Rayonier Inc (RYN) 2011 Q4 法說會逐字稿

Thank you for joining Rayonier's fourth-quarter 2011 teleconference call. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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

Thank you and good afternoon. Welcome to Rayonier's investment teleconference covering fourth-quarter earnings. Our earnings statements and presentation materials were released this morning and are available on our website at Rayonier.com.

I would like to remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of the 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 two of our presentation material.

With that, let's start our teleconference with opening comments from Paul Boynton, President and CEO. Paul?

Thank you, Hans, and good afternoon, everyone. I would like to make a few overall comments before turning it back over to Hans to review our financial results, and then we are going to ask Lynn Wilson, Vice President of Forest Resources, to comment on our timber results. Following our timber review, Charlie Margiotta, Senior Vice President Real Estate, will discuss our land sales results, and finally, Jack Kriesel, Senior Vice President of Performance Fibers, will take us through the results of our cellulose fibers business.

Let me start by saying we had a great year in 2011. We generated strong operating cash flow well above our dividend and increased pro forma earnings 42% to $2.11 per share. We believe that the 32% total return our shareholder realized last year reflects both the increasing value of our businesses, as well as the strategic priority we placed on growing the dividend, which we raised 11% to $0.40 per share beginning in the third quarter or $1.60 per year.

I am particularly pleased with our timberland acquisitions in 2011. The 320,000 acres of highly productive timberlands we acquired serve dynamic end markets in Alabama, Mississippi, Louisiana and Oklahoma. They also increased our geographic diversity and upgrade the quality of our portfolio. We see tremendous value in growing our timberland base, particularly with this rather young age class acquisition as we position ourselves for improved markets in the years to come.

Now throughout 2011, the team did a great job of taking advantage of specific opportunities in our markets to capture cash flow.

For example, we took advantage of strong Asian export markets. We leveraged the proximity of our coastal Washington timberland to five ports and adjusted our harvest plans to meet the growing Chinese demand. Our New Zealand joint venture also significantly increased log sales to China. While this market began to ease in the fourth quarter, we are seeing signs of strengthening that are expected to be an important source of demand over the long-term.

At the same time, we maintained discipline in our land sales program, reducing acreage sold and focusing on properties with more resilient values, such as rural and recreation and conservation lands.

Continued strong demand for our high purity cellulose specialties drove another record year in Performance Fibers. With our current volumes fully committed, we are working closely with our customers to provide a premium product, which is a critical part of their value chain. Now, as such we are making excellent progress on the 190,000 ton expansion in Jesup, and we are on pace for completion by mid-2013.

While we recognize the uncertainty still facing the domestic and global economies, including the housing market, we see ongoing operating momentum in our businesses that we anticipate will drive another great year in 2012.

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

Thanks, Paul. Let's start on page three with our financial highlights. Overall we had a very solid fourth quarter with sales totaling $388 million, while pro forma operating income totaled $88 million and pro forma net income was $60 million or $0.48 per share.

We had one special item this quarter, which was a $6.5 million non-cash charge for estimated future cleanup costs at our former Port Angeles mill site. Last quarter we also had one special item, which was a $16 million benefit from reversing a tax reserve established back in 2009 relating to the alternative fuel mixture credit.

2010 had two special items, a fourth-quarter $24 million tax benefit from the cellulosic biofuel producers credit and a first-quarter $12 million gain on sale of a portion of our interests in our New Zealand joint venture. All of these items have been excluded to arrive at the pro forma amounts used for the comparisons throughout this call.

On the bottom of page three, we provide an outline of capital resources and liquidity and the comparison to 2010. Our full-year cash flow was strong with adjusted EBITDA of $503 million and cash available for distribution of $287 million.

Note that 2010's cash available for distribution included receipt of $189 million from the alternative fuel mixture credit.

With respect to our debt, in the fourth quarter, we paid off a $93 million, 8.5% note that matured at the TRS, while at the REIT, we borrowed $150 million on our revolver in conjunction with our large timberland acquisition. We still closed the year with $79 million of cash. Our debt balance was $847 million, so on a net debt basis we finish at a very manageable $768 million.

Let's now run through the variance analyses. Turning to page four, we have prepared our sequential quarterly variance analysis. In Forest Resources, as expected, operating income increased driven by higher recreational license income, which is largely recognized in the fourth quarter. This offset lower volumes across our regions.

Real estate income decreased $21 million, mainly due to the timing of closings. The third quarter included a significant nonstrategic sale in Washington and also benefited about $6 million from the settlement of prior year's property tax disputes on some of our Florida holdings.

Moving to Performance Fibers, overall operating income increased by $1 million. You can see absorbent materials prices weakened. This was more than offset by the increased volumes due to the timing of customer shipments. However, our costs were unfavorable $5 million, primarily due to the previously announced $6 million write-off of environmental equipment no longer required due to our cellulose specialties expansion project. Corporate and other expenses were $3 million above the third quarter, which benefited from a $2 million insurance recovery.

Let's move on to page five and review the year-over-year variances. In Forest Resources, the fourth-quarter and year-to-date variances generally reflect similar drivers of improved prices and higher volumes. However, for the quarter and year, logging and transportation costs were well above 2010.

Moving down to real estate, fourth-quarter results were $6 million favorable as last year some sales were deferred into 2011 to take advantage of the built-in gains tax holiday. 2011 full-year results were well below 2010, despite benefiting from the property tax settlement, and the biggest driver here was a reduction in nonstrategic sales from about 45,000 acres to 12,000 acres, which was expected.

In Performance Fibers, the fourth quarter and full year benefited from improved prices in cellulose specialties and increased volumes. This was somewhat offset by higher input and transportation costs and the environmental equipment write-off previously noted.

Our Wood Products business operating income declined $4 million compared to 2010, which benefited from higher prices particularly earlier in the year.

Corporate and other expense in the fourth quarter and full year was favorable to prior periods. The fourth-quarter 2010 included a $3 million accrual related to closed facilities.

If we move now to page six. On this page we reconcile from cash provided by operating activities, which is our GAAP measure, to our non-GAAP metric of cash available for distribution. Our cash flow remains strong with CAD of $287 million, well above our dividend payout, which represented only 65% of CAD.

With that, I would like to turn the conference over to Lynn Wilson to cover Forest Resources.

Thank you, Hans. Let's start with page eight in the Northern region, which is primarily Washington state.

Export demand declined in the fourth quarter due to clogged ports and tighter credit conditions in China, which resulted in lower prices compared to the prior quarter. However, prices were still 30% above the fourth quarter of 2010.

For the full year, approximately 30% of Washington's 2011 volume was sold into the export market compared to less than 20% in 2010, due primarily to increased demand from China. Driven by continued economic growth and affordable housing initiatives, we believe China export demand will continue to grow.

In 2012 we expect the markets to improve by midyear as supported by a recent increased activity in our New Zealand and Pacific Northwest operations. With proximity to five ports and additional capital investments in roads in 2011, we are well positioned to increase volume by approximately 15% in 2012.

Overall we expect delivery log prices in 2012 to be comparable to 2011.

In the Atlantic and Gulf regions on page nine, pine stumpage prices increased from third-quarter levels due to the decline of salvage wood from the spring and summer fires. Prices were also higher than the same period last year as we capitalized on more competitive markets with strong pulpwood pricing.

Harvest volumes were below the prior quarter due to the salvage impact in quarter three, however, significantly higher than the fourth quarter of the prior year.

For the full year, 2012 Pine harvest volume will be comparable to 2011. The Gulf states will increase as a result of the recent timberland acquisitions, mostly offset by declines in the Atlantic region due to the continued depressed sawlog market and the absence of fire salvage wood in 2012. Pine prices are expected to be slightly above 2011.

Overall Forest Resources' operating income should be above 2011 due to increased volume and lower costs.

Now let me turn it over to Charlie Margiotta to cover real estate.

Thanks, Lynn. The volume of acres sold in the fourth quarter was in line with prior guidance as demand for rural and recreation land remains solid across most of our Southern land base.

Page 10 details rural and development sales volume. The 2410 acres sold was the lowest quarter for the year and in line with forecasts. A bright spot was the 468 development acres sold, which was predominantly in Florida. We expect 2012 rural acres sold to be above 2011, while development sales will continue to be relatively low.

Page 11 details per acre prices. Fourth-quarter prices are in line with the third quarter. For the full year, the average price of $2250 per acre for rural properties is well above 2010 due to improved demand and geographic mix.

Page 12 highlights nonstrategic timberland sales. The 2011 sales were approximately 12,000 acres, well below 2009 and 2010. The fourth-quarter sales were scattered parcels mostly in Georgia. We expect acres sold in 2012 to be somewhat below 2011 levels and at a significantly lower per acre price since most sales are likely to be in the Southeast compared to 2011, which included a 6000 acre sale in Washington state at approximately $4000 per acre.

We continue to be disciplined in the sale of our properties to preserve value until the markets improve. Overall we expect 2012 operating income to be below 2011, due primarily to the reduction in nonstrategic sales and the lack of the one-time property tax settlement last year.

Let me turn the teleconference over to Jack Kriesel.

Thanks, Charlie. As a result of strong demand for cellulose specialties, Performance Fibers reported another record year. On page 13 you see net selling prices for our two performance product lines. Cellulose specialties prices were comparable to the previous quarter. However, compared to the same quarter prior year, prices were up $185 per ton due to the 2011 annual price increase and improved mix.

As expected, absorbent material prices, which consists principally of fluff pulp, declined $49 a ton or 6% from the previous quarter and $115 per ton or 13% from the same quarter in the prior year as market conditions weakened during the year.

Moving on to page 14 and looking at volumes, our fourth-quarter cellulose specialties sales volume increased approximately 14,000 tons compared to the third quarter, and total year's sales volumes were 24,000 tons more than the prior year, reflecting the timing of customer shipments and the production shift from absorbent materials to cellulose specialties.

Absorbent materials sales volume increased from the previous quarter approximately 6000 tons, primarily as a result of the timing of customer orders. For the full year, sales volume declined approximately 10,000 tons due to the production shift previously discussed.

As we look into 2012, we are seeing continued strong demand for our cellulose specialties fibers. We expect 2012 cellulose specialties sales volume to be comparable to 2011, while based on completed negotiations prices should average about 12% to 13% higher than in 2011.

In our absorbent materials business, annual volumes are expected to be 8% lower with continued soft demand throughout the year. In general, we are expecting higher input costs due to increasing commodity prices. However, overall we are anticipating 2012 to be another strong year in our Performance Fibers business.

As Paul mentioned, we are making great strides with our project to expand our CS capacity by 190,000 tons by mid-2013. Demolition and construction is well underway with an immediate focus on completing a number of project milestones during our first-quarter maintenance shutdown.

We also continue to increase customer commitments against this new capacity. Since our Investor Day meeting in September, we have grown customer commitments from 70% to 85% and are in active discussions for the remaining volume.

Now let me turn it back over to Hans.

Thank you very much, Jack. Now I would like to provide some key statistics to assist you in developing your 2012 model for Rayonier. I would like to start with the tax rate and our variance analysis on page 15 since the year-over-year change is expected to be significant.

This analysis begins with a statutory federal income tax rate of 35% and then adjusts for the REIT income not subject to tax to arrive at income tax expense before any nonroutine benefits.

In 2011 this rate was 24.6%, which was well above 2010 due to a higher mix of TRS income, predominantly from Performance Fibers.

We then hit a number of specific nonroutine benefits that we achieved in 2011 as follows. $11 million installment note prepayment benefit resulted from the one-year suspension of built-in gains tax for 2011. In 2006 the REITs sold HBU properties to TerraPointe on a 20-year installment note, thereby deferring the built-in gains tax. This year we received approval from the IRS that pre-paying these notes during 2011 would also qualify for the built-in gains tax holiday. The 2006 sale terms included a make whole amount to compensate the REIT for the acceleration of tax liability and lost investment yield due to a decline in interest rates. TerraPointe paid this make whole payment, which resulted in a tax benefit of $11 million in 2011.

The second item is the exchange of the AFMC black liquor credit for the cellulosic biofuel credit, and that resulted in a $6 million benefit.

The third item was a built-in gains tax holiday benefit that we realized from real estate sales from the REIT.

We also realized some individually smaller benefits during the year.

So these items had the effect of reducing our 2011 taxes from $77 million or an effective tax rate of 24.6% to the pro forma tax expense of $49 million or 15.6%.

In looking forward to 2012, we will continue to seek tax reduction opportunities, but we don't expect the same level of these non-routine tax benefits, especially since we will be subject again to built-in gains tax. So we expect our 2012 effective tax rate to range from 24% to 26%.

Moving on, we expect depreciation, depletion and amortization of $147 million and the non-cash cost bases of land sold of about $8 million or approximately $155 million in total. This is about $15 million above 2011, driven primarily by our recent timberland acquisitions and increased Washington harvest volumes.

Capital expenditures, excluding strategic investments for timberland acquisitions in the cellulose expansion, are expected to total about $153 million versus 2011 spending of $145 million. This increase will be invested primarily in Performance Fibers, on cost reduction and efficiency projects and in silvicultural investments in our newly acquired timberland properties. We expect 2012 spending on the cellulose specialties expansion to range between $200 million and $210 million.

We expect interest expense net of interest income of about $52 million, which is net of $9 million of interest capitalized for the cellulose expansion project.

When you put all these elements together, we again anticipate very strong cash flow. We expect EBITDA to be about 10% above 2011. Cash available for distribution should range between $285 million and $310 million. Operating income is expected to be about 10% above 2011. However, because of the tax rate change, we expect earnings-per-share to be comparable to 2011.

Overall, we anticipate that 2012 earnings will be weighted more heavily to the back half of the year, reflecting both Performance Fibers shutdowns occurring in the first quarter, our expectations around real estate closings and the timing of timber volumes. In particular, we expect first-quarter earnings to be the lowest of the year at about $0.36 per share.

Now let me turn it back to Paul for some closing comments.

Thanks, Hans. Well, you have heard we had a great year in 2011, and we anticipate another strong year in 2012 with robust demand for our unique performance fibers and timber sales driving improved operating income and cash flow.

Our strategy remains constant. We plan to, first, expand our timberland holdings and optimize their value through exceptional management practices. Second, we will monetize properties with higher and better uses than timberland, and finally, maintain our global leadership position in high purity cellulose specialties through investments to increase capacity, improve product quality and technical expertise.

We remain committed to increasing our dividend over time funded by operating cash flows, and with our unique business mix and strong conservative balance sheet, we will continue to target initiatives that create value and increase cash generation in the years ahead.

So, with that, I would like to close the formal part of the presentation and turn the call back over to the operator for questions.

(Operator Instructions). Mike Roxland, Bank of America/Merrill Lynch.

A quick question on the Chinese demand for logs. Obviously you mentioned that your expectation is that demand has now reversed course. You are starting to see a little bit of a pickup, but it is to be more of a second-half event. What do you think is driving that demand, and what do you think -- what are the trends that you are seeing out of New Zealand?

Maybe I will take a shot at that, and then I will turn it to Lynn for any additional comments.

First of all, we have got a good perspective, I think, on China. We, of course, have got a team there on the ground. We have got a team in New Zealand that is focused on it as well and, of course, our folks in the Pacific Northwest, in addition to another business in Performance Fibers.

So we saw robust economics in China driving a strong GDP, and with that, we saw an overheated inflation. I think it edged up to 6.5% by the July timeframe. And with that, some policies went in place to put the brakes on to bring inflation back down to a target of 4%, which they achieved mainly and almost in the December timeframe. I think they brought it back down to 4.1%. I think that with that pulling things back a little bit, the pendulum probably went a little too far, and we saw a lot of idling of construction, and I think what we are seeing now is their December meeting of the assembly opening up credit, bringing back in some of the building incentives to open up the market there a little bit more.

So we are kind of seeing that go back. When we were there in December, we saw a lot of cranes idle at the time and now it is moving forward. So we think we are starting to see a little of that pick up in New Zealand, and off the Pacific Northwest, we are seeing some interest as well.

So we think it is that kind of shift back in policy and the pendulum coming back a little bit to bring GDP up to where they want it to be is driving a lot of what we anticipate will be a stronger year in the back half of 2012. I said a lot, and Lynn, if you have any additional comments to that.

I don't have any other additional comments, other than that we are starting to see activity on our early stumpage sales that we are putting in place in first quarter, and we still have that conviction that there will be the seasonal ups and downs. But, as Paul said, the fundamentals are there from an economic standpoint.

Yes, we saw prices out of New Zealand kind of bottom out late in the fourth quarter, and we saw it pick up a bit in December into January, and we are already seeing some of that into February. So, again, we just kind of see it lifting here a little bit, and that is usually our first sign of some things coming back around. But it will take after the Chinese New Year and into the second quarter to get things going again, we believe.

Got you. Very helpful, thank you. Domestically speaking, can you provide a little bit more color on the pulp markets in the Atlantic region? I believe in the press release you mentioned, and I think in the commentary as well, that you have seen some strength there.

Yes, Mike. What we have seen is that in a regional basis that there are several facilities that continue to be very strong. So, as you know, pulpwood markets are very regional, and across the South both in the Atlantic region and Gulf states, we are seeing specific customers continuing to do well. So with both our stumpage sales and our delivered wood program, we see pulpwood moving up.

We also are expecting that we will return to more consistent weather patterns and not have the fire and weather patterns that we experienced early in 2011. So that is our outlook for all of 2012 that we will be slightly up in each one of those markets.

One final question and I will turn it over. With respect to the cellulose specialties expansion, is there any way to transition the new line to make cellulose specialties at a quicker pace than you originally anticipated given what appears to be excess capacity in the commodity viscose market? I believe that you said at the Analyst Day that your intention was to produce commodity viscose initially and then transition to cellulose specialties. But given what appears to be an extra capacity market, could you actually accelerate the conversion to specialties?

Let me turn that over to Jack because we have got a plan to phase that in, and maybe Jack can take you through that plan. And it is much like you described.

I don't see anything significantly different from what you are describing right now. However, bear in mind that this expansion is essentially the same process we have on what we call our B mill.

So the qualification time should be minimal, but being conservative we are looking at sales of viscose for the second half of 2013 during this qualification time, and obviously we are going to ramp that up as quickly as we can.

Chip Dillon, Vertical Research.

You mentioned in the guidance $8 million in land basis, and I know this is counted in two different places. Carl and I talked about this a lot. But does this mean at least on the release, it is suggested in last year your land basis, if I read this right, was only $4 million. So does this mean you are expecting more land to be sold, more acres, or is it just the way -- you are just -- the lot differential is this big?

No, really what we are expecting is a little change in the mix, and more specifically we are already getting inquiries on some of the acquisitions that we just completed in 2011. And so we obviously would expect to sell at a reasonable margin over our basis, but this is much newer acquired property. So it has a much higher basis, let's say, than some of the historical property that we have been selling.

Got you. So actually can you just give us -- and you might have done this a rough acre number or a range that you think we could model in for 2012?

Our run-rate in rural acres I think over the last three or four years has been right at about 15,000 acres. I think we said it is going to be above and I would -- somewhere in the 15,000 to 20,000 acre range is what we are thinking about as Hans said. Consistent programs from our existing acres and timberland ownership and the 300,000 acres that we acquired provide some opportunity to increase that.

Got you. And then a second question is, you mentioned the South -- the Southern lands split between the Gulf and the Atlantic region. The total volumes would be flat, even with the acquisition. Would the decline be in the Atlantic area? Is that a further -- and I will mention -- I know it was discussed about the stronger pulpwood in some areas, but is this mainly a further reduction in saw logs, or are you backing off in some of the areas in pulpwood as well?

We are primarily focused on our sawlog volume and bringing that volume into the Gulf states. But what is not reflected in the summary is that we are adding additional hardwood pulpwood. So, in total, we are seeing consistent pine wood volumes, but what we are seeing is a shift to some of our hardwood pulpwood.

Got you. Got you (multiple speakers) and then the last -- I'm sorry?

I was just going to say again we are offsetting a large surge of fire damaged wood in the Atlantic region as well. So that is a key part of that offset. So we are definitely going up in the Gulf states as Lynn was talking about, and what you don't see in our statistics there, a good part of that is the hardwood as Lynn mentioned. And then, of course, we are competing against less salvage volume out of the Atlantic than we had in 2011.

Got you. And then last question, you have obviously done a good job in selling the new capacity in Performance Fibers. Is the way to read this, does this mean that as the mill is coming up, you are able to -- you would be expected to sell that committed volume as high alpha right away as you can make it? And maybe a different way to ask this, not to put the cart before the horse, but I mean one could assume that you are doing such a good job that maybe it would be all sold out, say, by the end of this year. But from what I hear you saying is that, even though it may be committed, it may not be committed right away. Is that sort of the way to think about it, like that 85% or whatever it turns out to be, some of that might phase in in 2014 or 2015?

The way that is going to work is that, if you recall during the Investor Day, we said we were going to be around 70%, and now we are seeing 85%. That increase is all due to high value CS type agreements. So, at that point in time, I think we have mentioned that we had roughly 30,000 tons or so in commodity type viscose. That number has not changed. So we are keeping that number constant for 2013.

And then as we move into 2014 and beyond, that is when these volumes do ramp up rather significantly to a high-value CS. So within a short period of time, we will be 100% high value CS.

One other comment just to make is that when we are looking at this capacity of 190,000 tons, our intention is not to fully commit in long-term contracts that entire volume. We want to had some flexibility to be able to meet the surging demands, the changes that our customers might have.

Got you. And I guess the last question is, given that there are some people nipping or trying at least to nip at your heels or restart out West, Latin America, are you able to add these new customers do you feel at terms that are comparable to what your existing volume is moving at?

Yes, we feel very good about our additional volume that we have put on for 2014 and beyond. It is very consistent. It is high quality. And certainly we have got folks trying to get into our space, but keep in mind they have been doing that for 20, 25 years pretty consistently.

So not a new obstacle for us, we have just got to continue to keep getting better and providing value to our customers, which is why you hear a lot about the project that Jack and his teams are putting in place to improve our consistency and our quality. So we will continue to push on that, and as we push on that, we are able to achieve high quality commitments going into the future.

Okay. And last little quick one. You gave us the number for the spending on the project at $200 million to $210 million this year. I guess I could use some math, but maybe you could just tell us how you view right now the remaining tail of that project in 2013? How much will be left for next year?

Well, we are still at -- we spent $43 million in 2011, and so if we are at $210 million, I think we are still on track for around $300 million project. So that is the balance that would be there in 2013.

Okay, so like $50 million-ish maybe?

Yes.

Steve Chercover, D.A. Davidson.

The first question on Performance Fibers. It seems like this is the first year in several where you will not have any incremental volume. Is that because you are absolutely maxed out until the conversion is online?

I will take a shot at it. I think we have been fairly consistent with our volumes. We have surged to the extent that we can and try and move whatever volume available on absorbent materials within reason of our facility.

And yes, I would say that we have been fairly consistent with volumes over the last handful of years, and you are right. 2011 we probably pushed more and surged a little bit more. But you are right. It is hard until we get this incremental line up to have any significant improvement until mid-2013.

And the 12% to 13% incremental price hike, is that based off the [$16.34] terminal price in 2011?

Yes, it is an average type price. And if you look at it, that is roughly about a little over $200 a ton on that figure.

Year-to-year, Steve.

Yes, and it would actually be the full-year average was right around the same level, so.

Yes.

And if fluff volumes are going down 8%, is that because it is just not economic to sell it?

No, what is driving that really is we have taken advantage of the viscose market on our C mill to a limited extent. For example, this next year we look to be making upwards of 20,000 tons or so of viscose pulp on that. When we do that, that offsets some of our fluff pulp. And, again, the economics of doing that is all relative to fluff pulp.

So fluff pulp pricing has been dropping, commodity viscose pricing has been dropping, but still there is a relative advantage to do that. So that is what is really driving the overall shift.

Great and two more quickies, please. First of all, do you have a targeted distribution payout ratio?

We don't really have a targeted distribution ratio. I think if you look at our history, we have typically run between 65% and 80%. When we view the dividend, it is typically after we have updated our five-year long-range plan, and we want to look out at least a couple of years pretty hard and make sure that any increase we make can be well supported and is not right up against our expected CAD and give us some operating flexibility for any opportunities that come up. So that is pretty much our process in deciding the dividend increases.

Understood. And, finally, did you discount any improvement in either wood products or residential activity in your guidance?

Pretty much. I mean we assume wood products is going to be relatively flat, and we certainly are not anticipating any rebound in the development HBU side of the business.

Thanks and good luck for 2012.

Mark Wilde, Deutsche Bank.

Really encouraging numbers in CS there. I'm really pleased by that. My first question is for Lynn. I wondered if you can just talk a little bit about what you are expecting out of Russian export taxes as regards the Russian admission into the WTO. Because I'm hearing that as part of that admission, they are going to have to significantly reduce the log export taxes, but we really have not seen any hard numbers yet.

As you know, we are really expecting not to see an impact until June 15 or beyond. Right now it is unclear whether there is going to be reductions in the log tariff. Because as they implement the quotas, there is an opportunity for them to extend that position.

So we really at this point are looking at -- our current internal expectations is that the tariffs will not materially impact the China log or lumber markets. From our standpoint, it is operationally and from where the logs are located not favorable to get those logs into China where the sawmill capacity is, and that there will be a point where there will be movement, but we still see that the bulk of the logs will still come from New Zealand, the Pacific Northwest, British Columbia, and that the trends will continue through 2012.

Mark, the lack of infrastructure in Russia we think is a far bigger component than the drop in the tariff in our view, and it is formed from a lot of conversations we have had with folks in China, one individual we met with in December, head of wood distribution in China.

So we are getting that feedback. We think -- we tend to think it is pretty good judgment, although there is bound to be some change. But, again, we don't think it is going to be significant, the change in the overall dynamic and, as Lynn says, kind of pulling from the other sustainable markets outside of China, New Zealand, Australia, Canada, US.

Okay. And then what exactly are we going to see on June 15? I'm just trying to understand what we should be looking for here.

They have to ratify the agreements, and then it would become effective 30 days later. And that is the point where you would have to find that judgment as to whether it will materially impact the business at that point in time.

Okay. The other question I had was just what we might expect in the first quarter and into -- a little further into 2012 in terms of fluff pulp prices. It looked to me like you were just below $800 per ton for the fourth quarter. And we are hearing spot prices significantly below that over the last week or two, so I wondered if you had any thoughts on that?

Yes, as you know, fluff prices follow NBSK pricing, and per RISI NBSK looks like it is going to bottom out sometime early in the first quarter here. And then typically fluff will lag for a couple of months or so. So we would think that fluff pricing is going to start to turn up some time in the second quarter. Now, again, in the past, we have been wrong on these things as RISI has been wrong with fluff and NBSK pricing, so we will wait and see where that goes.

But you are right. Spot prices in China right now are around $620, and list price for fluff pulp is about $950 right now. But you have got to discount that by roughly 20% or so to get to the actual transaction prices. So I guess we see the pricing dropping down a little bit more here in Q1 on fluff and then start to slowly pick up through the balance of the year.

Okay. And then the last question I have, Paul, is a little longer-term question. You seem to be doing a really impressive job of selling out that CS expansion. I just wondered given that whether you need to start thinking about what is your next move is in that business and what potential shapes that might take?

I think it is fair to say that we do have some conversation on that, but really right now the focus of the team is executing against the plan we have got in place and getting this up and running and contributing to cash so we can distribute that to our shareholders.

Will there be more to follow? We will keep you posted, but we are certainly not in a position to talk about it at this point in time. We have get to get this thing up and going.

Understandably. Fair enough. Good luck in the quarter.

Joshua Barber, Stifel Nicolaus.

I wanted to follow up on one of Chip's questions from before when they were talking about the 2013 production after that initial conversion. Jack, I think you had indicated that initially by conservative estimates you would be producing viscose for most of the back half of 2013. But to directly answer, who would be getting that contracted volume? Would the contracts not kick in until you actually started producing the high-end specialty and then you would be selling viscose on the spot market, or would some of that be under the previously contracted high-end volume?

We have been working on contract extensions with all of our customers and have been essentially successful across the board on that. So a lot of that will go through addition customers as we have extended these contracts out to as long as 2017. But we are also expanding and diversifying our base into the other product lines. We are predominantly right now in acetate with some amount of product going into ethers, the high-end ether applications. We want to grow in that area. Also with the specialty fibers used in filtration, we want to grow in that area, as well as in sausage casing. So we will be expanding our base more beyond that with current customers and with new customers.

Okay. For the back half of 2013, that would be under the contracted new volume or it would not be?

Under the back half of 2013, that is largely just commodity viscose pulp with qualification times.

Got it. And --

Again, Jack commented earlier, we will work to collapse that to the extent possible, and as he noted, the great thing here is that we are putting in a line that is a mirror image of our B mill, which is a well-known product line to all of our customers.

So, again, we will have more guidance in the future. But the way we have got it planned now, we have modeled it now is, again, the viscose in the back half of 2013, yet hopefully able to collapse that to the extent possible, but we will not have that type of information until later point.

Understood. Following up on one of the previous questions, do you think you will get some benefit on your effective year-over-year fluff pulp pricing by the fact that some of your volumes will now be commodity viscose?

Well, I think if you compare it to just fluff pulp, there is an advantage to it, or else we really would not be pursuing it. It is, as you know, viscose pricing is not real high at the current time. But it is to our advantage to produce more into that product line versus fluff -- versus spot fluff.

Got it. And last question, as you guys mentioned, the cash balance did come down fairly sharply this quarter, but I think for reasons we all understood. What would be the ideal cash balance that you guys would want to run at for the next two to three years on average?

Yes, I would say we feel comfortable somewhere around $100 million or so. That would give us enough flexibility. Don't forget we also have the $450 million revolver available to us as well.

Paul Quinn, RBC Capital Markets.

Very good results. Just a question on specialty dissolving pulp price increase for 2012, the guidance of 12% to 13%, I think it is higher than most people expected. I'm just wondering on the other side, on the cost side, what inflation you are expecting in the year?

We look year over year 2011 and 2012 we are looking at about 4% to 4.5% increase in costs.

In terms of the -- you mentioned the increase in pulpwood pricing. You have got significant upside in your mix for sawlogs. Have we seen any start to increased pricing on the sawlog side?

Not at this time, Paul. We have not seen any indication in the Southeast or any uplift. (multiple speakers)

I was going to add to that. Just as we look and we model the housing starts, we are, I would say, pretty consistent with other folks out there, if not conservative. And we don't have a -- we don't reach 1.2 million starts until the 2016 timeframe. So we see kind of a moderate improvement in that housing market. But the good news is we are performing exceptionally well now, and we see that as all upside to the future.

Right. Okay. And just lastly, just on -- you conduct a REIT asset test on a quarterly basis. Are you guys well in a comfortable position?

We are just finishing up our year-end test now, but we should be in pretty good shape. You recall that in the fourth quarter we closed on that $330 million timberland acquisition. And so that $20 million or so went into the TRS. The rest went into the REIT, and that will obviously help the test.

Thanks very much. Best of luck in 2012.

Mark Weintraub, Buckingham Research.

I'm just trying to understand the math on the guidance big picture. Because I think you say that you expect operating profits to be up about 10% 2012 versus 2011, which presumably is order of magnitude $35 million, maybe a little bit more than that $35 million. And you talk about the chem sale pricing being up, I think you said close to $200 a ton, and you make about 500,000 tons of it, if I'm understanding things right. So that would be almost $100 million. And then even if I think through the 4% to 4.5% increase in cost, which I would be curious as to what drives that as well, if you could throw that in in the answer. That maybe would seem to me like a $20 million type of offset. So I still have a big gap, and I realized there are a lot of other levers and movers here, but it is a big gap. So is there anything pretty big to explain the difference between the $80 million-ish improvement that is doing that back of the envelope calculation versus the $35 million-$40 million that you have indicated?

Yes, probably the big thing there is the fluff, the absorbent material prices year over year we have modeled in to be fairly significant, and that might be something that you would take a look at in your model.

The other part, of course, in that is that we have guided real estate down. And so Charlie gave you some parameters to that, that while rural sales will be up, we will not have a repeat of the nonstrategic sale, and we will not have the benefit of the tax that we saw here in the fourth quarter. So that is probably the other component that you may be missing in your model. I think you bring all those together, it should be close to the guidance we are giving.

Very good. And I'm sorry, I think this year real estate was about $40 million. Did you -- I apologize if I missed that.

It was $47 million of OI.

Of OI? Okay. And for 2012 were you specific, or just you gave some parameters we will work through and then come up with a number?

We just gave some parameters. I mean one thing we did note is we had that property tax settlement this year that benefited about $6 million. So that is obviously something that we don't expect to recur next year.

Sure. And I'm curious, the 4% to 4.5% in terms of cost inflation, we are seeing a lot of input costs actually coming down be it not gas, etc. What is behind that? What are the inputs that you are keying it on for the inflation guidance you are giving?

Yes, I guess one of the big ones would be wood. That is driven primarily through by softwood price increases. In the Southeast as Lynn has described, there is a number of drivers for that softwood fiber, and that has caused it to increase. And last year we had a dry year from a hardwood perspective. So we are not as certain that was indicating having a dry year, and that has a big driver on cost for hard wood.

Chemicals, caustic right now by CMAI is forecasting year-over-year up in pricing, and as with some other chemicals, we are seeing some upward trends at lease for the forecast. So, at this point in time, those are the big drivers. We also have some higher ALB-type costs associated with our labor.

Okay. That all makes sense. Just one clarification, if I could. So, on the wood, is that fairly region specific, or are you also expecting to where you are getting the wood for the mill, or you are also expecting higher -- and I realize this is pulpwood versus the saw timber -- are you expecting pulpwood across the board to be up, so also be benefiting you in one pocket as well?

Lynn, did you want to comment?

Yes, we are expecting year over year our pulpwood across the South-wide regions of both the Atlantic and the Gulf states region to be up year over year. So yes, we are benefiting from that within the Forest Resources business.

Okay. Thank you.

Again, keep in mind that is the largest driver in Performance Fibers. The largest component cost is wood. And so if that is moving up, as Lynn said, it should and it will, and our facilities operate to Lynn's perspective in her Atlantic region, if you will, although, of course, it's a separate business, and we run it independently. But the same dynamics being driven there would affect Jack's input costs.

One other input in terms of the softwood price going up year over year is we had the fires last year that the pulp mills benefited from and able to get some of their softwood fiber that we used at a lower cost, which we don't anticipate having this year.

(Operator Instructions). I am showing no further questions.

Great. This is Hans. I would like to thank everybody for joining us, and please contact Carl Kraus for any follow-up questions. Thanks, again.

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