Rayonier Inc (RYN) 2011 Q1 法說會逐字稿

Welcome and thank you for joining Rayonier's first-quarter 2011 teleconference call.

At this time, all participants are in a listen-only mode. (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.

Thank you and good afternoon. Welcome to Rayonier's investor teleconference covering first-quarter 2011 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 the SEC, list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page 2 of our presentation material.

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

Thanks Hans.

I'll make a few overall comments before turning it back over to Hans to review our financial results. Then I'll ask Paul Boynton, our President and Chief Operating Officer, to review the results of each of our businesses. When we finish our prepared remarks, we will invite Lynn Wilson, our Vice President of US Forest Resources, Charlie Margiotta, Senior Vice President of Real Estate, and Jack Kriesel, our Senior Vice President of Performance Fibers, to join us in responding to your questions.

We were pleased to report earnings of $0.70 per share in the first quarter. Our strong operating cash flows drove cash available for distribution to $1.08 per share. These exceptional results reflect good execution in each of our businesses. As we look out to the remainder of the year, we now expect to exceed our previous guidance.

In Forest Resources, we are encouraged by the strength in a number of markets and by the rapid pace of growth in exports from our Washington and New Zealand properties fueled by strong Asian demand. Additionally, global demand for our unique high purity cellulose specialty products continues to be very strong as we implemented our previously announced price increases.

We also are making good progress on the engineering and design analysis for the potential fiber line conversion in our Jesup, Georgia mill. This would add 190,000 tons to our current sold-out capacity of 485,000 tons of high-value specialty cellulose products. We are on track to complete this analysis and expect a decision by our Board soon.

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

Thanks.

Let's start on Page 3 with our overall financial highlights. As Lee noted, we kicked off 2011 with an excellent first quarter. Sales totaled $358 million while operating income totaled $88 million and net income was $58 million, or $0.70 per share.

There were no special items this quarter. However, both comparative quarters included special items. Fourth quarter 2010 included a $24 million tax benefit from the cellulosic biofuel producer credit which increased earnings per share by $0.29. And 2010 first-quarter results included the gain on sale of a portion of our New Zealand joint venture which increased 2010 first-quarter operating income and net income by about $12 million or $0.15 per share. Both of these gains have been excluded to arrive at the pro forma amounts used for the comparisons throughout this call.

On the bottom of Page 3, we provide an outline of capital resources and liquidity. Our cash flow was strong with adjusted EBITDA of $120 million and cash available for distribution of $88 million. We also repaid a $75 million term loan early which decreased our debt to $695 million.

We ended the quarter with approximately $317 million in cash, so on a net debt basis, we finished at $378 million.

I'll also comment here on a couple of notable events which occurred since our last call. First, S&P upgraded our debt rating to BBB-plus. Also, Moody's raised its rating outlook to positive from stable while affirming their BAA-2 rating.

Finally, we just entered into a new five-year $300 million revolving credit facility at a borrowing rate of LIBOR plus 105 basis points plus a facility fee of 20 basis points. So we feel very comfortable with our current balance sheet and liquidity.

Let's now run through the variance analysis. On Page 4, we've prepared our typical sequential quarterly variance analysis.

In Forest Resources, operating income increased driven by price and volume improvements in the northern region. Paul will cover the details a little later in his presentation. The negative variance primarily results from lower recreational license income, which is largely recognized in the fourth quarter of every year. Real Estate income increased $6 million due primarily to higher conservation acres sold.

Moving to Performance Fibers, you can see significant price improvement in cellulose specialties, reflecting our annual January 1 price increase. Input costs were slightly unfavorable led by higher energy and chemical costs. Corporate and Other Expenses were $4 million below fourth quarter, which was negatively impacted by accruals for future remediation costs at some of our closed sites.

Let's move now to Page 5 and the year-over-year variances. In Forest Resources, the year-over-year improvement was driven by stronger pricing in the northern region offset somewhat by lower Atlantic region volume and higher transportation costs. The Real Estate results in the first quarter declined $10 million, primarily due to the absence as expected of nonstrategic sales.

In Performance Fibers, operating income increased $31 million, reflecting strong price improvement from both cellulose specialties and Fluff. However, our costs have increased, led by higher chemical energy and freight expenses.

We turn now to Page 6 where we reconcile from cash provided by operating activities, which is a GAAP measure, to our non-GAAP metrics of cash available for distribution, or CAD. Our first-quarter cash flow was quite strong with CAD of $88 million, well above last year and our dividend payout for $44 million for the quarter.

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

Thanks Hans.

First, some housekeeping. Effective first quarter 2011, we consolidated US operations into one organization divided into three regions -- the Northern, the Atlantic and the Gulf States regions. Additionally, we renamed the Timber segment to Forest Resources, and also to be consistent throughout the US with one measurement system, all of our volume metrics will be reported in tons. Previously, Washington was reported in thousand board feet.

Starting with Page 8 in the Northern region, which is primarily Washington state, strong export demand, primarily from China, continues to lift the market and drive improved pricing. Rayonier is well-positioned to capitalize on the increased export demand with harvestable timber in close proximity to four ports in Washington. Currently 32% of our Washington volume is exported compared to 17% on average in 2010. Also, domestic pulpwood markets and pricing have seen some improvement with the announced startup of a pulp mill in Cosmopolis, Washington.

Now, as a result of increased demand, prices for delivered logs rose 13% from fourth-quarter levels and were up 45% over the prior-year period. Current log prices are now at levels last seen in the mid 1990s.

To take advantage of this strong demand, we have now locked in pricing on 65% of our planned 2011 harvest level. This harvest level is expected to be 10% to 15% above 2010. Overall, we expect 2011 log prices to be roughly 25% above 2010 levels.

Now, moving to the Atlantic and Gulf regions on Page 9, pine stumpage prices increased from fourth-quarter levels driven by strong pulpwood demand in certain markets, but mostly due to a harvest mix shift to the Gulf States region. Pine stumpage prices were also 6% above first quarter 2010.

Harvest volumes in the first quarter of 2011 for the Atlantic region were significantly lower than 2010, when we accelerated sales to take advantage of the tight markets due to weather related supply constraints. Now, for the full year, 2011 pine harvest volume and price are projected to be comparable to 2010. Overall, Forest Resources operating income should be substantially above 2010.

Now let's turn to our Real Estate business. We are seeing signs of increased activity across many of our rural land markets as improving economic conditions and availability of capital are supporting buyers' interest.

Page 10 details rural and development acres sold. As reported previously, we sold a 3100 acre conservation property in Washington state to the Nature Conservancy. The balance of the sales were spread across Florida, Texas, Georgia and Alabama. While sales can be somewhat lumpy, we project rural sales of 15,000 to 20,000 acres for the full year.

Page 11 shows per-acre prices. We have recently seen -- we've seen a recent improvement in rural per-acre prices. For the full year 2011, prices should be well above 2010, although still below the 2007 peak levels. We will be very patient with our Real Estate holdings and will continue to defer sales and preserve value.

Now, Page 12 details nonstrategic timberland sales. As previously indicated, 2011 sales of approximately 12,000 to 15,000 acres will be substantially below 2010 as the bulk of our land currently classified as nonstrategic has been sold.

Now let's switch gears and move to Performance Fibers. We started 2011 with a record quarterly operating income driven primarily by strong demand for our cellulose specialties products, offset slightly by lower absorbent material prices and higher costs.

On Page 13, you see net selling prices for our two Performance Fibers product lines. Cellulose specialty prices increased $138 a ton, or 10% from the previous quarter and $165 a ton or 12% compared to the same quarter in the prior year, due to the 2011 annual price increase. As previously reported, the 2011 cellulose specialty prices should average 12% to 14% higher than 2010.

The first quarter included shipments in transit at year-end at 2010 prices, which somewhat lowered the average increase for the first quarter.

Now, absorbent material prices, which consist principally of fluff pulp, decreased $21 a ton or 2% from the previous quarter. However, prices increased $217 a ton, or 32%, compared to the same quarter in the prior year.

Now, moving on to Page 14 and looking at volumes, our first-quarter cellulose specialty sales volume was favorable, 11,000 tons compared to the first quarter 2010, due to the timing of customer shipments and increased production. Absorbent material volumes were slightly favorable from the same quarter last year.

Now, we successfully completed our annual maintenance shutdowns for our Fernadina mill in the first quarter and for our Jesup Mill in April. Both mills are now up and operating well.

As we look into the second quarter and for the balance of the year, we continue to see strong demand for cellulose specialty products. We also expect good market conditions for absorbent materials. Production costs, primarily commodity chemicals, and energy, continues to rise. But even with these cost increases, we are anticipating record financial results for the year for Performance Fibers.

Now let me turn it back over to Hans.

Now I'd like to update some key statistics to assist you in refining your model for Rayonier.

We expect depreciation, depletion, and amortization of about $135 million and the non-cash [cost basis] of land sold of about $5 million, or approximately $140 million in total, slightly below our prior guidance of $142 million.

Capital expenditures, excluding acquisitions, are expected to total about $145 million, slightly above 2010 spending of $138 million. This increase will occur primarily in Forest Resources, on road construction in Washington to increase harvest access, as well as additional planting and fertilization across all of our holdings.

We expect interest expense, net of interest income, of about $50 million, $2 million below prior guidance, reflecting the early repayment of the $75 million term note mentioned earlier.

Finally, our effective tax rate guidance remains in the range between 20% and 22%. When you put all these elements together with the strength of our Performance Fibers and Forest Resources businesses, we anticipate very strong cash flow and are increasing guidance for the year. We expect adjusted EBITDA to range from $480 million to $510 million. CAD is now expected to be in the $285 million to $310 million range versus our prior guidance of $260 million to $280 million. Finally, we expect earnings per share to now be between $2.85 and $3.10 per share versus our prior guidance of $2.50 to $2.70 per share.

Let me turn it back to Lee now for some summary comments.

As you heard, we are off to a very strong start for 2011, again generating cash flows that more than cover our recently increased annual dividend of $2.16 per share. For the remainder of the year, we will continue to focus on value creation achieved by operational excellence across our balanced mix of businesses.

In Forest Resources, we will closely monitor our markets, alter our harvest plans as appropriate to take advantage of both international demand as well as shifting dynamics in local domestic markets. In our Real Estate business, we anticipate increased demand for our rural properties. In Performance Fibers, we continue to invest to further enhance product differentiation and high-level technical support for our customers.

Overall, our long-term strategy remains on course. We are committed to growing our dividend over time, funded by strong operating cash flows. We continue to seek acquisition opportunities to grow our timberland base. We'll invest in our Performance Fibers business to maintain our global leadership position.

As we look forward, we are positioned to benefit from the growth of our domestic and international customers, from the recognition of the value creation of well managed timberlands. With our proven track record of execution, our strong balance sheet and liquidity, we are confident in our ability to drive shareholder value.

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

George Staphos, Bank of America.

Thanks everyone. Good afternoon. Congratulations on the quarter. Two quick questions. First of all, can you, to some degree, size for us the opportunities that you are seeing in terms of Asian exports, particularly around China and why you think it's a sustainable source of demand from here as opposed to something that could be on-again/off-again.

Then within Performance Fibers, obviously you're insulated to a large degree from the factors in the broader dissolving pulp market. But on the other hand, we are seeing a lot of [deep peak] capacity coming on in the next year or two. Can you review why you think these capacity increases won't somehow leach into the markets that you're obviously very well ensconced in at the present time? Thanks.

Let me take the first one, which is the demand in China for logs. We actually saw that begin a couple of years ago; it began to affect us in our New Zealand market. Three years ago, we were exporting no logs from New Zealand to China, and today they are the largest customer. We then began to see it move over into our Washington state properties. As you know, it's affected the entire West Coast, particularly Canada and Northwest, over the course of the last year. I think it is driven and we're pretty close to it with our operations in China that actually manages our export -- our imports into the country from New Zealand. I think it is a result of decreased imports from Russia. They have been and still are their largest supplier, but their costs have gone up, and as you know they impose a tariff in addition to increased costs. I think China began to move and look for additional sources of timber. The Chinese demand has continued to grow, and so I think, because of supply constraints, meaning the costs out of Russia, as well as increased demand in China and their interest in looking for additional sources of supply, they have turned to and have now become accustomed to markets both in the Northwest and in New Zealand and Australia. So everything we can see points to continued sustainability of demand in China. Now, obviously, this ebbs and flows in terms of buying. You can anticipate that in this commodity just like in others. But overall we feel like it's a sustainable demand.

The second question you had had to do with capacity as it related -- capacity of dissolving pulp as it related to our products. First, you're correct in that our products, in and of themselves, which are specialty products, have independent demand from that of products that are supplied by commodity dissolving pulp. We see good, steady demand there and demand growth that our customers have, so we think there is good, sustainable growth there for our products.

As far as the overall dissolving pulp market, the commodity viscose market, there is and has been quite a bit of increased capacity. On the other hand, there is a substantial amount of additional capacity announced for viscose staple fiber, which is supplied by that dissolving pulp market. As a matter of fact, if you look at projections, there still appears to be somewhat of a gap over in the 2014/'15 period of capacity to demand as far as dissolving wood pulp versus viscose staple fiber.

My sense is it is driven by increased demand for rayon, increased demand both for rayon fabric as well as for rayon blended fabric, as well as the increased cost of cotton in the marketplace and kind of a cap on what the total amount of cotton could be. I think the acreage will go up with the total amount of cotton that could be available.

So overall I guess it's why that market is concerned. As you know, we really don't participate in that market. It looks to us like there is good, sustainable demand there as well for commodity viscose products. So I guess basically what I would say is we feel pretty confident about where we are as far as capacity and demand is concerned for our products. We really don't see an impact on our products from what's going on in the commodity viscose market.

Thanks, Lee. I'll turn it over.

Chip Dillon.

Good afternoon. Could you -- with your stock now hitting the mid $60s, which I know must feel good, could you talk a little bit about your share count? I know you had a couple of bond deals, one in '07 and I think one in '09, that could impact the share count, and how we should think about that, if the stock stays in this area or goes higher?

It's Hans. You're correct. We have a $300 million issuance and a $172.5 million issuance. Basically under the accounting rules, you have to start taking into count dilutions. So the first quarter, for example, those two issuances under the accounting rules resulted in a de facto 975,000 additional shares in calculating EPS. Now, the accounting rules are based on the initial strike price, as you may recall. We did a transaction to effectively increase that price on the $300 million issuance from about $54 a share up to about $63 a share. So while there hasn't been much economic impact per se, under the accounting rules, that does increase the count and effectively it has about $0.01 a share impact on the first quarter. For the full year, it may have about a $0.03 a share impact, so not too significant.

I think the other thing is that both of those were established that they would have the ability to be settled in cash.

They will be settled in cash, that's right.

Got you. So therefore it limits the amount of dilution even if the stock keeps going up [dramatically]?

Yes, it's just an accounting exercise right now.

Got you. Then this is I suppose more for Lee or for all of you, but it looks like the higher guidance, as I look at my model at least, if you took the midpoint of the two ranges from the last call to this one, it's about $0.37, $0.38. My sense is that about a fourth of that is coming out of the Forest Resources segment and three-quarters might be more or less due to the Performance Fibers income being higher. Real Estate is probably about as you expected. Am I in the ballpark there versus how you all view the change and how you view the year?

I think it's probably a little -- it is clear that the increases to our prior guidance are really as a result of Forest Resources, primarily the Northern region as we talked. Performance Fibers, I'd say that's closer to half-and-half in terms of where those increases are coming from, and Real Estate about where we thought.

Got you.

(multiple speakers)

My last question is given the strong year that you're seeing -- and I know one quarter you can't base too much -- but any view toward how you might look at the dividend or buybacks? I know you mentioned the big project that you're certainly studying, but do you see it as an either/or proposition, or maybe a both/and?

I think the way we think about utilization of cash and investing is the dividend is very important. As we've talked in the past, our Board looks at that each year. They particularly look at it closely when we do our five-year plan update. We typically do that in the summer and early fall. So that's a very important part of a value proposition that they pay attention to.

Secondly, they are looking at investing opportunities. We talked about the one in Performance Fibers. But we've also talked about acquisitions. I think those are the places that we really look at utilizing cash and utilizing our ability to use debt to do that kind of investing. It's not that we don't look at all those. It's not either/or. We look at all of those as opportunities that we have.

Got you. Thank you.

Marked Wilde, Deutsche Bank.

Congratulations. It's a wonderful quarter. Just Lee, from a big picture sense, how would you have us think about sort of the sustainability of this new level that Performance Fibers has gone up to? How do you think about it?

We spend a lot of time on it in the context of this project that we discussed, the expansion of nearly 200,000 tons in this specialty category. We feel like there is good, steady growth for our customers in the categories where we provide products. So, we feel like it is a good opportunity for us to take a hard look at expanding, because we think it is a sustainable business, one that is growing and has got good demand and is very diverse globally as well as the variety of products that we make. So, I guess we are quite positive about it.

Okay. I guess Lee, you look at some of the tremendous ramp up that this has had in profitability over the last six or eight years, [it just trended] kind of ballpark where we ought to be kind of thinking about that business going forward. Do we kind of run off of what we saw in like '09 or '10, or do we take this new $350 million, $360 million level and go forward off of that?

Well, it's very hard to give you a lot of guidance right now on that. This business is affected by supply and demand like any other business is. Right now, we feel positive about that. On the other hand, as you know, it's affected by cost, particularly in some of the commodities. As you saw in '09, we had a real spike up in caustic pricing, and that was difficult for us to deal with. So I feel quite positive about where we are and where this business is positioned going forward from a profitability point of view. But those are the kind of dynamics I think we have to look at before we give you better guidance on.

Hans or Paul, if we can come back a little closer to the assumptions on the Performance Fibers, I wondered if you could help me just sort out three things that I think will influence how the business does in the next quarter. One of them is it sounds like the average price for the specialty fibers ought to be up in the second quarter because you won't have this catch-up of fourth-quarter volume that flowed into the first quarter. So it sounds like you have a price change that's going to go on there. I think you mentioned some second-quarter maintenance outages at the two mills. The third and final issue that I can see is that if costs are continuing to go up from first-quarter levels, you'll probably have some higher unit costs. Can you just help us sort of size each of those issues?

Yes, sure. This is Paul. Yes, to your question on price increase, we do expect kind of the full-in year-over-year price level to be at our original guidance of the 12% to 14% as we flow through the volume and get out of the first quarter with some residual 2010 shipments, which is typical of what we've seen for many years.

The second part, you asked I guess about the outages. Those outages, one is behind us in the first quarter. The Jesup mill, as I noted, just completed their outage this April, so that is in the second quarter, but they are up and running.

Then the final part of your question was caustic. Yes, we are seeing rises in caustic. We talk about mainly chemicals and energy. I guess we've given guidance in the past of kind of a cash-on-cash increase year-to-year, and in the past I guess maybe it was in January call, we kind of put it at the 4%-plus range. We are probably more at the 6% range at this point in time.

That Jesup outage in the second quarter, Paul, how -- just ballpark either how big was it or how expensive is it for you in terms of impact on second-quarter EBIT?

I'll turn that over to Jack, and maybe he can talk a little bit about the outage and what we did in the line.

Yes with reference to the shutdown, as you know, we have three different mills at the Jesup site. We kind of staggered the shutdown. But in general, it went from about 10 days to 15 days, depending upon the product line. During that outage, we accomplished quite a bit of call it custodial cost improvement, quality improvement type projects that should position us better in the future.

Was that all in the second quarter or was there some in the first quarter, some runs over into the second quarter?

All in the second quarter.

Jesup was all the second quarter (multiple speakers). I think the questions here, the EBIT [mark] was we basically are capitalizing the shutdown costs and then we amortize them in over the coming 12 months. So there's not a one quarter hit if that's where you were headed from your question about EBIT.

Okay, yes.

So that cost has been basically amortized over the 12 months between shutdowns.

Okay.

So there is really no impact from that on the P&L versus what we typically see.

Then the final thing I had is just, Lee, in your comments, it sounded like you echoed something we heard from Plum Creek last night. They were saying that sort of the market for -- I don't know whether it's rural land tracts in Georgia and Florida, or maybe even some real estate land in Georgia and Florida seem to be picking up. I took from your comments you're seeing some of the same?

I think we are. I would say it's beyond Florida and Georgia. We've seen just kind of a steady improvement as far as demand for some of our rural tracks. That includes smaller rural tracks and other places where there are large ones. But Charlie, do you want to talk a little bit about that?

This is Charlie. Yes, generally across the board, we've seen some particular strength in Texas and Alabama, so just a steady, slow increase in demand and interest.

Is it giving you any pricing power, any leverage in terms of moving price at all?

It is, not enormous, but I think we are getting -- negotiations are going much better these days, and we have, sometimes have an opportunity to raise list prices, so our asking prices. So yes, clearly a change from 12 months ago.

That's very hopeful, I'll turn it over. Thanks and good luck in the second quarter.

Dan Cooney, KBW.

Good afternoon guys. On the Performance Fibers business, I was hoping you could maybe give a little insight into the conversations you're having with your customers for price increases for 2012, just given the weaker dollar and rising costs. Is it unreasonable to assume you could see another double-digit increase or do you think it moderates a little bit?

It's really too early to talk much about pricing at this point. The main conversations we're having with customers at this point have to do with how they feel about volume increases if we bring on our new capacity. So that's the discussion, that's more of a 2013/2014/2015 kind of volume view that they've got. Overall, those discussions are going quite well, but it's a little early in the year for us to begin discussions related to pricing.

Okay, great. Then on the resource business, I was wondering if it was possible to kind of get a breakdown of the price gap in the north between logs that are shipped for export and those that are going into the domestic market. I don't know if you have that handy.

Lynn, do you want to talk about what you're seeing out West?

Right now, we are in a position that all of those log prices are going at consistent pricing because our position with our export logs put us in the position to price our domestic logs comparably.

Basically it's the same.

Great. Then the decision to lock in prices in the north, I think you said for about 65% of the harvest this year, so is it fair to say that you think that kind of over the course of the year, there could be more limited pricing upside from where we are right now?

We do see that there could be additional supply coming on in the market. Right now, the weather is not as favorable as it will be later in the year, so we just view this as a good opportunity with our roads and where our ownership is to really position ourselves well right now and get that pricing and achieve it right now before there's more favorable logging conditions and additional logs coming on the market when it becomes summertime.

You know, it's one of the ways that we typically think about utilization of our stumpage model as well. So it's -- we both have delivered logs but we also have stumpage sales. We really try to look at where we think the market pricing is, and how much of that volume we want to lock in. As Lynn said, typically the early part of the year, particularly as far as weather is concerned, is often a good time to go ahead and lock in pricing.

Great, thanks guys.

Mark Weintraub, Buckingham Research.

Thank you. First, could you give us a sense as to roughly what percentage of your logs in the Pacific Northwest might end up in export versus remaining domestic?

I think the figure that Paul used was 32% export, and I think that compared to 17% last year, so it's about a third.

Is that something that -- could you even push that higher, or are there constraints or reasons why that's basically about as much as you would want to be exporting?

Lynn?

The market will continue to determine where our export log percentage lands. Right now, that's through our stumpage sales and through our delivered program, the 32%. But we can move up higher. We have some commitments to local log customers, but we still have room to move that percentage up. It's really being determined by the ability to pay the price that we've achieved.

Right, because we do seem to be in an unusual circumstance where the sawmills in the Pacific Northwest can be doing very well right now with lumber prices where they are and log prices where they are, and yet you do have the strong export demand. Historically, lumber has tended to lead log pricing. If you had to have a view, is that the way it's going to play out this time, or is the export market sufficiently strong that it can potentially pull the log pricing despite the narrow margins at the sawmills?

We currently have strong domestic log customers. But what we're seeing is that they are shifting their lumber to export because of the port facilities they have access to, so really we see that they are very closely correlated within our Washington log markets.

I think one of the things that is I wouldn't say totally unique but somewhat unique to our operations out in Washington State is they are all out on the Olympic Peninsula and they spread the Peninsula, and we've got four ports that are available to us for export. The primary domestic customers we supply are in that area as well. So it is heavily influenced by this export demand, probably more so than the majority of timber owners because of the port facilities and the location of both our timber as well as our customer sawmills.

Okay. Then shifting gears if I could, you mentioned Cosmopolis as being a new source of demand for pulpwood. So presumably that facility is up and going. Can you give us a sense as to what they are producing? Is that going to be competing with the Performance Fibers that you are manufacturing, or is it going to be in different areas?

No, I do not think it is operating yet. I think the announcement that they've made is they expect to operate beginning in May or June. I think they -- we know what they produced in the past. As far as the present, I don't know whether they've announced anything or not. Jack, have you heard anything?

Not really. The assumption is it's going to be commodity viscose.

Right, so our expectation is it's going to be commodity viscose, but we know they've got the potential to produce some of the product that we produce. As to whether they do or not, we don't know.

Lynn, you had a comment on it?

In addition, because of their announcement in that they would begin operation in May, they've heavily influenced the local pulpwood markets because they've started making commitments, so that's driven up the pulpwood pricing in the region.

Very interesting. Thank you.

Peter Ruschmeier, Barclays Capital.

Thanks. Good afternoon and congratulations on the quarter. A couple questions. Lee, I think you mentioned that acquisitions is one potential strategy you could consider. Can you remind us your criteria in the timber area of what's important to you either by geography or by age class or species or financial returns? Anything you can offer up as to how you're thinking about the criteria?

Sure. It's criteria that relates to kind of each of those categories you talked about. We typically have looked at timberland and particularly interested in timberland in the US, although we have also looked at some in New Zealand and elsewhere in Australasia, but particularly in the US. We are particularly interested in timberland that is co-located or fairly closely located to land we currently own, just from a synergy and management point of view. We look at and generally value it particularly with a discounted cash flow approach, so we are looking at what's merchantable and what's pre-merchantable as far as that timber is concerned. But we are often quite interested in what the site index is and what we could potentially do with our silvicultur practices that would add value.

Then finally I'd say, as far as the financial hurdles are concerned, we often are looking at 7.5% to 8.5% kind of discount rates when we are thinking about what we are interested in paying for land. As you know, at times, we have opportunities for internal like kind exchanges as well when we are thinking about buying as well as selling land. So we often will take that into account. That's the kind of criteria we are typically looking at, Pete.

That's helpful. I guess somewhat related, I don't know if Hans maybe you can comment. Where do you stand on the asset test and the income test as of the first quarter? It seems like, with your debt declining and values rising, you kind of have this high-class problem of whether you're getting closer on those tests.

We just completed -- the asset test is done quarterly, so we completed the March acid test which is still subject to Board review. But if you recall, when you value the TRS, it's on a net basis. So effectively we pay down debt at the TRS with cash from the TRS, so that really had no impact on the net value.

I would just remind everybody that right now, all $695 million of debt is at the TRS. So that brings down the net value of the TRS. So at this point, we certainly don't see any problem with the asset test.

Certainly, if you look on the other side, on the timber side, certainly values are holding up there and certainly out West we would say that the values of our estate out there are definitely increasing. The income test is just done annually. As you recall, the amount of income from the TRS is only counted to the extent that you actually dividend cash from the TRS to the REIT. That's something that we control. Effectively we back into that number at the end of the year. So I don't anticipate any issues with that as well.

So we look at it every quarter and we review it with our Board every quarter, but we also, as we do that five-year plan update each year, we project out where we see that asset test and whether in fact we feel there are any issues there that we may be approaching an issue. At this point in time, we don't see any.

That's helpful. As we think about Jesup, recognizing you're still evaluating the situation, but if you were to proceed with the Jesup C line, I guess a couple of questions. What kind of timeline might you expect to begin seeing production if you were to pull the trigger as early as June? Then also realistically, of the 190,000 tons of product, how much of that might be specialty cellulose right off the bat versus viscose market exposure?

Well, if in fact the Board approves a project this summer, I would say you are talking about production two years later. Kind of the summer of 2013, we'd probably start the construction over the latter part of this year. It would go through next year's shutdown, and the next year's would be a shutdown that would result in start up. Jack, you want to comment some of the start up curve? We would bring it up over time and we'd start off with a limited amount of the specialty cellulose and we would also have commodity viscose on it.

Realistically, if we started up in let's say June, May/June of 2013, the balance of that year would be used to qualify our pulps for their customers. So optimistically, we could see some commercial sales of high value type product in late 2013. The balance of that volume would be produced as commodity viscose, and then it ramps up relatively quickly as we go into 2014 and beyond in terms of the amount of high-value cellulose we'd be producing, ultimately getting to 100% high value on that line.

Okay. Just recognizing we are talking about the distant future here, but just at a high level, would you anticipate you could get to 100% specialty within two years of start up or five years of start up? Any high-level expectation as to how quickly you would ramp into that specialty cellulose?

Probably two years is closer to the kind of timeframe we would be working on.

Maybe just a quick one, if I could, I'll turn it over. I'm curious if you have any updates on the port investments you're seeing in Savannah. How does that relate directly, indirectly to your opportunities there? How soon might you foresee seeing some revenue opportunities on the development side resulting from some of those investments that are taking place?

Savannah as well as Jacksonville ports are aggressively pursuing funding for deepening their channels to allow the larger ships that will be able to come through the expanded canal to come into those ports. But my sense is that is several years off in both cases. There are just many hurdles they have to overcome. Both ports, however, and particularly Savannah, is already a very, very active port. In Savannah, I think Charlie is what, second most active on the East Coast?

That's right. They're very successful. We're pretty excited about what they are doing. How that translates into, say, industrial or even residential sales for us is a little hard to predict. But clearly Savannah is doing very well.

So I think you're talking about, as economic activity improves, as that port activity then improves with it, we see more and more interest in our property that's just south of Savannah, our industrial as well as residential. But you know on that property as well as the property we've got down closer to the Jacksonville port, that industrial property, we have it entitled. It is available for industrial. My sense is it's probably a couple of years before we think it's really going to get the kind of value that we are interested in, so we will be quite patient on that.

Very good. Thanks very much guys.

Steve Chercover, D.A. Davidson.

I'm glad this wasn't a game show, considering how long it took me to get in the queue. So first of all, if fuel and chemical prices continue to rise, would you envision imposing surcharges as you did in 2009?

No, we would resist that unless there was some really extraordinary impact as there was in 2009. I think that was primarily just the extraordinary impact of caustic pricing. But I think it's just -- that was very unusual for us to do that, and I think it would be very unusual for us to do that again.

Sticking with Performance Fibers, you indicated that about half of the upside to your guidance is from Performance Fibers, and yet you knew that there was going to be a 12% to 14% price increase. So, is your mix better than you thought, or did you keep costs under control despite the inflationary inputs?

This is Jack. What's driving that really is primarily the fluff improvement on that.

Okay. Then last question. Switching to land sales, you've got about, I guess what, 15,000 left of HBU and almost all of the 12,000 to 15,000 acres of nonstrategic. Can you give us any sense of when those might hit?

The nonstrategic I think we have said is about, this year we estimate it about -- is your question which quarter?

Yes, which quarter.

It's pretty hard to say right now exactly quarter-to-quarter how that's going to flow.

Did I misunderstand the volumes?

No, I think you have the volumes right. I'm just saying -- trying to split between Q2, 3, 4, we're really not prepared to kind of go (technical difficulty).

Yes, that's where it gets really difficult as to when you're going to sell and when you're going to close contracts. That's why it's so difficult for us to try to predict on a quarterly basis what we can predict on Real Estate sales. That's why we do it on an annual basis.

These figures basically constitute kind of foot off the gas pedal in terms of trying to push land into the market, correct?

Clearly that's the case for us. On nonstrategic -- we've classified our land. We identified what we felt was nonstrategic and we pretty well sold most of our nonstrategic land. I think we've identified now 12,000 to 15,000 acres we'll sell this year. Until we acquire additional properties, which may include some nonstrategic, I think you'll see us selling not much that we would call nonstrategic.

On the rural land sales, it is largely what the market is demanding. We are not pushing land into the marketplace.

On our development acres, we are absolutely not pushing anything into the marketplace because we think, several years from now as the economy improves, particularly in our part of the country, those lands are going to bring far more value than they would today.

Great, thank you for your answers. Congratulations.

(Operator Instructions). Dan Rohr, Morningstar.

Thanks for taking my call. Just looking at Slide 8 in the presentation, since we are talking about delivered prices out in Washington, I'm curious as to how much of that $19 a ton uptick you guys realized in 1Q '11 versus 1Q '10 was eaten up by higher costs associated with getting the log from the stump to the point of delivery, so diesel contractors and the like?

This is Lynn. We didn't see any impact in the early part of first quarter, and we just have just started to see an increase in what we need to pay our contractors for our delivered programs, so it's still very minimal at this point in time in the year.

All right, thanks a lot.

Dan Cooney, KBW.

A follow-up on the REIT income test and potential dividend growth. As we look at cash flow growth at the TRS over the next year or two, is there any reason to assume that you are more likely to maintain a lower CAD or AFFO payout ratio as cash potentially gets trapped at the TRS, or is that something you guys feel pretty confident in your ability to just manage through?

I'd say we feel very confident in our ability to manage through that. Over the past few years, we've done a number of things, whether internal sales of HBU property or other structuring. So at this point and as I mentioned before all of our debts there, we have $93 million coming due at the end of this year. We'll have $300 million to refinance there next year, have growth opportunities. So at the end of the day, I don't really see an issue with cash being trapped at the TRS.

Great, thanks.

Mark Wilde, Deutsche Bank.

Just a quick follow-up, I just wondered if Lynn could give us a little bit of color. It sounds like what the Chinese buy is a pretty different log, both kind of species and quality-wise, from what you might ordinarily sell into the Japanese market. Can you confirm that and kind of explain the differences to us?

For our market and the brokers that we are dealing with and who is bidding on our logs, primarily we are 100% moving into the China market. So, it is a different log than what would go into the Japanese market, but all of the demand and uptick that we are seeing is being driven by that 8-inch top log. All of the specs are consistent with a number two log that you would see go to one of our domestic mills.

Very good, thanks.

Chip Dillon, Credit Suisse.

One quick follow-up. On the harvest level, I know that, I believe from your recent presentation online, that you are holding back some of your harvest out West even with the strong export demands. But how do you view the current harvest level that we are seeing, say, in 2011 versus what it potentially could be in 20 -- say the middle part of the decade? Are you -- could we see a ramp up? I mean, one of your competitors has it going way up over 10 years; another one has going up for 10 years before it goes down again. How do you view sort of your sustainable harvest potential over the next 5 to 15 years?

We are currently at the 75% level of where we can ramp up to. That's a good point. We do have that ability, as we invest in roads and with our current land-based and harvest profile, that over our next ten-year planning period we can move up to a higher level.

This is the Northern region.

Northern region, Pacific Resource unit.

How about in the Gulf and the Atlantic areas?

It's flat over the ten-year planning horizon.

But the mix should be significantly different and improved.

Yes.

(multiple speakers)

(multiple speakers) -- therefore more profit.

Yes, much more. That's a big difference in the Atlantic from where we are today. We are very heavy pulpwood today.

Got you. Thank you.

That was our last question. I will turn it back over to the speakers.

We appreciate everybody's participation today. If there are any follow-up questions, please contact Carl Kraus. Thanks very much.