we came out of our scheduled shutdowns faster than expected, positioning us to meet growing demand for our cellulose specialties products.

The actions our businesses are taking not only drove strong results in the second quarter, they also create the basis for the increased guidance that we'll describe in more detail during the call. Let's turn now to page three, with the overall financial highlights.

We had a very strong second quarter, with sales totaling $312 million, while operating income totaled $56 million and net income of $39 million or $0.48 a share. We had no special items in the second quarter. However, last year's second quarter included the 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 a share.

Also, the first quarter of 2010 included a $12 million gain or $0.14 per share from the sale of a portion of our New Zealand joint venture. Both of these items are excluded to arrive at the pro forma amounts which 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 was strong, with adjusted EBITDA of $201 million and cash available for distribution of $303 million, which includes receipt of the $189 million of alternative fuel credit.

Our debt and debt-to-capital ratios were above year-end levels, reflecting a $75 million, five-year term note from a group of banks. We ended the quarter with approximately $344 million in cash. So on a net debt basis, we finished at a very manageable $420 million.

Let's now run through the variance analyses. On page four, we prepared a sequential quarterly variance analysis. In Timber, operating income was comparable, as stronger pricing was offset by lower volumes in the western region and slightly higher costs in the east. Real Estate income decreased $13 million, due primarily to selling fewer non-strategic acres this quarter.

Moving to Performance Fibers. Operating income was comparable to last quarter. Stronger fluff pricing was offset by higher wood, chemical, and transportation costs. Finally, we had a $4 million improvement in our wood products results, driven by higher lumber pricing.

Turning now to page five and the year-over-year variances. The second quarter and year-to-date variances generally have similar drivers. Our Timber results reflect strengthening prices, slightly offset by lower thinning volume in the east. The Real Estate variances were driven by fewer non-strategic timberland acres sold and somewhat lower rural pricing due to mix.

In Performance Fibers, cellulose specialty prices declined, due to the removal late last year of a cost-based $95 a ton surcharge. This was somewhat offset by stronger fluff pricing. Improved cellulose specialty volumes and lower chemical costs drove the improved operating income. Finally, wood products results were significantly better, again driven by the stronger lumber prices.

Turn now to page six, where we reconcile from cash provided by operating activities, which is our GAAP measure, to the non-GAAP metric of cash available for distribution, or CAD. Our cash flow was quite strong, with CAD of $303 million, well above our dividend requirement.

With that, let me turn the call over to Paul Boynton, to cover Forest Resources.

Thanks, Hans.

Overall, we're pleased to report operating income of $8.7 million for the second quarter, compared to $400,000 for the same period in 2009. On page eight, you'll notice that our prices for our western timbers stumpage continued their upward trend and increased 20% in the second quarter over first quarter, and were up 67% over the year-ago period.

Now, since a substantial portion of our volume is currently generated from delivered logs, we have also included the corresponding price trend, which you can see has had a similar track. Continued strong export demand, driven mainly by China, and improved domestic saw log demand lifted second quarter prices.

With a significant portion of third quarter volume under contract, we expect selling prices in the third quarter to be comparable to the second quarter. However, with prices still below historical levels, we will continue to defer approximately 30% of our sustainable harvest levels in 2010 to preserve value.

In the east, on page nine, pine prices remained relatively flat to first quarter levels, declined $0.34 a ton, and were 31% above second quarter 2009. Supply constraints due to wet weather and strong pulpwood demand supported higher prices during most of the first half.

In the second quarter, we continued to pull stumpage sales forward and have locked in the majority of our 2010 volume at these higher price levels. As mentioned last quarter, 2010 pine harvest volume is planned to be below that of 2009, as thinnings return to more normal levels.

And overall for the year, operating income should be substantially above 2009. And with that, let me turn it over to Charlie Margiotta to review our Real Estate business.

Thanks, Paul.

The real estate markets in which we operate remain reasonably consistent, with continued strength in Texas and Alabama. Non-strategic timberland sale opportunities continue to be identified. And during the second quarter, we completed an auction of 5,000 acres to 50 separate buyers.

Chart ten is the HBU sales in acres, which shows second quarter sales of approximately 3,000 acres. Sales were completed in every state in which we have ownership. Land sales for 2010 will be somewhat second half-loaded, and we continue to project that 2010 sales volume will be above 2009.

Chart 11 indicates the per-acre sale prices. Overall, prices are steady, with the lower second quarter prices driven primarily by mix, which included sales in New York and a 1,000-acre conservation sale in the Okefenokee Swamp. We expect the second quarter average rural price per acre to be the low point of the year.

Chart 12 details our non-strategic timberland sales program. As I mentioned, during the second quarter we conducted a successful auction of scattered properties in Georgia. While 2010 will have fewer acres than 2009, we do continue to find opportunities to sell properties at attractive prices.

We continue to make progress with our entitlement projects, and are experiencing increased interest in our large industrial sites, one located just south of Savannah and the other west of Jacksonville. Both sites have superior attributes, including rail access.

With that, let me turn it over to Jack, to review our Performance Fibers business.

Thanks, Charlie.

Strong Performance Fibers results continued through the second quarter, due to the growing demand for our cellulose specialties and absorbent materials products, and good overall operational performance.

On page 13, you will see net selling prices for our two Performance Fibers product lines. Cellulose specialties prices were comparable to the previous quarter. However, compared to the same quarter prior year, Q2 prices were down $69 a ton or 5%. As we have discussed previously, this decrease is due to the removal of our cost surcharge late last year. Excluding this surcharge, prices were up $26 per ton or 2% compared to the same quarter last year.

As projected, absorbent material prices, which consists principally of fluff pulp, increased $81 a ton or 12% from the previous quarter, and $120 or 19% from the same quarter in the prior year, as market conditions continued to improve.

Moving on to page 14 and looking at volumes, our second quarter cellulose specialty sales volume of 115,000 tons was favorable 24,000 tons or 26% compared to the same quarter in the prior year. And absorbent materials volume of 51,000 tons was unfavorable 14,000 tons or 22%. These volume shifts were largely due to mix optimization to meet customer demands.

As expected, overall costs for the second quarter were higher than Q1, driven by higher transportation costs, higher chemical prices, primarily caustic, and the completion of our planned annual maintenance outage at Jessup.

For the full year, we see continued strong demand for our cellulose specialties products, with the volume 2% to 4% greater than the prior year. Overall, we expect costs to stay flat to Q2 for the remainder of the year.

In summary, Performance Fibers' strong second quarter and first half results have us on track for another strong year of financial results. Now let me turn it back over to Hans.

Thanks, Jack.

Now I'd like to update some of the key statistics, to assist you in refining your 2010 model. We expect depreciation, depletion, and amortization of $146 million, and a non-cash cost basis of land sold of about $8 million, or approximately $154 million in total.

Capital expenditures excluding acquisitions are expected to total about $141 million, versus $92 million in 2009 and a normalized run rate of about $100 million to $110 million. This significant increase will primarily occur in Performance Fibers cost reduction and efficiency projects, as well as additional environmental projects.

We expect interest expense net of interest income of about $50 million for the year. Our pension expense for the year should be about $11 million. We expect to contribute a significant amount to our pension plans, possibly in the $40 million to $50 million range. Finally, our full year effective tax rate is expected to range between 16% and 18%, consistent with our prior guidance.

When you put all these elements together with the AFMC refund, we anticipate very strong cash flow, despite continuing to defer the harvest of our higher-value saw timber. We expect adjusted EBITDA to be well above 2009, and CAD should also be well above 2009 and in the $360 million to $380 million range, reflecting the AFMC refund net of the higher CapEx and pension contributions. And we expect pro forma EPS to now be between $2.05 and $2.20 per share, excluding the gain on the New Zealand joint venture transaction.

Now let me turn it back to Lee. Lee?

Okay, Hans. Well, I think as you all heard, it was not only a good solid second quarter, but we have projections for the rest of the year that have allowed us to increase our guidance in terms of earnings and cash flow. We feel very positive about our business and how it's performing at this point.

But Hans, why don't you finish reading my statement. Then let's open it up for questions.

Okay. Thanks, Lee.

We recognize that our timber markets will remain dynamic until the housing recovery gains momentum, and we have the operational flexibility to continue being opportunistic and to manage for the long term. Over time, we see the value of our timberlands increasing as this resilient asset benefits from improving markets.

Our timberland portfolio is further enhanced by the value we capture through rural, conservation, and development sales. As the global leader in cellulose specialty products, we see continued strong demand for our products and tight market supply. With our major planned shutdowns successfully executed, we're running above plan, supplying our customers with a premium product that is a critical part of their value chain.

Our unique business mix, conservative balance sheet, and substantial liquidity provide the operating flexibility to take advantage of opportunities for growth. Our actions to drive value reflect our strategy of providing shareholders with an attractive dividend, funded by strong operating cash flows and a growing investment in geographically diverse timberlands. We see tremendous value in our timberland portfolio, and expanding our land base continues to be a top strategic priority.

With that, I'd like to close the formal part of the presentation and turn the call back to the operator for questions.

Thank you.

(Operator Instructions.)

Your first question comes from Chip Dillon, Credit Suisse. Your line is open.

Yes, and good afternoon to you all.

Hi, Chip.

First question is -- and I just have to make the comment. It's great to see you raising guidance, and not really selling land to do it. When you look at the second half of the year, is most of the earnings distribution pretty even through the two -- the third and the fourth? I know you can't tell us exactly, but is there any sort of skewedness to the two quarters, based on, I guess, land sales or harvest profiles or maybe even the way you view pulp pricing?

Well, overall, Chip, I'd say relatively even.

But Hans, why don't you comment on that? Because it is probably a little stronger in the third quarter, at least looking at where we think things will close.

That's right, Lee. Right now, we would expect Q3 to be somewhat stronger. As always, Chip, with the timing of land sales, it makes it a little dicey. But where we sit today, we think Q3 actually maybe a little bit stronger than Q4.

And I'm just curious. Would you -- I would expect, I guess, in the Performance Fibers, for the specialty cellulose probably to not change a lot in price. I don't think there's any reason for it to. You can correct me on that.

But do you assume that, I guess, fluff pulp prices stay kind of stable with where they are now?

Well, I tell you, you're right on cellulose specialties. I think we've commented in the past on how we, basically, negotiate price on most of those -- most of that product on an annual basis, so it's pretty steady. It just depends on exactly the mix of products we ship, but I think pretty steady.

As far as fluff pulp is concerned, we at this point feel like it's -- there's good demand out there, and fairly steady as we look out into the year. It could weaken a little in the fourth quarter, but it's hard to predict at this point.

Okay. And I guess, lastly, you mentioned again the long-term goal of expanding the land base. Are you -- I guess, two kind of questions tied to that. Number one, are you seeing any increased opportunities that you feel are attractive?

And secondly, just to refresh our memories, as a timber REIT, are you, either through the TRS or even in the REIT, able to maybe hold onto some of the cash, especially since, I guess, black liquor counts as earnings, so that you have a -- you have more of an ability to execute a transaction without taking on a lot of debt?

Well, absolutely, we do. But let me -- I'm going to let Paul comment in just a minute on your first part of your question, which had to do with what we see as far as land transactions. We did comment in the past that, as far as large tracts of land, we really don't see many in the market, at least domestically. We do see smaller tracts. And we're pretty active, as far as looking at that. And we've seen some larger tracts outside the US that we've taken a look at.

But Paul, you may want to comment on what we're seeing.

Yes. Lee, I think, actually, you're right on with regard to your comments. We're seeing the overall market relatively quiet. Smaller tracts, certainly, out there. But I think, by and large, just the uncertainty of the economy, there's a lot of cash sitting on the sidelines. I think, as a timber owner, you're happy to be in timber, and since the fact that it's still growing in these uncertain times, and you don't know what to do with your cash at this point, you stay there.

So the market's relatively quiet. And we'll be patient. We'll keep looking out there.

Now Hans, you may want to comment a little bit on --

Yes.

-- Chip's second part of his question.

Sure. Well, the cash from the black liquor credit is sitting in the TRS. It's just, basically, been converted, Chip, from a receivable to cash. So as far as the asset test, we're really in no different position than we were at the end of the year, if you think of -- along those terms.

So we're fine when we look at the asset test. All of our debt is in the TRS, as well. So you recall that test is done on a net asset basis. So we're just going to be opportunistic and very disciplined in looking where to invest that cash.

And the very last question. And I guess, maybe because you didn't mention it, maybe that is the answer. But only one company so far has kind of come out and said there might be a -- or likely would be a different action toward the tax credit by going after the cellulosic biofuels credit.

Have you all looked at that, and is there a chance we might get a little extra bump from that?

No. We --

Well, we --

Go ahead, Hans.

Oh, I'm sorry, Lee.

I was just going to say we're just in the middle of evaluating it, Chip. There's a number of technical issues involved with it. I mean, obviously, the gross amount of the credit, even on an after-tax basis, is greater. However, you're likely limited to the time period that you can actually use it. The mechanics of going through the process aren't clear. And obviously, there's some political risk.

So we're still evaluating all that. But at this point, we're not that deep into it yet.

Thanks very much.

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

Thanks. Good afternoon, guys.

Hey, Chris.

Hey, congrats on the quarter. I was just wondering, though -- last quarter you thought that 2Q might be sort of comparable to last year's quarter. And I was wondering what was the positive surprise that developed during the quarter.

Chris, I think the biggest thing that affected the second quarter was the Performance Fibers business and the way we came out of our maintenance shutdowns, our annual shutdowns. I thought there was a lot of good work done.

I think, as I commented, we're operating above plan. So I think that's, primarily, what drove the upside. I think we were pretty much on as far as what we had forecasted in our Timber and Real Estate business. So I really think it was more the Performance Fibers improvement more than anything.

Okay, great. Can you talk about sort of what a typical cost for the maintenance shuts might be and how much it was this year?

What a cost would be?

Right. Between --

Is that --

Between the expenses that you incur to actually do your maintenance, as well as the lost tonnage.

I don't know whether we have those kind of figures right at the top of our hand here. Jack, I don't know whether there's something generally you can comment on that.

What these are, Chris, is it's our annual shutdown. Typically, they'll last as long as 30 days. We had one at both mills. Not at the same time, but at different times. I think, if anything, we came out of the plan sooner than we thought, which meant that we produced more pulp than we thought and were able to sell more.

And I think our costs were in line, if not a little better than in line. The other thing I would say on Performance Fibers -- and Jack, you can correct me -- but I think we ended up with more domestic sales in the second quarter than export sales. And that mix actually helps quite a bit as far as our transportation costs.

But Jack, have you got anything further you want to add to that?

Lee, I think you covered it. And you're exactly right on the mix issue for Q2.

Yes, okay. Switching gears to Timber. Can you tell us what the mix is in the west between delivered and stumpage sales?

Paul, have you got that?

Yes. I'll give you kind of a rough -- oh, hang on here just a second, Chris. Let me --

Okay.

Yes. Just looking a number up.

Chris, about 15% stumpage, 85% delivered. And we're pretty good at flexing that through time and depending on the market conditions. I think that's one of the things we do, actually, fairly well, is move that around in response. So that's about where it is at the current time.

Okay. And then can you tell us, of the delivered, how much of that is export business?

Typically, of our total volume, export is in the range of 10% to 20%. I think in this type of market, it's closer to the 20%, again, of our total in the west.

Okay. And then in the south, is that all stumpage sales then?

No. In the south, it's also a mix between delivered and stumpage. And again, one of the things I think we do fairly well as an operational team is move that, depending on the markets and what we saw. And so the split -- currently, I don't have the number. Hans is kind of pulling this up for me, but --

It's almost the reverse, I think, Paul. I think the vast majority is stumpage in the south.

It is, Lee. And I think we've kind of -- maybe it's at 65%-70%.

Yes. We're running, probably, around 70% -- 70%-plus stumpage in the south, Chris.

Okay. Can you talk a little bit about how you view strategically what the right mix is there, why the stumpage sales predominate in the south whereas the delivered sales predominate in the west?

Yes. It does vary, for a lot of different reasons, certainly, is demand. If we see, for example, as we did earlier this year with -- in the southeast with some heavy rains, a spike in interest in timber, we move towards that and put more out onto the stumpage and try to take advantage of that. So that would be the type of thing that we would do. We kind of would flex that way, depending on if there's a hotter market. We kind of look at our markets on a very micro way, and move and flex accordingly.

Yes. The other thing I would just mention, Chris, is, out west, this is probably an unusually high percentage for us, because what we're deferring out west would typically be stumpage sales.

Right. And as we mentioned, Hans, adding to that, we're deferring probably about 30% of our sustainable harvest right now.

Oh, okay. So maybe some of the larger, saw log type --

Yes, absolutely. We see that, obviously, having more value going out in the future. So to the extent we can hold that for future sales, we will.

Okay. And I was a little surprised that you said that, at least in the west, prices would be flat quarter-over-quarter in 3Q. I'm just looking at wood product prices in general. They're off quite a bit in 3Q.

Do you not see that impacting log prices?

Well, yes. What we have is -- in the west, we've got several customers with contracts that we'll see the benefit of the higher prices that we've seen in the first half of the year continue to flow through the second half of the year, keeping us pretty steady and strong out there.

And on the stumpage sales, those actually have locked-in prices.

Okay. How long are they locked in?

Well, typically on a stumpage sale, the person who buys them has a year in which to harvest.

Okay. I'll go ahead and turn it over. Thanks for your help, guys.

Your next question comes from Mike Roxland, Bank of America Merrill Lynch. Your line is open.

Thanks very much. Hey, great quarter, guys. Lee, hope you're doing better.

Thank you.

Just a little bit more color on what's happening in fluff pulp. Obviously, you're starting to see some pricing weakness in commodity pulp, which could undercut fluff pricing at some point. So I just want to get your thoughts on the fluff pulp market.

Overall, I think the demand continues to be strong as far as fluff pulp, at least based on what we've seen. But as we've said in the past, the price as far as fluff pulp is concerned is largely set by much larger suppliers than us. We are a relatively small supplier, but we've got a great customer base.

And -- but, Jack, you want to provide any more input on that?

Just a couple of comments. I think you guys are well aware that fluff pricing tends to lag the broader paper pulp market. So right now, we're seeing a little bit of softness in the paper pulp market. And should that continue, it's going to be at least a few months before we see any type of activity in the fluff market.

Got it. So you could see some -- potentially see some weakness in fluff pulp in 4Q.

Potentially.

Potentially, okay.

Yes.

Now, just going back to the guidance question. Obviously, you raised guidance for -- to $2.00 -- from [$2.10] (corrected by company after the call) to $2.20, from $1.85 to $2.00. So I'm just wondering, does that guidance -- does that increase imply -- or is that all being driven by Performance Fibers? Or do you expect the second -- in the second half, the results to also improve at some of your other operations, as well?

I think a lot of that is driven by, basically, the strength of where we think we are in each one of our businesses, kind of where we see our land sales, what we think we've already got under contract as far as timber sales and our outlooks on timber, but also continued improvement as far as Performance Fibers.

As I said, we're operating above plan. We think we're doing well there. So I think it's a combination of all of it. But I do think, as I said, in the second quarter, I think Performance Fibers is doing better than we had planned, good production and good sales.

Hans, you want to comment on that any further?

That's exactly right, Lee. Really, Mike, across the board, certainly stronger than when we were -- in early May, as I recall, in our first quarter call.

Okay. Got you.

And just lastly, on -- I just want to get your sense of what is the export trend for log sales, given that China's growth has slowed a little bit. Do you see that -- has there been any corresponding effect on exports? I mean, obviously, you had strong export sales to China in 2Q. But what are you currently seeing with respect to export log sales?

We continue to see strength. I know our exports out of New Zealand, particularly, go into China, as well as Korea. And matter of fact, if you look, over the last three years, China went from no exports from us to, now, our number one customer. So I mean, it has backed off some, but they're still quite strong.

Paul, do you want to comment further on it?

Lee, I think that's right. We've got two views of China and what's happening there, one off the west coast and, as Lee commented, off New Zealand, as well. We still see volume flowing, easing maybe a little bit. Prices off of the peak maybe of three, two months ago, but still historically above what they have been. So we anticipate that it may remain relatively off that peak here for the next couple months. Then you'll be coming into what we would consider, perhaps, a stronger back half of -- back half of the year, so a stronger fourth quarter.

Got you. All right. Good luck in the quarter.

Thanks.

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

Hi. Thanks very much.

I just wanted to go back to your answer to Chip's question. And I was hoping you could just elaborate on how you're prioritizing potentially growing your land base outside of the US.

Claudia, we have focused primarily on growing inside the US over the last several years. We have looked at properties outside, particularly in New Zealand and Australia, because of our presence in New Zealand.

We've also looked down in South America. Basically, what we've concluded, after looking at a lot of it, is that we think there's probably more value in investing in timberland in the US than it is outside, at least based on the ones we've looked at, at this point.

Now, that doesn't stop us from continuing to look at them. But the ones we've seen so far and the sales we've done in the last couple years have all been US-based.

Okay. That's helpful.

And then, other than just sort of maintaining your patience in the acquisition environment and sort of waiting for more land to come on the market and prices to sort of become attractive, how are you thinking about your cash more broadly? Are you thinking at all about the dividend or stock buybacks at this point? Or are there capital investments that you might be able to make within the Performance Fibers business?

Yes to all of that. As a matter of fact, dividend is clearly something that we're taking a hard look at. Our board has looked at that over the course of their last couple meetings. And generally what they do is look at it in the context of our updated, five-year, long-range plan, which we do every fall.

But that's clearly a high priority for us. Always has been and will be. We have invested a little more in our capital projects this year, as you could see from our capital spending in our mills. There are some additional opportunities there we're looking at. We have decided to put some additional funding into our pension plan, which we will do over in the fourth quarter.

And then we're pretty active on looking at some timberland, different tracts. They're not large tracts. But we do find, in the 10,000-acre to 20,000-acre range, timberland that's available in the market. So I think there are going to be good opportunities down that whole range for us to deploy this cash in a way that really gives good value to our shareholders.

Okay. Thank you very much. I appreciate the color.

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

Thank you.

I was just wondering if you could expand on the benefits or what precisely the capital projects at the pulp mills were that are supposed to drive down costs.

Jack, you want to comment a little bit on some of those projects? Now, some of them were not just costs. Some of them were associated with environmental upgrades that we're doing at our mills. But Jack, you want to comment some on it?

Yes. We have invested in both of our facilities at Fernandina and Jesup during the shutdowns quite significantly, to improve our overall performance, which is a big driver in our cost improvement. The performance of our Fernandina mill, as a result of some design investments in our boilers, has resulted in it running extremely well.

We've also invested in a number of other quality/cost improvement projects, typically in a return of 20%-plus type levels. A big chunk of the incremental spending is associated with some environmental investments in our operations.

So this is where you're getting that capacity creep of 2% to 4% annually, as well?

Yes. I think the productivity improvement -- I mean, the investments, for instance, in the boilers is a good example of that. But also some investments related to our pulp dryer at Fernandina. And those are the kind of things that, from a volume improvement and associated costs improvement, are allowing us to look at the kind of increases you referenced.

So I suppose I was a little surprised to hear that your costs wouldn't come down, given the benefits of the project and the downtime that was incurred in the quarter. Did I hear that correctly?

Well, I think the costs you're referring to are the comments we made more on the commodity input costs. We've seen wood costs go up. Those were the costs that -- to some extent, uncontrollable kind of costs, more of our input costs.

But Jack, you want to comment further on that?

Yes. I think, I guess, quarter-over-quarter, our manufacturing costs have gone up 1% to 2%, and again driven largely by those other factors such as external price with transportation and chemicals that I have little direct control over within the year.

Sure. And those guys who control the trees can be buggers, too.

Yes. They're tough.

Final -- final question. And I hope I didn't miss this. But how does the board evaluate the dividend? Is it done quarterly or annually? Because last year, it made sense, I suppose, to hoard cash. But you guys are now earning more than the dividend.

Well, they did last year. I think we went through a period of really -- well, I mean, the whole economy went through an incredibly difficult period. And the Board decided, last year, not to increase the dividend, even though we had done it for a number of years, just from a liquidity point of view.

And this year, they're taking a look at it. They typically do it on an annual basis, and they typically do it in the context of looking at the projections we give them on our five-year plan, to ensure that it's sustainable and it's a part of an overall business going forward and cash management going forward. And so they're in the process of doing that. They'll do that -- we started that process in July. They'll do it as we go on over into October. But typically, they do it on an annual basis.

Great. Thank you all.

(Operator Instructions.)

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

Thanks. Good afternoon, and congratulations on the quarter.

Thank you, Peter.

A couple of questions. Unless I missed it, did you quantify the production tons lost related to Jessup and Fernandina in the quarter? Or could you, Jack?

There wasn't a production ton loss. I'm not sure, Peter, where --

Related to the maintenance.

I mean, relative to our plan, there is an improvement. Certainly, we plan to have these annual outages of a number of days. And you take production out associated with that. But relative to the plan, there was an improvement.

Okay. And --

Peter, to your question, I mean, typically, on a sequential basis, let's just say you're going to lose -- and it's going to vary, year by year, depending on the difficulty and the length of shut down. But this year, sequentially, we were down roughly 22,000 tons, 23,000 tons as a result of the outage.

Okay. And are you still looking for full-year volumes to be flat to up slightly for cellulose specialties and absorbent materials?

Cellulose specialties, yes. We plan to be up slightly on that, I think, 2% to 4% overall for the year-to-year. AM will be down slightly.

Okay. And just to -- so that means, I think, some fairly significant second half volumes. Is it -- can you help us to understand the split between 3Q/4Q? Is it split evenly between 3Q and 4Q?

Q4 is typically a higher quarter in terms of sales. One, it's a longer quarter. And as usual, you also have tendency of moving more volume in the final quarter of the year.

Okay. And Jack, I'd be curious if, from 30,000 feet, you could maybe help describe the -- what you're seeing in end market demand. If we look at acetates and ethers and viscose, are there any particular pockets of strength or weakness? And how do you keep up with the market? In other words, isn't the market still growing? How do you -- how do you maintain your share of the global market?

Yes. Let me cover that. The overall market in the CS side of the business continues to grow. It's grown at roughly 40,000 tons a year in the markets that we serve, which is about a 1.4 million ton overall market. And all of those markets, the acetate, the ethers are -- have come back to pre-economic downturn levels. And so you're seeing growth in the acetate of roughly 2%, in the ether some 4% to 6%. So there's good, strong growth out there.

The other factor impacting our markets is the strong commodity viscose market. And it has distracted -- maybe distracted isn't the right word. But our competitors are going after that volume, that is -- has been recently very high-priced. And as a result of that, that presents even more opportunity for us to participate in some of the markets that they are not participating in.

Okay.

So overall, Peter, it's a very strong market for us at the current time. And we see that going into the future.

I think, to the second part of your question, which is how we look at our position as a leader in that acetate area, as well as some of the others, is that the kind of 2% to 4% creep we were talking about, we're constantly looking at how we can increase the volume out of our mills. Some of that has to do with just good productivity improvement, and some of it has to do with investments.

And we're constantly looking at that, because we want to continue to provide the leadership in that area that we've had for a long time.

Okay. That's very helpful.

Maybe just lastly if I could shift gears back to the Timber business. I think you said that close to 20% of your volume in the northwest is going offshore. Can you help us to understand, how much of that is actually going to China today and what is your two to five-year outlook? Do you expect that to go up much? And are you seeing any shift in the types of logs that are -- do they tend to be the low-end logs? Are you seeing demand from China for the high-end logs? Can you give us some color on that?

Sure. First of all, that volume, again, has been relatively steady this year. It's been pretty strong, of course, in the first part. Where it's going -- we expect to see, overall, that the Asian basin is going to be relatively tight, as we see it in the long term. Just with the product availability and traditional markets that they have sourced from, Russia, Indonesia, other places, it's created a bit of a constrained opportunity. And therefore, we do see some good opportunities for us out of New Zealand, out of the west coast. So we expect that -- I can't give you a definitive year-to-year. But overall, we see some good strength coming out of there.

Paul, it's primarily our hemlock off the west and Radiata out of New Zealand?

That's correct. And for us out of the west, hemlock, mainly in markets in like Korea. New Zealand, divided between China, Korea, and India. So we see some healthy opportunities across the board there.

Thanks very much, guys.

Thanks, Peter.

Your next question comes from Anna Torma, Soleil Securities. Your line is open.

Thanks. Good afternoon.

I was hoping you could give us an update on any interest you're seeing for long-term contracts for biomass, especially from European utilities.

Well, we've continued to have interest from -- and you're right -- European utilities who are looking for contracts to support pellet plants. I mean, there's a major one, as you know, in our area over near the Okefenokee that is being constructed by a large utility. There's another one that is in process as far as discussions and negotiations. But I think we continue to see the Europeans interested, driven primarily by the regulatory regime in Europe.

But Paul, is there anything new on that, that you see?

Just to add to it. Just not only pellets domestically for the European market, but also direct sourcing to Europe off -- out of the ports on the east coast. So we think we're well-positioned and we're having a lot of good discussion.

Great. Thanks very much.

I will now turn the call back to Mr. Vanden Noort for closing comments.

All right. Well, I'd like to thank everybody for joining us. And please contact Carl Kraus with any follow-up questions. Thanks.