Rayonier Inc (RYN) 2011 Q2 法說會逐字稿

Welcome and thank you for joining Rayonier's second-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'd like to 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 material 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 with 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 business. When we finish our prepared remarks, we'll 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 have taken significant steps since our last call to execute our strategy of creating attractive returns for shareholders through the generation of strong cash flows, growing our dividend, and investing to increase the value of our businesses. We continued to execute well this quarter, reporting earnings per share of $0.67, a 40% increase over the prior-year period, with strong cash flow from operations. These results reflect actions we've taken in each of our businesses. We capitalized on strong export pricing in our coastal Washington and New Zealand timberlands, adjusting harvest plans to meet increased Asian log demand.

In Performance Fibers, we continued to work closely with our cellulose specialty customers to meet their demand for our high purity products.

Our balanced business mix allows us to manage for the long term. With the slow pace of the housing recovery, we've maintained pricing discipline in our land sales program and continue to defer harvest of more valuable saw logs in our Atlantic and Gulf states regions.

The actions our businesses are taking not only drove results this quarter, they are also driving performance for the second half of the year, leading us to reaffirm our guidance for the year. Consistent with our stated capital allocation strategy, we increased our dividend 11%, the second increase in nine months, and announced a three-for-two stock split at an annualized rate of $2.40 a share on a pre-split basis. Our dividend is now 20% higher than a year ago. Our confidence in our future cash flows, ample liquidity and strong balance sheet were all key considerations in the Board's recent decision to increase the dividend.

Additionally, in the second quarter, the Board approved the conversion of the Absorbent Materials production line at our Jessup, Georgia mill to cellulose specialties, adding 190,000 tons in mid 2013 to our current sold-out capacity of 485,000 tons. This $300 million investment is a critical part of our strategy to remain the global leader in this high-value segment and is expected to create attractive returns and strong cash flow.

Finally, as part of our strategy to grow and upgrade our timberland portfolio, we have acquired or have contracts pending for nearly 65,000 acres of attractive timberlands, including 50,000 acres of timberlands closed in July.

Now, with that, let me turn it over to Hans for a review of the financials.

Thanks Lee. Let's start on Page 3 with the overall financial highlights. As Lee noted, we had a strong second quarter with sales of $357 million, operating income of $79 million and net income of $56 million or $0.67 per share on a pre-split basis. We've included a pro forma section here to show our EPS on a post-split basis as well, which is $0.45 per share.

We had no special items in the second quarter or on a year-to-date basis. However, 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. This item is excluded to arrive at the year-to-date amounts used for the comparisons throughout this call.

On the bottom of Page 3, we've provided an outline of cash resources and liquidity. Our year-to-date cash flow was strong with adjusted EBITDA of $232 million and cash available for distribution of $134 million. Note that last year's cash available for distribution of $303 million included receipt of $189 million from the alternative fuel mixture credit.

Our debt and debt-to-capital ratio were below year-end levels and we ended the quarter with approximately $314 million in cash. On a debt net basis, we are at a very manageable $383 million.

Let's now run through the variance analyses. On Page 4, we've prepared a sequential quarterly variance analysis. In Forest Resources, operating income was comparable to the first quarter as stronger pricing and volume in the northern region was offset by $3 million of losses due to forest fires in our Atlantic and Gulf state regions. Real Estate income declined slightly due primarily to the timing of rural land sales.

Moving to Performance Fibers, operating income was $5 million below last quarter. Stronger sale of specialties pricing due primarily to a very strong product mix was offset by lower sales volumes caused by the timing of customer orders. Costs also increased, reflecting higher chemical and maintenance expenditures as we completed the annual shutdown of our Jessup Mill.

Let's move now to Page 5 and look at the year-over-year variance. The second-quarter and year-to-date variances generally have similar drivers. Our Forest Resources results reflect strengthening prices and volumes in the Northwest driven by export demand, offset by lower volumes in the Atlantic and Gulf state regions and the fire losses. The year-to-date Real Estate variance reflects our planned reduction of nonstrategic timberland acres sold partially offset by higher rural HBU thing.

In Performance Fibers, both cellulose specialties and Absorbent Materials prices strengthened, somewhat offset by higher input and transportation costs. Finally, wood product results were lower reflecting weaker lumber prices.

Turning now to Page 6, this is where we reconcile from the cash provided by operating activities, which is a GAAP measure, to our non-GAAP metric of cash available for distribution. As you can see, our cash flow was quite strong with CAD of $134 million, well above our dividend requirement.

With that, let me turn the conference over to Paul Boynton to cover markets and operations.

Good afternoon.

Let's first cover Forest Resources. We'll start with Page 8 in the northern regions, which is primarily Washington state.

Strong export demand continued throughout the quarter, primarily from China. We sold 35% of Washington volume into the export market, and that's up from 32% in Q1. Even though inventories that China ports in elsewhere in the pipeline are currently high, the majority of our third-quarter volume has blocked in prices just slightly below the second quarter, and we expect to double our 2010 export volume in 2011.

As a result of increased demand, prices for delivered logs rose 12% from the first-quarter levels and were up 28% over the prior-year period. Overall, we expect delivered log pricing for the full year to be approximately 25% above 2010 levels and 2011 volume to be 15% to 20% above 2010.

In the Atlantic and Gulf regions on Page 9, [volume] stumpage prices decreased from the first-quarter levels due to a higher pulpwood [thinning] harvest as well as the abundance of salvaged wood from the recent fires. However, prices were comparable to the second quarter of 2010.

Pine harvest volumes in the first half of 2011 were significantly lower than 2010 when we accelerated sales to take advantage of the tight markets due to weather-related supply constraints. For the full year of 2011, pine harvest volume and price are projected to be slightly below 2010, primarily as the result of salvage operations related to the fires. Overall, Forest Resources' operating income should be substantially above 2010.

Now let's turn to Real Estate. As expected, the Real Estate operating income of $5 million for the second quarter was relatively low as 2011 results will be more second half weighted.

If you look at Page 10, we show rural and development land sales activities. In our rural markets, demand is steady and we are achieving solid per-acre prices. Rural land sales of approximately 4000 acres were spread relatively evenly throughout our ownership areas. We continue to project rural land sales of 15,000 to 20,000 acres for the year.

Now, Page 11 details per-acre prices. Rural prices increased 9% to $2470 per acre, compared to the first quarter 2011, primarily due to higher mix of sales in Texas and Florida where unit prices are the highest.

Page 12 highlights nonstrategic timberland sales. We expect 2011 sales to be between 10,000 and 15,000 acres, and obviously weighted to the second half of the year. Overall 2011 operating income will (technical difficulty) 2010 as we substantially reduce our nonstrategic timberland sales and maintain pricing discipline in our land sales program.

Now, moving to Performance Fibers, we continued to generate strong operating results in the second quarter driven primarily by the increased cellulose specially prices. On Page 13 you seeing net selling prices for our to Performance Fibers product lines. Cellulose specialty prices increased $100 a ton or 7% from the previous quarter due primarily to improved product mix and first-quarter prices being somewhat muted by 2010 price shipments that were in transit at year-end. As discussed on our last call, our year-over-year cellulose specialty price increase should have reached 12% to 14% with pricing and the second half being somewhat below second-quarter levels, again due to mix.

Absorbent Material prices, which consist (technical difficulty) fluff pulp, decreased $25 or 3% from the previous quarter. However, prices increased $111 a ton or 15% compared to the same quarter from the prior year.

Let's move on to Page 14 and look at volumes. Our second-quarter cellulose specially sales volumes were comparable to the second quarter 2010, and year-to-date sales volumes were 10,000 tons more than the prior year, reflecting the timing of customer shipments and a strong customer demand. Year-to-date Absorbent Material volumes were approximately 4000 tons lower than last year as we maximized production of cellular specialties. For the full year, we project cellulose specialties and the (inaudible) material volumes to be somewhat above 2010 levels.

As we look at the balance of the year, we continue to see very strong demand for our cellulose specialty products. However, the Absorbent Material market has started to weaken. Production costs, primarily commodity chemicals and energy, have stabilized at levels substantially above 2010. We expect total year-over-year costs to increase approximate 6%. Even with these cost increases, we are anticipating another record year of financial results for Performance Fibers.

With that, let me turn it back over to Hans.

Thanks Paul.

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 $136 million and the non-cash cost basis of land sold of about $5 million or approximately $141 million in total, which is consistent with our prior guidance.

Capital expenditures, excluding strategic investments for timberland acquisitions and C-note conversion, are expected to total about $142 million, slightly below our prior guidance of $145 million. We expect 2011 spending on the C-note conversion to range between $45 million and $50 million. We expect interest expense, net of interest income, to total about $50 million. Finally, our effective tax rate guidance remains in the range between 20% and 22%, excluding special items. 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 reaffirming our previous guidance for the year. We still expect adjusted EBITDA to range from $480 million to $510 million. Cash available for distribution is expected in the $285 million to $310 million range. Finally, we expect EPS to be between $2.85 and $3.10 per share on a pre-split basis, or $1.90 to $2.07 on a post-split basis. Note that this EPS guidance excludes a $16 million tax benefit we will record in the third quarter related to reversing tax reserves associated with the alternative fuel mixture credit.

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

As you've heard from Paul and Hans, our actions to create value continue to drive strong results. With our stock's outperformance this year, we believe that our strategy of providing an attractive dividend while investing to grow future cash flows of our businesses is paying off with shareholders. We've increased our dividend and are actively evaluating additional opportunities to expand our timberland holdings, our top priority for investing strategic capital.

As the world's leading supplier of cellulose specialties products, we are investing to meet our customers' future volume needs and enhance the value of that business. Our unique business mix, strong balance sheet and substantial liquidity enable us to take advantage of these opportunities for growth. In short, we remain confident in our ability of our businesses to drive value creation going forward.

By the way, I'd like to remind you that we'll be hosting an investor day at our Performance Fibers mill in Jessup, Georgia on Thursday, September 22. We'll be contacting you soon with more information.

Now I'd like to close the formal part of the presentation and turn the call back to the operator for your question. Operator?

(Operator Instructions). Chip Dillon, Vertical Research Partners.

Yes, thank you very much. Good afternoon. Could you just quickly repeat what was the tax benefit that's left from the black liquor that you're going to recognize in the third quarter and is that the last of that?

The tax benefit, it's $16 million, and this relates back to '09 when we first established the credit. There were some issued at the time over taxability. So we established this reserve related to the taxability. We've just gone through the audit, received a final report. So that is the reserve that we will now be reversing in the third quarter. That's different from the exchange of the alternative credit for the cellulosic biofuel producer credit, which was the $4 million benefit that we recognized in the second quarter.

Got you. I would imagine there's more to go on that exchange that you did. Is that correct? Is there a rough estimate as to what the value of that is?

You're correct, there is more to go. What we've done is looked at it for 2011, and so we've come up with this calculation to maximize the benefit for 2011. Your available basically to make this election all the way through the first quarter of 2013 that can actually run through 2015. But we're going to do -- basically take more of a year by year basis, Chip, so we think we're pretty well set for the year. We'll probably take a look in early 2012 on the various things that we have going on at that time, as well as the refund opportunities then, and make a decision then whether we do another exchange or not.

Got you. Then just as a quick follow-up, Lee, you mentioned it sounds like you're stepping up a little bit in terms of being an acquirer of timberland. I was wondering if you could tell me how that might be broken down versus, say, within the US versus outside the US. Is it fair to say that I guess the values you're seeing outside the US might carry higher near-term cash returns, but that the -- I guess you would see the opportunity in the US to be more down the road, given that log prices outside the Northwest are pretty low?

First, the acquisitions that we've done have been in the US primarily although we have done through Matariki and our venture in New Zealand, an acquisition there, and potentially we'll do another that we're working on now. So we've looked at both places.

As far as the second question is concerned, there really is a range in these properties. I think the 65,000 acres I talked about is across five or six different tracks that we've acquired, some of which had strong stocking and actually would be available soon. Others were relatively young and would be down the road. So it's a range, and the properties really range from kind of across the Southeast, so it's not easy to generalize on them. I'd say as far as all of them are concerned, we were pleased with him. We think we'll get a good return on them, but they're all quite different.

Got you. You have closed on these yet, have you?

Some of them we've closed on, yes. As a matter of fact, the 65,000, I think we closed on all of those.

Got you. Thank you.

Joshua Barber, Stifel Nicolaus.

Good afternoon. I was wondering if you could talk a little bit more about the specialty prices. It looked like it got to almost $1700 a ton which, based on your prior guidance, would mean that prices for the second half would be 5% or 6% lower than that. Can you talk a little bit about the margins in this quarter and where you expect them to go? They were probably a little lower than I think I would've expected given the very high selling prices. Was that due more to maintenance downtime and the fluff pulp business, or is that a good proxy to look at for the second half of the year, especially if prices are lower?

Let me let Jack respond to that. But remember, as far as that second-quarter pricing and then looking at the second half, some of that has to do with the mix in the second quarter. We had a very strong mix in the second quarter that will probably be different from the second half. But Jack, do you want to talk about pricing and (inaudible) (technical difficulty)?

Just I guess reemphasizing that, as you know, Josh, we have a wide variety of products that command different pricing, so the timing of that mix really led to the second-quarter pricing. As stated earlier, we'll see that dampen out for the balance of the year, and then (technical difficulty) 12% to 14% that we've been giving guidance to.

I think that, on the cost side of things, we have, as I said --

On the cost side, we've seen some increase in our chemicals and energy pricing throughout the year continue to (technical difficulty) the second quarter. Particularly when you look at the chemical side, caustic continues to go up. We've also seen fuel oil, our number six fuel oil, be pretty significantly higher for the second quarter.

The other point you made, Josh, is correct. We did have the maintenance shutdown at Jessup mill, which drives a good bit of cost as far as maintenance is concerned during the second quarter.

Yes, if you look at -- our cost per ton in the second quarter was a bit above the first quarter, as Lee mentioned. That's mainly shutdown related there. So the margins overall for the quarter were a little stronger than the first quarter, as the pricing mix helped overcome some of these costs, but we expect those to come -- both the price and cost per ton to come down in the back half of the year.

That's very helpful. Paul, you made some comments before about pricing for the third quarter mostly being locked in out of Washington state but for the export log pricing still remaining pretty strong, especially given that there's been a recent backup to China. What would you say the spot market price difference is from that, if any?

Josh, good question there. Let me turn that over to Lynn on the spot side. We do see the continued strength, and again mainly that's because of how we've structured better our contract and our business. Most of that, as we commented last time, has been sold already and we're just moving the volume out (inaudible) (technical difficulty) those prices third quarter up higher than maybe others. But on the spot market (technical difficulty) where you see that.

Well, right now, what we've seen is that, in second quarter, we achieved pricing about 12% higher than first quarter. What we're looking at in third quarter, just because of the seasonal nature of summer logging, those prices just settle out closer to that first-quarter pricing in third quarter. Really that spot market is being driven by still that strong China pull, even though there's additional volume on the market, and the stronger domestic market as they saw lumber for Chinese exports.

Just to cut a little more flavor on that, we do think we'll see the kind of strengthening back that we saw last year. We've seen it because of seasonal slowdown again and part of it is that kind of increased activity out of Russia, seasonal slowdown in China, but our anticipation is that we'll see some (technical difficulty) the fourth quarter. And we hope to see those prices stabilize a bit.

Got it, that's helpful. One last question, you mentioned the timberland acquisitions. Would there be some details I guess forthcoming in the next month as those assets close about locations and price breaker stocking levels and such similar to what Chip was asking before?

Yes. I think we can provide more detail as we get all that together. Probably the investor day, we will give a good bit of information about that. I would say, overall, when I look across all of those acres, the average price would be about $1600 an acre for those in the US.

Okay. Last question, I apologize, but is most of that going to be funded out of cash on hand or debt or some combination thereof?

Most of that will be funded with cash.

Thanks very much guys.

Steve Chercover, D.A. Davidson.

I won't keep asking about what you just purchased, but I did hear that you sold about 6000 acres in Washington for $4000 to one of the other REITs that's not in Spokane or Seattle. So could you confirm that? Is there any HBU in that value in fact accurate, or are they particularly well-stocked lands?

Charlie, do you want to take that?

Sure. Well, if you heard that, we did have a sale, and it was in that range. I can't disclose who the buyer was; I don't intend to do that. It was an excellent sale. It was a competitive bid with tight bidding, and we got several bids. So, we are quite pleased with the results.

And that's a pure -- like from your perspective, you didn't sell it as HBU, but as non-core?

Absolutely. It was a little -- just a little more background, it was the last parcel we owned in Lewis County, Washington. We might have a few odds and ends, but that area was deemed nonstrategic to us a year or two ago, and it was really the last parcel we had.

That's the one I'm referring to. But we shouldn't just say $4000 for all of Washington, or should we?

I think that's your job.

(inaudible)

That is my job I suppose. Then switching gears to cellulose, beyond the C line conversion, did you guys do any debottlenecking in the cellulose business that will have some benefits over the next 12 or 18 months?

One thing we have worked on is a debottlenecking project at our Fernandina mill. It has to do with our ability to increase production rates there. Jack, I think we've generally looked at 155,000 tons currently, and I think, when we finish that up, we'll be able to take it to 170,000.

170,000 tons, actually a little bit higher by permit, and then we'll gradually move up to that with some other debottlenecking projects. So --

That would be the primary one.

Great. A final question, also on the cellulose side. Dissolving pulp prices are falling pretty hard now, and I believe you'll be involved in that business once the C line first ramps up. Was a price correction reflected in your business plan? Maybe I'll just leave it at that. Are you indifferent so long as dissolving prices stay north of fluff?

I think, first, you're right. As we bring that C mill up in 2013, we will sell some of the dissolving viscose, depending on the range of commitments we already have for our specialty. And by the way, we're getting a great reception from our customers on that. And it largely will depend on probably how long it takes us basically to qualify our specialty on that line.

The second point I'd make, and I'll let Jack add to this, he's been in this business a longer than I have, but just in the last couple of years, maybe even the last year, we've seen that viscose go through the kind of commodity cycles it typically does ranging from --

Well, the last two cycles -- and you guys are probably well aware of it -- it's gone from $700 a ton up to the peak here just recently of $2600 a ton.

So it may well go through another cycle or two by 2013, but we would anticipate overall that the demand for that product has been good and continues to be good and grow. We anticipate it in our planning, but indeed we may well see cycles when we bring this up. To tell you the truth, I'm not particularly concerned about the cycle at that point in time.

That's great. To be honest, I don't think any of us could even spell viscose about a year ago.

Mark Wilde, Deutsche Bank.

Good afternoon. Lee, just on the timberland side, I think you said you bought 65,000 acres recently, but I think you also said you're seeing more timber come into the market. I just wondered if you expand on that. The only big block that I had known about was the 50,000 acres in Louisiana. I didn't realize there was much else on the market right now, so maybe if you could give us a little color on that.

I guess what I was referring to more, Mark, is the fact that we seem to be hearing a little bit more about people who are interested in talking about selling timberland, not necessarily people who put it out on bid. But I would say, over the course of the last six months as opposed to the 18 months before that, we've had -- maybe it's because we've been doing more outreach, I don't know, but we've certainly had more discussions and more opportunities to participate in looking at acquisitions. As I said, some of them are small; some of them are larger. But we certainly have had more opportunities in the last six months by far than we had in the 18 before that.

Do you have any idea, any sense, Lee, for sort of what your competition is like for commercial timberland right now?

I think it's the same competitive set we've faced over the last number of years. I think it's the TMOS -- I think is the other REITs. I think that's who's primarily out there looking to buy timberlands, same groups.

Yes, I guess I was just wondering if you think there's more money sloshing around in the TMOS community right now.

We probably hear the same kind of numbers that you do of how many billion dollars may be available. I've talked to individuals directly who've talked about the amount of money they have to invest, and those are guys who run [TMOs]. So I think there's money there and they're looking to invest, and that's who we seem to run into is the same group of people, which is the [TMOs] and to some extent now I think I read recently of one of the REITs who has purchased property, so I think it's the active group.

I just wanted to turn to the cellulose business, a couple of questions. One, can you give us a sense of where you see the fluff market right now relative to where we were at in the second-quarter average?

Jack, do you want to take that?

Yes, the contract fluff market is relatively flat to the first half of the year. It's the spot market that has dropped off, particularly in China and in the Middle East. That has dropped off somewhere in the neighborhood of $100 a ton, but again, the contract market, which is the majority of our business, is still relatively flat.

Then the other question I had in this business was in the specialty cellulose market, just as we look forward into 2012. This is kind of a hard business for I think most of us on the outside to sort of read in terms of what are the dynamics which are going to determine what kind of pricing you're going to realize next year. Could you provide us with some kind of guidance for metrics that we might be looking at, indicators?

The key for us is just overall demand on our product. As stated earlier, our demand continues to be very strong. We have a hard time right now meeting that demand, so assuming that continues, it looks good. Your costs are the obvious thing, another thing you look at as you go into your pricing, but -- and also I think we've shared with you we do this on an annual basis, which we'll share that actual information with you late this year, early next year.

I think, overall, as far as demand is concerned, we typically think about 40,000 to 45,000 tons of additional demand for this product on an annual basis. It's driven by a 3% to 4% growth in the overall market for specialties. That's very different in different segments. As you know, we supply a number of different segments. But overall, the market is growing. It's a steady market. It's not like a commodity market. It's a steady market with steady growth. We look at both the demand, and it's very strong for our product, and we also look at our cost when we look at pricing. We'll do that as we head towards the next year.

That's helpful. I guess we'll hear more about that once we get into early 2012.

That's correct.

Thanks guys.

Mark Weintraub, Buckingham Research.

Thank you. Firstly, just the 65,000 acres that you acquired, where they all in the US South?

They were. They range from Florida out to Texas.

Okay. So at about 1600 an acre, that would suggest about $100 million or so in total. In thinking about the next couple of years, you're obviously spending a fair bit of money on the Jessup conversion project. Would you anticipate that the dollars that would get put to work in timberland acquisitions would at least match or be more than the amount of money you're spending at Jessup, obviously depending on your ability to find appropriate transactions?

Well, with that last caveat, I would say it would be more than.

That's helpful. Thank you.

Dan Cooney, KBW.

Hey guys. Good afternoon. If we could just talk about the pricing in Absorbent Materials, do you think that's a little bit kind of somewhat reflective of some of the incremental supply that's coming into that market, or maybe just a little bit more color on what's driving that kind of downward sequential trend in pricing?

I think you're right there that there is some incremental supply. You've got the [IT Franklin] mill that's -- you talk about converting (inaudible) come on, the Alabama Pine facility, so there's some incremental capacity but, you've got to remember that market is growing very strong also, roughly about a 4% growth for about a couple hundred thousand tons of demand each year. The spot drop-off we believe is primarily due to the Chinese stockpiling and managing their inventories. At the current time, the paper market drives that in a big way. So when the paper market drops off, the fluff market tends to follow a little bit lagging.

Great. Then moving into the Timber business, I guess it looks like the operating expenses in the Atlantic region jumped up about $1 million year-over-year, which kind of was despite a 12% reduction in volume. Was there something kind of going on there or any more detail on that?

Lynn?

We had significant expense related to our fire suppression, so that's the direct correlation there with the Atlantic region where primarily our fires were in Georgia and Florida.

Great. Thanks a lot guys.

Daniel Rohr, Morningstar.

Thanks a lot. I'm just trying to get a better sense of where you all see the log export volumes going in the back half of 2011. I think back-of-the-envelope sounds like you might have done around 300,000 tons out of Washington in the first half. You mentioned on the call that you are looking to double export volumes in full year 2011. So just for a sense of scale, where were export volumes at in 2010?

Lynn, do you have that?

I do. In 2010, we exported, in total for the year, about 17% out of our 164 million board feet --

Tons.

-- excuse me, yes. In tons last year, we did 1.6 million tons -- excuse me, 1.4 million tons, and this year we'll do closer to 1.7 million tons, and this year 35% of our total tonnage will be export at this current pace.

Thank you very much.

Peter Ruschmeier, Barclays Capital.

Thank you and good afternoon. I wanted to ask on the 65,000 acres, again roughly $1600 per acre, any high-level qualitative guidance you can provide on whether the productivity of those acres in aggregate, or the inventory or age of those acres is greater than, equal to or less than your average holdings in the South?

That is a hard one. The reason I say that's a hard one, I'm going to let Lynn take a shot at it, but the fact that it really is a range there. Some of that property for instance we acquired from a distressed seller and it had HBU value, so a lot of it was driven by that, although the price was quite low. Some of it was very well-stocked timberland with great site index and very good timber, so the value was largely driven by that. But Charlie, you or Lynn want to take a shot at it?

Charlie, why don't you --

I'd say we're trying not to be specific on a property by property basis, but I would say the biggest influence of price was the superior stocking and age of some of the properties, particularly a larger one. That property had a much older age class than our legacy timber and much higher stocking in volume. So, it basically paid for a lot of volume. It's a very high quality site, so excellent property. It really is hard to just compare price track to track. It's so much driven by the attributes of the property.

In addition, there were several opportunities for us to improve through silviculture and investment to not only take the superior stocking that we purchased but also improve the site index over time, so we have both of those opportunities with these properties.

Okay. Recognizing timber acres are different, every asset is different, it seems that the sale you mentioned in Washington state is also important because we haven't seen a lot of transactions there. So is there anything qualitatively you can offer up as to whether those acres that you sold were similar to the acres that you own, or were they unusual in their age class or their species or site index, anything unusual about those acres, positive or negative?

I wouldn't say there was anything unusual. Most of our acres of high quality. The reason that property was not strategic to us was because it was isolated from the rest of our property, and we find that some of our nonstrategic properties are quite strategic to others and they're willing to pay for it. So this is a highly competitive property but it had really no HBU. It was just good quality, industrial timberland out by itself. (multiple speakers) Hopefully --

That's helpful. Back on the export situation to China, I'm curious if we try to triangulate what you're seeing from China, not only the Northwest, but out of New Zealand. How much of your New Zealand volume is going now into China? If you were to compare and contrast what you're seeing in terms of buyer behavior, is there anything noteworthy as to what you're seeing in New Zealand relative to what you're seeing in the Northwest?

It's Paul. I don't have a specific number or percentage on our volume off the top of my head here, but let me just comment. We're seeing very parallel situations that we see here in the Northwest. We have ongoing dialogue of course between our team there and our teams here. What we are seeing is a slowdown because the ports are full, the infrastructure is full. Again, there's plenty of Russian logs that come on through the summer. The Chinese kind of back off a little bit in the production of the summer months as well. Our anticipation there is the same as it is here, that we'll see that come back around again. But we have seen folks, competitors kind of backing off a little bit during these downtimes. As prices soften, again, we would expect that. Therefore, we would expect opportunities to move back in when the demand picks up again here, and the supply lessens.

Then just lastly if I could on the C mill, you indicated you'll spend $45 million to $50 million this year. Can you remind us what the plan is for 2012 and then the remainder in 2013 in capital?

Then also, I know this is preliminary, but if you plan to start up the 190,000 tons annual in mid 2013, what's a preliminary expectation for your learning curve? How much of that product -- how quickly that product can be sold into specialty cellulose as opposed to how much of that product would be viscose?

Jack, why don't you take that?

I'll take the last question and then Hans will address the first question. The start-up in 2013, we're going to quickly qualify as much of the product as we can because, again, our customers have a lot of commitment into volumes and we want to get it qualified quickly. So there certainly will be a period of time. It could be three months; it could be six to nine months for some of the more demanding grades to get qualified. But we anticipate a real strong ramp-up there to fill up that 190,000 tons, maybe upwards of two years.

I'll tell you, the mill itself, the C mill itself, will be a duplicate of our B mill. So it is not like it is a new product line or a new set of products. And so the people -- we've got people who have run a duplicate product line in our B mill that will be right there with our C mill. So we are anticipating, as Jack said, that we'll work hard to qualify grades on this new mill for our customers as quickly as we can, which will then dictate largely what that start-up curve looks like.

But given the nature of the gradual demand increase that I think you mentioned, call it 40,000 tons a year or so globally of specialty cellulose, is there the ability out there for your customers to have more of a step change in their demand for the product such that you can fairly quickly sell those tons into the market you want, or are we literally talking about a multi-multi-year period where you sell commodity viscose and you just slowly bleed those tons into the specialty markets until you're full up?

I can just pause and weigh in on that. If you look at our plan now, which is already having the conversations with the customers and getting that commitment, so I wouldn't say it's a slow bleed in. Right now it's going to be a planned step in, customer by customer, of that volume. They are planning that now because -- and we've been talking to them for some time about this. That 40,000 tons doesn't start today. We've been sold out for some time. So there's been some anticipation of this (technical difficulty). In some cases you'll see it come on quite quickly depending on the customer than others, and overall it will look like a bit of a feathering but I would not say a slow bleed-in.

I'd say another point I would make on this is it's given us the opportunity for the first time in a long time to respond to a number of new customers, people who have wanted to do business with us and frankly we couldn't respond to. It's also given us the ability to begin to talk to customers in product lines that we want to expand in, we hadn't had the ability. But I know, Jack, you are already getting commitments from customers for a substantial expansion and new customers.

Right. As I stated earlier, it's well received, and we are well within along the way to get the [190,000] tons of commitments.

But Pete, one of our plans on September 22 is to take you through all of this in some detail, including the capital layout, customer layout in a little more specificity to the commitment levels. So we'll do that all on the 22nd.

Very good. Thanks very much guys.

Collin Mings, Raymond James.

Thanks, good morning -- or good afternoon rather. In terms of customer response to the C mill conversion, are there any particular segments? I mean, you guys kind of talked about this a little bit -- but that are -- they have the most interest in, whether it be the acetate, the ethers? Is there a particular segment that's just really gotten a lot of interest from end users?

You to two of the main ones, that are acetate and ethers, but it's broad. It also includes the high tenacity rayon type end uses for tire cord, sausage casings, the specialty end uses for filtration. Again, it's across all segments of this CS business.

The full Spectrum, not really one area in particular. Is there a particular area that you're working harder on trying to secure commitments for, or is it just in general?

I think it's in general, but obviously the two big ones are acetate and ethers. So that's going to take a large amount of the volume but, again, it's not limited to them by any stretch.

Okay. Then just back to the timberland acquisition environment, with regards to the new -- you mentioned New Zealand as well. Is that just kind of a potential play on just Asia demand, or is there kind of a special situation now that you're pursuing?

It's the same play on Asian demand, just continued tightness across our Pacific Basin that we see not only today but an ongoing long-term opportunity there. But we tend to like property in New Zealand, and it's a good expansion point for us.

Great, thanks guys.

Michael Roxland, Merrill Lynch.

Thanks very much. Good afternoon.

Over the last couple of months, we've had a number of dissolving pulp capacity announcements aimed to start not only in China but here domestically. Obviously you are well entrenched in the market, but any concern that these proposed capacity additions eventually erode your market share? And practically given the amount of capacity that is targeted to come online, I think somewhere over -- in excess of 2 million tons over the next year and a half?

I think a couple of things. I think, one, our product line is dissimilar from the capacity announcements that have been made. There haven't really been any capacity announcements in our specialty categories.

What I have seen has all been in the commodity viscose area. That's really unrelated to the demand for our products.

The second thing is, just as an aside, I'd be surprised if all of that capacity came on. I did -- I have seen a lot of the announcements. I have begun to see a little bit about people who've postponed the announcements -- I mean postponed the implementation. So I think both of those things -- the big one from our point of view is it is not in the product categories that we produce.

But in terms of let's assume, for the sake of argument, that you're right and that not all of that capacity comes on, but let's assume that a certain amount does and it is targeting the commodity viscose. Any concern that, as you start to ramp up your C mill in 2013 and start selling initially into commodity viscose, that the margins get I wouldn't say get crushed but certainly get impacted by the capacity that's come on earlier?

No, we really are not concerned about that, and we are not concerned for a couple of reasons. One, the discussion we had about bringing on our specialty cellulose as quickly as we can qualify customer orders, but the second reason is as we have done our work around commodity viscose and the demand for that, we think there will be strong demand for rayon fabric for the long term. We see -- and we've spent a lot of time looking at growth and where that's going, how it relates to cotton and cotton availability. So we actually think that commodity viscose will go through its up and down cycles, but throughout the process, we think you're going to have good, steady demand for rayon.

In fact, if you tracked the announced expansion for the viscose customers through the same period, you'd see matching if not more planned demand for that than these 2 million tons that you have announced here. Our thought of course is all that's going to retreat for a little bit and may come back on just as we've seen in the past. I think history is a good teller here where before we had prices of viscose pulp down in the $700 to $800 age, it went up to $1300, $1400 at one peek there. There are a lot of announcements of capacity coming on, and then it dropped back down to $800, $700 a ton. A lot of those announcements went away and those people went away. And then it went back up to $2600 and everybody said, okay, we're on it again. I think we'll see the same thing, a lot of folks who have changed their mind, and so it's a very commoditized business.

One thing that we do is we stay focused on our business, and our customers know that. I think they appreciate it. So even the small number of players that can kind of flow in and out on the fringe of our business, our customers recognize that we stay with them even when prices on the commodity side are much higher. They know we don't chase that. Therefore, I think that keeps us pretty solid in the marketplace.

Thanks for that, Paul. Two final questions. Can you give us a sense of how your pricing is shaping up thus far for 2012? I believe you're beginning to approach your customers now. Should we expect a similar type of increase in 2012 as you've had -- or that you expect for this year?

I don't really think we'll give any kind of guidance on pricing until probably right in the beginning of 2012.

Final question -- in terms of capital allocation and going forward, how would you think -- have us think about how you're prioritizing your allocation of excess capital, particularly after the recent dividend increase announcement in the C mill conversion? Is your primary focus still going to be on the dividend and followed by timberland acquisitions? Just if you could remind us how you look at that going forward.

We do think about it in that order. As far as strategic capital is concerned, we have had a strategy for the last couple of years that first we take a hard look at our dividend. We always keep our debt in mind. We also wanted to assure that we continue the leader in specialty cellulose and thereby the expansion there, and then timberland acquisitions. So I think you can expect that we will stay with that strategy. We always pay attention to a good, competitive dividend, but at the same time we want to grow our businesses. We really think growing timberland business is something that will be a major priority for our strategic capital going forward.

Thanks very much. Good luck in the quarter.

Mark Wilde, Deutsche Bank.

Just a couple of kind of final follow-ups. One, is there any kind of acceleration in your costs that you expect in the second half of the year or into next year? I don't know whether you've been protected at all by kind of contracts on some of your chemicals or anything.

I don't know of anything (multiple speakers) kind of changes there. Do you?

No. Commodities change very quickly but right now things look fairly stable and then we're hedged somewhat on our energy as we go forward.

I know down in Southeast Georgia, there was a big pellet plant that started up, I don't know, six, nine months ago. I just wondered if you'd comment on how that's affected the fiber market down there, and also whether you're hearing about any more biofuel projects in any of your markets.

Lynn?

Right now, Mark, we are delivering to the facility in Georgia. Georgia Biomass, also known as RWE. So we have a contract with them for 300,000 tons. They are running and accepting deliveries. Then we have seen a few other announcements that we really are focusing on only those facilities that are within our footprint that we think are viable. So there is a potential for one in Alabama and a potential for one in eastern Texas. But as of right now, they're still going through permitting processes and getting their business plan taken care of. So right now, we're just focused on that one facility -- as well as one of the things that we're continuing to do is really recruit new capacity into our region. The pellets, because of the European market, is really the place where we see our most viable future customers, and we continue to focus on those ones that really uplift our pricing in our regions.

What have you seen in that particular basket as far as pricing is concerned? Have you seen an effect from that pellet plant?

The range right now within that footprint is $2 to $3 per ton uplift in that basket for this year compared to last year.

That's on a base of approximately what, Lynn?

It's a 10% change.

That's helpful. Thank you very much.

I'm showing no further questions.

This is Hans Vanden Noort. I'd like to thank everybody for joining us. Please contact Carl Kraus with your follow-up questions.

Thank you.

This does conclude the conference. You may disconnect at this time.