Rayonier Inc (RYN) 2013 Q2 法說會逐字稿

Welcome and thank you for joining Rayonier's Second Quarter 2013 teleconference call. At this time, all participants are in listen-only mode.

(Operator Instructions)

Today's conference is being recorded. If you do have objections, you may disconnect at this time. Now I will turn the call over to Mr. Hans Vanden Noort, CFO. Sir, you may begin.

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

I'd like to remind you that, in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release, as well as our Form 10-K filed with the SEC, list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They're also referenced on page 2 of our presentation material. With that, let's start our teleconference with opening comments from Paul Boynton, Chairman, President, and CEO. Paul?

Thanks, Hans. I'd like to make a few overall comments before turning it back over to Hans to review our financial results. Then we'll ask Lynn Wilson, Senior Vice President of Forest Resources, to comment on our timber results. Following our review of Forest Resources, I'll discuss our real estate results and then Jack Kriesel, Senior Vice President of Performance Fibers, will take us through the results of our cellulose fibers business. We are pleased to report second quarter pro forma earnings of $71 million or $0.54 per share, reflecting very solid business unit operating income, particularly from Forest Resources, due to improved timber markets. Our operating cash flows continue to be strong, with cash available for distribution well above our $0.44 per share dividend.

In addition to excellent financial performance in the second quarter, we executed several significant strategic initiatives. First, we accomplished an important milestone with the on-time startup of the cellulose specialty expansion project at our Jesup Mill and we're very pleased to report that the initial production volumes and quality have exceeded our expectations. Second, in April, we closed on the acquisition of two of our three partners' ownership interest in the New Zealand joint venture to increase our ownership from 26% to 65%, as we further position ourselves for a long-term play in the Asia-Pacific basin. Finally, we significantly increased our dividend, effective for the third quarter distribution, by 11.4% from $0.44 to $0.49 per share. This is our ninth dividend increase in 11 years. As Hans will discuss, our balance sheet and cash flows are strong, providing us the financial strength and flexibility to execute on our strategic objectives. Now with that, I'm going to turn it back over to Hans for a review of the financials.

Thanks, Paul. Let's start on page 3 with the overall financial highlights. As Paul noted, the second quarter was very solid with sales of $409 million, operating income of $111 million, and net income attributable to Rayonier of $87 million. In accordance with GAAP, both operating income and net income included a $16 million gain from the acquisition of the additional 39% of our new New Zealand joint venture. We have excluded this gain to arrive at the pro forma operating income and pro forma net income amounts, which will be used for the comparisons throughout this call.

On the bottom of page 3, we provide an outline of capital resources and liquidity. Our year-to-date cash flow was strong with a pro forma EBITDA of $290 million and cash available for distribution of $170 million, both of which were above the prior year amounts. We ended the quarter with about $1.7 billion of debt, which now includes $211 million of New Zealand joint venture debt and $344 million in cash. On a net debt basis, we finished at about $1.3 billion. We continue to feel very comfortable with our current balance sheet and liquidity.

Let's now run through the variance analyses. On page 4, we've prepared a sequential quarterly variance analysis. In Forest Resources, second quarter operating income was favorable to the first quarter, reflecting increased volume from our US holdings and improved prices in New Zealand. Real Estate income was well below the first quarter, which included a $20 million nonstrategic sale. Moving to Performance Fibers, you can see price improvement in cellulose specialties, reflecting the full realization of the 2013 price increase and improved product mix. However, this benefit was more than offset by reduced volumes and higher wood and chemicals input costs. Corporate and other expenses were $5 million above last quarter, due to higher legal and business development costs. The first quarter also benefited from a favorable mark-to-market gain on New Zealand dollar hedges.

Let's move on to page 5 and look at the year-over-year variances. The second quarter and year-to-date variances compared to last year generally have similar drivers. Our Forest Resources results reflect improved prices and volumes in all US regions and higher prices in New Zealand, driven by strengthening demand in saw timber and strong Asian demand.

The Real Estate results were comparable for the second quarter, but favorable on a year-to-date basis, due to the previously mentioned first quarter nonstrategic sale. In Performance Fibers, cellulose specialties prices and volumes were higher, but fluff prices were weaker and input costs were above last year. Finally, the increase in corporate and other expense generally reflects the items noted on the previous page. Turning now to page 6, on this page, we reconcile from cash provided by operating activities, which is a GAAP measure to our non-GAAP metric of cash available for distribution or CAD. Our year-to-date cash flow was quite strong with CAD of $170 million above last year, and well above our dividend payout of $113 million. With that, let me turn the conference over to Lynn Wilson.

Thank you, Hans. Good afternoon. Let's start with page 8 and the northern region, which primarily comprises our Washington state operations. Delivered sawlog prices increased throughout the quarter, despite weaker domestic sawmill demand as export demand, especially to China, continued to strengthen prices. With our ability to capitalize on China demand, sawlog prices increased 10% from the first quarter and prior year quarter. Our stumpage prices declined from the prior quarter, solely due to the mix of tracts being harvested. Volumes increased significantly over both the prior quarter and year, as we took advantage of favorable pricing and operating conditions.

For the second half of 2013, we believe overall demand will continue to remain strong, driven by improving domestic log markets and continued demand from China and therefore, we plan on maintaining the 2012 volume levels in 2013. Overall, based on current pricing, we expect delivered log pricing will be up 10% to 15% in 2013. In the Atlantic and Gulf regions, on page 9, average pine stumpage prices declined slightly from the first quarter, mainly due to mix, as higher pulpwood thinning volume drove the increased total volume. Prices were above the same period last year for both sawlog and pulpwood. We continued to capitalize on areas of high rainfall across the regions, as the strong competition for available volume resulted in higher pricing. Volumes increased significantly from the prior quarter and second quarter of the prior year. For the full year, we continue to anticipate that 2013 pine harvest volume will be comparable to 2012 and that pine prices will be 5% to 10% above 2012.

Now, let's focus on our joint venture in New Zealand on page 10. As Paul mentioned, in the second quarter, we acquired an additional 39% interest in the joint venture and increased our ownership to 65%. The driver was to take advantage of the long-term net wood deficit in Asia-Pacific, primarily resulting from China demand for urban housing construction and declining Russian log supply. Consistent with our Northwest prices, export prices increased from the first quarter and second quarter of prior year, as Asian demand continued to strengthen. We expect a similar increase for domestic pricing in the third quarter, as that market tends to follow export pricing. The chart depicts prices for delivered logs.

For the year, we expect export pricing to be 10% higher than 2012 on the strength of Asian demand and we anticipate domestic pricing to increase 5% to 10%, following the export market. Total year volume will decline 10% to 15% from 2012 as we adjust our harvests to match the age class distribution across the estate. Overall, Forest Resources' operating income, including New Zealand, should be well above 2012, due to stronger demand driving higher prices in all regions and the New Zealand acquisition. Now, let me turn it over to Paul to cover Real Estate.

Thanks, Lynn. As Chris Corr, our new Senior Vice President of Real Estate, joined us just last week and is in the process of relocating, I'll provide the real estate update. Now, going forward Chris will discuss our real estate business at these quarterly teleconferences. Chris has a great background and record of success in real estate and we look forward to his leadership in this business. Real Estate operating income was comparable to the prior year period, but well below first quarter, which included a sale of 5,450 acres in Washington state for $20 million. Compared with prior year quarter, higher, nonstrategic property volumes and prices were offset by lower average rural HBU prices due to mix. Page 11 details real estate rural HBU and development acres sold, showing volume generally comparable to prior year period.

Demand for rural HBU property remains solid. Our Gulf region markets remain strong and we're starting to see increased interest in rural markets in Florida, Georgia, and Alabama. Page 12 details per acre prices. Average rural HBU prices held firm, helped by Gulf region sales in Texas, Louisiana, and Mississippi, but were below prior year period, which included a relatively large higher value sale in Florida. We continued to experience strong interest in property from our recent acquisitions. Page 13 shows nonstrategic Timberland sales. Volumes and average prices were higher than prior year period reflecting the mix of properties and the timing of closings.

Demand for our nonstrategic properties has improved and we expect, for the full year, that acres sold will be up significantly from each of the prior two years. I'd like to also note that we received megasite certification for our second industrial site, the 1,800-acre Crawford, Florida industrial property near Jacksonville. The certification that the property is ready for industrial and commercial development has substantially enhanced the site's visibility and marketability to users. In summary, while our second quarter real estate operating income was relatively low due to the lumpy nature of this business and the timing of closings, we are quite encouraged by the interest level we are seeing in our industrial and commercial project areas and in our residential development properties. Although we are not yet able to discuss specific transactions, we expect to close on a small, but meaningful industrial property sale this year and on other industrial and residential development properties in 2014. We anticipate the pace of serious interest in our well-situated and high-value coastal corridor HBU properties will continue to accelerate as the economy improves. Now, let me turn it over to Jack Kriesel to cover Performance Fibers.

Thanks, Paul, and good afternoon. Compared to the prior year quarter, strong cellulose specialties sales volumes were offset by higher cost, due to the planned extended outage at our Jesup Mill for the cellulose specialties expansion startup and higher input costs. On page 14, you see net selling prices for our two Performance Fibers product lines. Compared to the first quarter, cellulose specialties prices increased $28 a ton, or about 2%, as a result of the full realization of the 2013 price increase. Compared to the same quarter in the prior year, cellulose specialty prices were up $10 a ton or less than 1%, as the 2013 price increase was partially offset by the strong 2012 sales mix. Prices for absorbent materials, which consists principally of fluff pulp, were flat compared to the previous quarter and declined $74 a ton or 10% from the same quarter in the prior year, due to the influence of weak commodity pulp prices.

Moving on to page 15 and looking at volumes, our second quarter cellulose specialties sales volume increased 7,000 tons over the prior year, mainly due to the timing of customer orders. Second quarter 2013 absorbent materials sales volumes declined 17,000 tons, mainly due to lower production volumes as we exit the market to accommodate the cellulose specialties expansion. Overall, we still expect that Performance Fibers' operating income will be 10% to 15% below 2012 record results, primarily due to additional costs and lower volumes as a result of the cellulose specialty expansion transition and higher wood and chemical costs.

As Paul stated, we are very pleased to report that we successfully started up the cellulose specialty expansion project. Recall that we initiated this conversion project about 20 months ago with the objective of replicating our industry benchmark hardwood acetate grades. The excellent job done by the design and implementation team enabled us to begin production as originally scheduled on June 28. After a brief initial commodity viscose run, we transitioned to acetate by early July and we quickly realized quality levels and production rates far beyond our plan. We have since switched back to viscose pulp while we fully evaluate the acetate pulp quality.

Our ability to duplicate our customers' processes in our R&D facility has enabled us to already complete the extensive end-use testing of this pulp. The positive results give us confidence to send samples of the pulp immediately to our customers worldwide; again, well ahead of plan. Lastly, the cost of the project continues to track to the previously stated range of $375 million to $390 million. Now, let me turn it back over to Hans.

Thanks, Jack. Now, I'd like to provide some estimates of our key metrics, which should now include the impact of New Zealand joint venture consolidation for the remainder of 2013. We expect depreciation, depletion, and amortization of about $188 million and a non-cash cost basis of land sold of $9 million or approximately $197 million in total. Capital expenditures, excluding strategic investments for timberland acquisitions and the CSE project, are expected to total about $160 million. We continue to expect 2013 spending on the CSE to range between $130 million and $145 million. We expect interest expense net of interest income of about $45 million, which is net of $6 million of interest capitalized for the CSE project. With respect to income taxes, we expect our effective tax rate from continuing operations to range from 16% to 18%.

When you put all of these elements together, we, again, anticipate very strong cash flow. We expect pro forma EBITDA will be moderately higher and operating income and CAD will be slightly higher than 2012. Also, we continue to expect that 2013 earnings will be weighted more heavily to the first half of the year, as evidenced by our first quarter realization of tax credits and the $20 million Timberland sale and the impact of the CSE on the back half of the year. Now, I'll turn it back to Paul for some summary comments.

As you've heard we've had another excellent quarter and for the year, we expect to achieve a slight improvement in operating income and moderately higher EPS, even during this transition period for Performance Fibers. In the first half of the year, we realized the benefits from the early stages of a recovering US housing market. As we look forward, not only will this rising housing market support sawlog prices and improve our sawlog pulpwood mix, it will also drive volume and prices in our real estate business. We've noted that we're encouraged by the increased interest in our development properties and we believe that we're entering a period of long-term value growth in our real estate business. These two businesses, Forest Resources and Real Estate, are well-positioned to benefit from a strong US economy. In Performance Fibers, we're excited about entering into the customer qualification phase of our cellulose specialties expansion. The team did an excellent job of maintaining schedule and assuring absolute quality in the project.

With our disposition of the wood products business in first quarter and our exit from the fluff market, we are fully focused on the unique potential in the high purity cellulose markets; creating what is truly a specialty chemicals business. Of course, we're pleased to substantially raise our dividend. This increase reflects the confidence we have in future cash flows. In summary, the improving timber and real estate markets, along with the on-time and successful CSE startup, strengthens our confidence that we're well-positioned to drive cash flow and value creation in 2013 and beyond. Now with that, I'd like to close the formal part of the presentation and turn the call back to the operator for questions.

(Operator Instructions)

Mike Roxland, Bank of America Merrill Lynch.

Congrats on the quarter and the startup of the new machine. First question is, given that your production volumes and quality on the new line have surpassed your expectations, is there any way that you could begin selling cellulose specialty sooner? I realize that you said in the past that you're going to phase that in over 2014, but now that everything seems like it's being done a lot better, a lot more quickly than you had expected, could you actually bring on some of the acetate quicker rather than slowly phasing it in?

Mike, this is Jack. We still have to go through that qualification period as stated, but that could take anywhere from three to six months, which is a likely timeframe. Our plan right now is any incremental sales would be into the commodity viscose pulp.

Got you. Initially in commodity viscose, but I think you were targeting mid-2014/late 2014 to have everything up and running with respect to cellulose specialties. Could that be more now a 1H '14 even rather than mid-to-late '14?

We look at our transition in 2014, we'll be roughly around 90,000 to 100,000 tons of the CS pulp. That's what we've been planning on, that's our expectation going forward as we feather in this over the next few years. We don't see a significant shift in that. Obviously, as opportunities present themselves, we'll take advantage of them.

Got it. Last question, just some chatter about weakness in the ethers market. Have you heard anything or just provide a little bit more color what's happening in ethers?

The ethers market is a pretty complicated market because it has a number of end uses. There's construction and industrial grades, as well as food and pharma. Now, our product goes primarily into the food and pharma and those end uses continue to grow, particularly the food segment, upwards of 10% type growth year-over-year. In the industrial type applications or more specifically, the construction grade, there is some weakness and that is really segmented towards the European market. Again, that's not a segment that we participate in a big volume.

Thanks for that, Jack. Good luck in the quarter.

Mark Wilde, Deutsche Bank.

Lynn, a couple questions for you. There had been some reports that maybe there was a little bit of easing in Pacific Northwest log pricing late in the second quarter. It didn't sound, from your comments, like you guys were seeing any of that.

Mark, we did see, in the domestic lumber market, some of our customers, because of the lumber market pricing coming down a little bit, there was a tail off. But there had already been enough stumpage sold in the first quarter that was being severed in the second quarter, that pricing remained strong on our stumpage program. As well as, that's when the export market really ramped up, so really, as we moved in, it really surged on export side in April and May. We really didn't see a tail off in our price realization, despite what was going on in the domestic lumber markets.

Okay. All right. Another question, I just was with a commodity broker last week and they were talking about increasing amount of interest in trying to export southern logs. I think maybe you had talked a little bit, at one point earlier this year with me, about doing some of that off the Gulf Coast. They were also talking about it off of some of the Atlantic ports in the Southeast there. Can you talk about what you're seeing and what kind of potential you think there is over time to export more logs from the southern US?

Yes, Mark. We have done some trials ourselves out of Savannah with containers and southern yellow pine logs and tested that. We know that, from other reports, that others have tested the same. Right now, we just don't see that the net timber margin and return to our shareholders that that's the right decision. Our domestic pricing still beats that, but we have the ability. The largest difference is that currently, there are no break bulk or open ships to load, so the transportation is the cost that is prohibitive.

Whereas in the Pacific Northwest, because of the long history there, you already have those larger ships with break bulk loading facilities at all of the ports that we deliver to, whereas in the south, we're still stuffing containers. That really is for us, the decision is net timber margin and return and we just don't see it. But we could ramp up over time, but right now, our other destinations are a better and more profitable decision.

Okay. A question about how you see relative value on timberlands. We saw a big acquisition out in the West Coast announced during the second quarter, but I'm also hearing about some other big players selling timber on the West Coast right now and looking more at buying in the southern US. Do you have a view, just generally, on relative attractiveness? Where do you see the best value opportunities?

Mark, it's Paul. Certainly we're seeing timberland values hold strong. We're out there actively looking a lot. We've looked at over 800,000 acres already this year. We don't have a lot to show for it. At the same time, we think there's going to be some opportunities for us to continue to acquire. But with your observation, we agree that timberland values are holding up, we think, very well and it's a very active market, so I think that's all. Any other comments, Lynn?

No. I think that's consistent.

Okay. All right. The last question I had is just, can you make any comment on that rise in legal and corporate development costs in the quarter?

Sure. The largest part was a legal accrual as we settled an outstanding contingency.

Okay. All right. Sounds good. Good luck in the third quarter and through the balance of the year.

Steve Chercover, DA Davidson.

My questions are primarily for Jack. It's almost for modeling purposes, now that absorbant materials is no longer in the mix, might you show us commodity viscose volumes and prices until the transition's truly done?

As we ramp up our CS production, the balance of this year we're looking at 60,000 to 70,000 tons of commodity viscose. Obviously, next year if we do 90,000 to 100,000 of CS, there's about 40,000 or so, 50,000 tons of commodity viscose. Again, that's assuming some of our decreased production rates as we were ramping up. But again we're running at -- we're seeing indications that we're going to be able to run at a higher rate. By 2017, we're out of the commodity viscose.

In regards to commodity viscose pricing, a lot of capacity was brought online over the last few years, roughly about 3 million tons, and probably some of that didn't come to realization and then there's another 1 million or 2 million tons slated to come online over the next three, four years. That should hold the commodity pulp pricing down somewhere between the $850 to $1,150-type range, just depending upon circumstances. Now obviously, things can change dramatically, bad cotton crops or whatever, but all things considered, that's the type of price range we're looking at.

Okay. That's helpful. Given that you've committed volumes to commodity viscose in order to keep the markets tight, would you still characterize the relationship with your customers as being on allocation or can they get what they want now?

I'm not quite certain I understand the question, but we have contracts for the majority of our customers. Certainly, there's some incremental volume out there with the weakness in the commodity viscose pulp, some of the swing players can come into play. But by and large, the market is not changed.

Yes. Certainly, Steve, just to jump in here, we were obviously extremely oversold over the last handful of years. As we've come on and others come on with some more availability, that situation certainly has eased and if that's what you're referring to the allocation, I'm not sure. But as Jack referenced, our volume's under contract and we've got solid sales going out through the year.

Yes. Thanks for clarifying, Paul. That's exactly what I meant. I think you could have sold more, especially pre-recession, if the capacity was available. Now, the tension's not quite there, but it's still fantastic to have the commitments nonetheless. Okay. That covers it for me. Thank you.

Chip Dillon, Vertical Research Partners.

It looks like things could be heating up quite a bit for the Real Estate business, especially given that, as we talk to people in the Real Estate and builders in particular, the biggest bottleneck is land. Could you give us some -- maybe a wedge or range of what we could see that segment do? Obviously, last year was a low point at $32 million and I guess year-to-date, your income is $23 million. But could we be seeing a $100 million number? We're not going to hold it to you, like in '14 or ' 15, as you entitle? Secondly, as an unrelated question, what are your thoughts about how far down the development process you're willing to go in order to capture more value, although there's more risk the further you do go down that line?

I'm somewhat reluctant to say exactly where that will go into the near future, but certainly, it's got the upward potential. You're right, we reached a low point last year. We've already guided that it's going to be a real strong year this year relative to last year and we continue to see that moving north, so we're encouraged. We're very encouraged by the level of activity. We're back to having conversations with national, regional, local homebuilders, and talking to retailers, distribution networks about our industrial property.

These are all things that we haven't had conversations on in some time, so again that gives us the optimism, while we don't have anything to show for it quite yet, that things have certainly turned and we're going to see a much more positive outlook in our Real Estate business. Again, not specifically answering your question, but generally saying it's going to be a much stronger business for us going forward and again, we've got very unique properties. You've seen them, Chip, and we think we're going to have a lot of nice value accretion from those properties.

Okay. That's very helpful. Turning back to the specialty cellulose, I know that most of the demand drive, I think, with the acetate grades that you're expanding in is tied largely to tobacco in China. That's my perception, but has that market or target changed at all or are you thinking is it even broadening to other areas or is that still basically where most of the increment will go to?

When we look at our expansion, our intent is to grow all of the primary segments. Acetate, ethers, high-tenacity rayon, and specialty high-value. Specifically in the tobacco end of it, that market continues to grow at roughly 2% or so, primarily in the China region. Even with cessation-type efforts, that growth rate is forecasted to continue well out into the future and in fact, some forecasts say, in 2040 there's still going to be growth in that type of range.

Got you. Thank you.

Chip, if I can go back to your other question, because I realize I left off the second part of your question, which is how far are we willing to go in the development side of Real Estate? Just wanted to comment on that because we are not developers, we don't plan to be developers. However, we are interested and willing to commit some modest amount of capital to either protect our property or to enhance our property and I'll give you a couple examples. In Nassau County, we've got six miles of riverfront along the Saint Mary's River, which divides Florida and Georgia. Of that, we went a couple years ago and had invested some modest capital to protect that, a mile of that, bulkhead to keep it preserved for future opportunity and optionality. Again, one example of us protecting our Real Estate business.

Another one, we have this industrial property in Belfast, we call Belfast Industrial just south of Savannah. There, we're looking at some modest capital in terms of utilities, sewer, water, to get that industrial property up to speed so they can quickly take on new opportunities for investors. Those are some things that we have done and will continue to do. Again, relatively modest ways on capital on our real estate.

Thanks for answering that. Just as a quick related point, are there any, I guess what I would call, unorthodox for timber REIT properties that just make a lot of sense to acquire that are contiguous to what you can develop in northern Florida or southeastern Georgia?

I don't know, from a REIT perspective, how to answer that. If there are any properties that sit adjacent to ours or near ours that we think we can create value for the shareholders on, we'll take a look at it. But I don't know if there's anything, from a REIT perspective, that would allow us to do anything differently. Hans?

No. If there was something that we had a development type of interest in, we would just acquire it in the TRS and just have it alongside our other property there.

Got you. Okay. Thank you.

Mark Weintraub, Buckingham Research.

Just a bit more along the lines of understanding how you think about development properties and how they fit in your portfolio. Is that a type of business that you intend to increase your expertise over time and perhaps expand and grow in? Or is it really you're just taking advantage of opportunities that came of that out of the timberlands that you held? How should one be thinking about your mindset on it?

Mark, the last five years, we've taken a very quiet position on the real estate. We've quietly worked on entitlements, positioning our property for the return of the economy, which we now are seeing the edge of that. The hiring of Chris Corr, who's got an extensive real estate and strategic planning background when it comes to real estate, I think is a message on how we're looking at the property, in light of the comments I just made about what we're willing to put in on capital. We do think there's an opportunity for us to think very strategically about our assets and positioning ourselves more holistically as we look at real estate and not so much as the one-off, but the master thought and plan and strategic plan for an area of development. But again, with limitations in terms of capital what we're willing to do. We'll let our partners go and invest that heavy capital.

Is it an area where, on a go-forward basis, you might be making selective acquisitions where you think that you can add some value? Obviously, not necessarily bring it all the way through the development process itself, but is it an area where, again, you might be looking to go outside of your existing holdings and think that you can add value?

Yes. The question is, Mark, to go out and buy a property that's already in real estate value to enhance the real estate value further, I struggle to see us moving in that direction. However, we continue to look at timberland acquisitions with a heavy eye to the real estate component and seeing how we can extract that value with the talent that we have on our team.

Okay. That's helpful. Thank you.

Collin Mings, Raymond James.

Congrats on the CSE project. I know you guys are typically pretty reluctant to share too much detail on the CS price outlook until price negotiations are completed. But maybe you could offer some of the key talking points from both sides of the table this year, just in context of both new supply but also some of the strong results still being reported by, particularly your acetate customers and their corresponding businesses?

Collin, Paul. Just real quickly, it's way too early for us to discuss pricing. As you know we're very consistent with this, we'll talk about pricing in January, in our January call, and not in advance of that. The components to pricing remain the same, though. We will obviously consider, first and foremost, the supply-demand dynamics to the equation. We'll look at our cost of input materials, we'll look at the financial health of our customers, including the health of the markets that they serve, and the dynamics related to it and then finally, we'll consider global currencies. We'll take all of that into our thought process, into our discussion process with our customers and we'll come out in January and let you know where we're sitting.

Okay. Fair enough. On the cost increases that you alluded to in the prepared remarks within the CS category, can you talk a little bit about what you're seeing on that front?

Collin, certainly, we had a slight increase in wood cost and then some chemicals as well. We've had a little bit of energy increase as well.

Okay. Lynn, on the last few calls, you guys have highlighted some specific wood baskets in the South where you're seeing demand, as well as pricing trends improve. Can you update us on where you're seeing really the most positive momentum in the South in pricing?

Yes, Collin, we are seeing specific markets that are really beating the rest. If you think about our East Texas/West Louisiana markets, that's strong, both on a pulpwood and log pricing side. Then the heart of our real strong markets continue to be southern Alabama and that Eastern Mississippi area, some of those timberlands are some of our newest acquisitions, as well as our legacy timberland. Then right in the heart of our coastal resource unit where we have several competing facilities all within that northern Florida/southern Georgia coastal region. Those are the hearts of our very strong demand.

Okay. Last question, I know you guys had an event really tied last month to the Crawford Diamond Certification announcement. Can you maybe just talk about, more specifically, maybe the incremental interest that event generated here in the last six weeks or so?

Yes. We had a nice kick off of that property with local officials, congressman, the Governor Scott was out for it. Certainly, it generated and sparked a lot of conversation on the property. Our website hits went off the chart, for us anyway, which is obviously not a consumer website, so it was great for us to see that. It, Collin, just generated a lot of good conversation around the property and the 1,800 acres we have there and what it can do. It has two class one railroads running right through the middle of it, so it's one of the very few railroad diamonds, as they're called, in the US.

It makes it really ideal for manufacturing of large-scale distribution. We know the governor's personally gone out and has talked about it in his travels around, as well as we got a lot of great interest from site selectors. Again, it's off in the right direction. We've had some good conversations on it already and as you noted, it's just been six weeks into it, so we're pleased.

All right. Again, congratulations on everything you guys accomplished during the quarter and good luck in the back half of the year.

Paul Quinn, RBC.

Just a couple questions on the specialty developing pulp markets. One, we've got that Chinese investigation that's out there. Maybe you could just comment on how you respond to that and what the expected timeline on a decision is?

We filled out all the necessary documents and we actually had face-to-face meetings with the appropriate Chinese officials. As you probably know, it's not a very transparent process. The expectation is that the preliminary ruling is going to be sometime this fall, likely October timeframe, but the final ruling won't be until about February and even that can be delayed up to six months. Again it's not very transparent. We've done all that we can at this point in time.

If you could just comment on how they're looking at you guys specifically? You do a fair amount of specialty into China, but I guess also an increasing amount of commodity, as the Jesup conversion volume hits the market. How are they looking? Have they differentiated the two markets?

They are continuing to look at the market as a whole. The dissolving pulp markets, I mean here, and that includes acetate and commodity viscose. The reason they do that is when it comes into the port, they have a little bit of a difficulty discerning which pulp is which. Our approach, again, we don't know how they're viewing us, but we produced very little of the commodity viscose pulp during this injury period that they're reviewing compared to the amount of acetate pulp that we put into China. Our exposure, we feel, is very low.

Again, Paul, to remind you, the analysis period for them was 2012 and that's what they're looking at. Again, to Jack's point, very small amount of our volume went in there as viscose, as you know, we're just moved a little bit out on opportunistic point of view relative to fluff. The bulk of our sales, as Jack has noted, is cellulose specialties and acetate into China. It's hard for us to tell. It's a very non-transparent process in where it's going to go.

Yes. Thanks. I appreciate the color. Jack, you made the comment on acetate growth being about 2%. Is that more the high-end filter use or is that cigarette consumption that's going up 2%?

When I'm talking about it, that's filter use. The driver here that's making the growth in that level is one, the population growth continues to expand, but also, the filter total length, primarily in China and other areas in Asia, you see a strong growth related to that as they try to reduce the overall tar level.

Great. A question for Lynn on timberland, just taking a look at your US pine timber sales, you've got pricing up a little bit here in terms of stumpage, but we haven't seen a material move-up. When do you expect those prices to move up?

We are starting to see, Paul, the pricing move-up, but because of the heavy rains, we moved a little bit more pulpwood during this period. We are starting to see, in certain markets, both the chip and saw and grade volume begin to move up and additional capacity either through chip or through startups of certain facilities. We are starting to see that response, but it is very slow and very gradual except in certain target markets where we are already seeing very strong pricing and demand in certain facilities.

Paul, let me just add to that. In the Northwest, certainly we've seen the combination of pressures from the stronger lumber market, as well as exports to Asia combine and drive the price up and Lynn talked about those prices. In the South, we've got to get to the housing starts at that new normal level, which we think is between 1.3 million and 1.5 million starts to really support sawlog prices as we think they should be. There'll be a rise to get to that point, but that's the point we need to have and again, that's 2015-type timeframe.

Great. Great quarter. Thanks very much.

Mark Wilde, Deutsche Bank.

Jack, I think you mentioned, when you've talked about those four variables you think about with respect to CS pricing, one was currency. I'm just curious which currency relationships would you watch most carefully there?

This is Paul. I just want to make these comments about pricing components. We have to recognize that our customers are global and they are in different positions on how they buy our product even though we sell in US dollars everywhere. But we have just got to make sure we understand the operating environments of all our customers and we just take that into consideration. I think you know well where our different major customers are, they're in China, they're in Japan, they're throughout Europe, particularly Germany, obviously in the US. We've watched the combinations of not only how they're operating in terms of their raw material costs, but also how they're selling their product. We just take that into consideration, really that's just helping us gauge the health of our customers and make sure we understand if one or the other is going to be adversely or positively affected by currency translation.

Okay. The other question I had, you've talk about Crawford Diamond here, but you have that other site, I think it's up in central Georgia. Can you just give us an update on what the progress is on that industrial site?

Yes. That's our Belfast Industrial/Belfast Commerce site. That's the one that's 17 miles south of the port of Savannah. It's got a CSX line, a rail line going right through the property, along with I-95. It's a well-positioned industrial property, about 1,100 acres. We did the same sort of thing there where we had a megasite certification that was completed last December. We are actively marketing that property now and we've got some very sincere interest in it and that's all I can say at this point in time. We hope to be able to dish out a few more things about the property and our success there in the near future.

Okay. Sounds good. Thanks.

At this time, I have no further questions.

This is Hans Vanden Noort thanking everybody and please follow-up with Ed Kiker with any additional questions. Thank you.

Thank you. That does conclude the call for today. You may disconnect your phone lines at this time.