Rayonier Inc. (RYN) Q4 2014 Earnings Report, Transcript and Summary

Welcome and thank you for joining Rayonier’s Fourth Quarter 2014 Teleconference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Mark McHugh, Senior Vice President and CFO. Sir, you may begin.

Thank you and good afternoon. Welcome to Rayonier’s investor teleconference covering fourth quarter earnings. Our earnings statements and financial supplements 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 Federal Securities laws. Our earnings release and Form 10-K/A filled with the SEC lists some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page 1 of our financial supplement. With that, let’s start our teleconference with the opening comments from Dave Nunes, President and CEO. Dave?

Thanks Mark. And before I begin, I would just like to welcome Mark to our team. Mark has been here a couple of months and it’s great to have him as part of the Rayonier team and great for you all to get introduced to him in his new capacity. So, first regarding the fourth quarter and full year results, I will make a few overall comments before turning it back over to Mark to review our financial results. And then we will ask Doug Long, Vice President of U.S. Operations to comment on our U.S. timber results. I will then discuss New Zealand timber results followed by the review of our timber results segments. Chris Corr, our Senior Vice President for Real Estate will discuss our real estate results. One of the changes that you will see in our reporting this quarter is that we have realigned our reportable segment. The new segments reflect the way that our senior management team evaluates the operating performance of our business with our narrow focus on timber and real estate, following the spin-off of the performance fibers business. And with our new management team in place, we recently completed an evaluation of our segment reporting. In determining our reportable segment, we consider the economic characteristics of each business unit and how we internally evaluate business performance and make capital allocation decisions. The outcome of that evaluation is that we have disaggregated our former Forest Resources segment into three new segments: Southern timber, Pacific Northwest timber and New Zealand timber. Our real estate segment remains the same except we will now provide more detailed categories on sales. We previously reported real estate sales in three categories: development, rural and non-strategic. We now separate development into improved development for sales of properties, where Rayonier has invested capital and infrastructure to add value and marketability and unimproved development for sales of properties designated for development, but for which Rayonier has not invested any material improvements. We expect that this new improved development category will provide more information about our progress over time in generating returns from our real estate development project In addition, we have changed the definitions of our rural category and former non-strategic category. We are taking the conservation related sales out of rural and leaving rural recreation and rural residential in this category. The non-strategic category is now called non-strategic/timberland. And this category includes three types of sales: sales of timberlands that we have deemed to be non-strategic within our portfolio, sales of properties for conservation purposes, and periodic sales of core timberlands, where we receive offers at attractive prices relative to our perceived holding value. Our fifth and final segment is trading. And this segment includes our log trading activities in New Zealand and Australia. This business complements our New Zealand timber operations by providing log trading services to third-party timberland owners and adding scale and related cost benefits to our log – to our export operations as well as additional market intelligence. It also utilizes our timber market’s expertise to provide a modest contribution to earnings and minimal capital – for minimal capital invested. You will also notice that starting this quarter and consistent with our commitment to transparency, we are providing significantly more details regarding segment results in our supplemental materials. Now let’s switch to our results. Overall, we finished the quarter generally in line with our earlier expectation. We continued to see strong demand and price improvements in Southern timber, but saw a price decline in Pacific Northwest and New Zealand primarily due the lower demand from China. We also began reducing harvest volumes in the Pacific Northwest pursuant to our previously announced strategy of harvesting at levels that are sustainable over the long-term. Real estate results in the fourth quarter were impacted by lower sales of non-strategic Timberland as we sharpened the focus of our real estate segment for true, higher and better use opportunities. And with that let me turn it over to Mark to review our financial results in more detail.

Thanks Dave. Let’s start on Page 4 with our financial highlights. Overall we had a solid fourth quarter. Sales totaled $147 million while operating income was $14 million and net income was $9 million or $0.07 per share. Our fourth quarter results included $2.4 million in legal and audit expense related to the internal review and restatements that we announced in November 2014. Excluding these expenses as well as a small adjustment for discontinued operations, our fourth quarter pro forma operating income was $17 million and our pro forma net income was $11 million or $0.09 per share. For the full year, our pro forma operating income was $104 million and our pro forma net income was $66 million. These amounts exclude discontinued operations, costs related to the spinoff of performance fibers, costs related to our internal review and restatement and cumulative out of period adjustments to depletion expense. A reconciliation of our pro forma results for the comparable metrics is provided on Page 17 of the supplemental materials. Adjusted EBITDA for the fourth quarter was $51 million compared with $70 million in the prior quarter and $76 million in the prior year quarter. For the full year adjusted EBITDA was $235 million compared with $220 million last year. Note that both our 2013 and 2014 adjusted EBITDA include pre-spin general and administrative expenses that could not be allocated to the discontinued performance fibers business. On the bottom of Page 4, we provided an overview of our capital resources and liquidity at year end as well as comparison to 2013. Our full year cash available for distribution or CAD was $150 million compared to CAD of $83 million in 2013. Note again that both 2013 and 2014 CAD included some G&A expenses as well as the income tax impacts associated with the performance fibers business that we spun off in June which can not be allocated to discontinued operations. Also note that we have changed our definition of CAD to simplify it and to exclude the impacts of changes in working capital from period to period which we do not expect will be significant going forward without the performance fibers business. We believe that our revised CAD disclosure will provide investors with a more useful and consistent metric to track our underlying operational performance and cash flow generation. A reconciliation of CAD to cash provided by operating activities is provided on Page 8 of the supplemental materials. We closed the year with $162 million of cash. Our debt balance at year end was $752 million. On a net debt basis we finished the year at a very comfortable level of $590 million or approximately 14% of enterprise value based on our closing stock price at year end. Pages 5 and 6 of the supplemental materials provide a variance analysis for operating income and adjusted EBITDA by segment versus the prior quarter and the prior year quarter. Page 7 provides a variance analysis for full year 2014 compared the prior year. As mentioned earlier on Page 8 we provided calculation of our CAD with the reconciliation to cash provided by operating activities. Beginning this quarter, we are also providing much more detail on each of our timber segments including detail on volumes, pricing, costs and CapEx. Trusted investors will find this disclosure to be very helpful in evaluating our results. I will now turn the call over to Doug Long to review our U.S. timber results.

Thanks Mark. Good afternoon. Let’s start with Page 9 in the Southern Timber segment. Fourth quarter pine sales from the Southern region consisted of 68% stumpage and 32% delivered sales. Net stumpage pine pulpwood prices increased 3% from $17.95 per ton last quarter to $18.50, sawtimber 4% from $25.93 to $26.93 and weighted average net pine stumpage 2% from $20.81 to $21.28 per ton. These price improvements in the third quarter were partially offset by an increase in the portion of pulp volume to the mix of stands harvested. Compared to the prior year quarter, the weighted average net stumpage pine price increased $2.83 per ton or 15% due to higher prices across all products and higher proportion of grade volume across the region. Pine volume was slightly favorable compared to Q3 as we are able to take advantage of strong spot markets at year end due to our road infrastructure investments allowing harvesting when it was too wet for many of our competitors. Pine volume was also favorable for the same period in the prior year. Compared to the prior year, net stumpage pine pulpwood rose 15% from $16.12 to $18.48 per ton, sawtimber was up 10% from $24.06 to $26.45, and the weighted average pine price from $18.86 to $21.20 per ton, an increase of $2.34 or 12%. Additional strength in pulpwood was primarily driven by reduction in supply due to wet ground conditions across the region. Year-over-year, volume was flat. In 2015, we expect our pine harvest to increase to 5 million tons and our hardwood harvest volume to approximate 360,000 tons as we integrate recently acquired properties in our harvest rotation. Additional grade low capacity such as Klausner Lumber in Florida and growth in pulping product such as containerboards and strong kraftliner demand are expected to result in 2015 pulpwood prices comparable to 2014, which was a strong year. Grade prices are expected to increase 3% to 5% with forecasted improvements in housing starts. However, due to a higher percentage of thinnings in 2015 and changes in our regional harvest mix, we expect that our weighted average price in 2015 will be slightly lower than 2014. Now, moving to Pacific Northwest timber on Page 10. The Q4 average delivered sawtimber price of $39.19 per ton decreased 6% from $83.91, while the pulpwood price of $43.23 rose 14% from $37.86. The weighted average price decreased 5% or $3.45 per ton due to lower domestic and export prices combined with a higher percentage of pulp and ship and saw being harvested. Compared to the same period in the prior year, prices decreased $1.70 per ton or 2% due to high log inventories in Asia during the latter half of 2014 forcing export prices lower combined with a reduction in the percentage of sawtimber harvested. Pacific Northwest volume in Q4 was 20,000 tons lower than Q3 and 129,000 tons lower in the same period in the prior year. For the full year, Pacific Northwest volumes decreased 179,000 tons reflecting the company’s new operating strategy announced in November 2014. Full year 2014 delivered prices increased 5% or $3.36 over 2013 due to strong export prices in the first half of the year. In 2015, we expected our volume in the Pacific Northwest will further decline by approximately 240,000 tons consistent with our previously announced operating strategy. Export prices are expected to be lower due to higher inventories in China, which will also put pressure on domestic sawtimber prices. Overall, product prices are expected to be approximately 5% lower across all grade products. Now, Dave will review December timber results. Dave?

Thanks, Doug. Page 11 shows results and key operating metrics for our joint venture in New Zealand, in which we own a 65% interest. Sales in Q4 were roughly flat and operating income provided modest – improved modestly versus Q3 as higher volumes in export prices were largely offset by a decline in domestic prices. Sales and operating income in Q4 were both up modestly from the prior year quarter as higher volumes and income from land sales were mostly offset by lower prices across all product categories. Lower pricing was largely driven by softening demand in the China export market, which in turn put pressure on domestic pricing. The decline in domestic pricing in U.S. dollar terms was also partially attributable to a decline in the New Zealand U.S. dollar exchange rate, which led to an unfavorable price variance when converted to U.S. dollars for reporting purposes. Since export logs are sold in U.S. dollars, this exchange rate variance did not similarly impact reported export log prices. In 2015, we anticipate continued headwinds in the China export market. As China works down its current high log inventories and that the devaluation of the Russian ruble makes Russian log exports more competitive, but that these unfavorable factors will be partially offset by lower freight cost due to the decline in oil prices. We expect that 2015 total sales volume will be roughly flat versus 2014. And with that, we will turn it over to Chris Corr to discuss real estate.

Thanks, Dave. The real estate business had a solid fourth quarter with sales of over $11 million and 5,300 acres. For the full year, real estate sales totaled $77 million and 44,800 acres with HBU sales reflecting considerable improvement over the prior year. In addition to land sales, we made progress on our project areas including Belfast Commerce Center, South to Savannah, Georgia and the Mixed Use Village North of Jacksonville, Florida. Consistent with our commitment to promote best in class disclosure, Page 13 is a new table illustrating key metrics for our real estate business, including acres sold price and per acre. As you can see the table was organized into four land categories that Dave noted improved development, unimproved development, rural and non-strategic timberlands. In 2014, we sold approximately 44,800 acres for an average price of $1723 per acre including the 19,500 acre non-strategic timberland sale in Florida that we reported in the second quarter. Excluding this sale and other non-strategic timberland sales and focusing just on development in rural real estate 2014 sales totaled approximately $46 million on 18,900 acres for an average price of $2417 per acre. As you can see in the table we have separated development into two classifications improved development and unimproved development. Improved development means projects in which we have invested capital in infrastructure or other improvements to create parcels or lots for sale. Unimproved development means properties with land use entitlements or other development end uses that will allow for higher pricing but for which we have not invested capital in improvements. Currently we have only one improved development project ready for sales in the Belfast Commerce Center South of Savanna. Consistent with our strategy we have discussed to unlock value from our development properties over time we expect additional projects and growth in this area in the future. Focusing now on detailed operating results this quarter included sales of 554 acres classified as development including 515 acres that was part of one transaction in George. While classified as development, this property was less than desirable and non-strategic remainder of a larger tract that we entitled and sold a number of years ago. Fourth quarter sales included approximately 2,600 acres of land classified as rural including properties ideally suited for recreation and low density residential uses. Sales of rural land were steady throughout the year and that interest appears to be continuing into the first quarter although we have seen some indications of slower traffic in Texas and Louisiana likely due to uncertainty in the region caused by lower oil prices. Switching now to non-strategic and timberland, sales of approximately 2,100 acres in Q4 included an unsolicited sale in Mississippi of 640 acres and two sales totaling 475 acres the conservation interest in Alabama and Florida. Consistent with our stated strategy, we expect to limit sales of core timberland to those situations in which we can achieve a meaningful premium to our holding value of such land. Within North of Jacksonville, the Nassau District Schools have now retained the design team for the K5 schools scheduled to open in our Mixed Use Village project in the fall of 2017. We are excited about our partnership with Nassau District Schools as we know that schools are a powerful real estate driver. We believe this school will catalyze opportunities that will grow the value of our surrounding lands over time. In the full year 2015, we expect real estate sales to be between $60 million and $70 million on volume of approximately 25,000 to 30,000. The significant decrease in volume from 2014 reflects the realignment of strategy announced last quarter to reduce reliance on planned sales of non-HBU timberlands. In forecasting rural land sales we are cautious because as timberland values have gone up, specifically in the Southeast we are not seeing a commensurate increase in rural HBU land prices. We have experienced more situations recently where we have passed on rural HBU sales because the author did not achieve a sufficient premium for holding the property for timber. This has been especially true in Alabama and Georgia markets that traditionally have been strong for rural sales. We will create value in 2015 and beyond by staying focused on the enhancement and marketing of rural HBU properties and continuing progress on development projects. I will now turn the call over to Mark to review our consolidated 2015 financial guidance.

Thanks Chris. Page 14 of our financial supplement provides revised guidance for 2015. We expect adjusted EBITDA for 2015 to be in the range of $190 million to $215 million. This is slightly below the preliminary range we provided in November 2014 primarily due to our current expectation of continued weakness in China log demand and corresponding revisions to our outlook for the Pacific Northwest and New Zealand segment. Our 2015 guidance also includes new detail on operating income and adjusted EBITDA by segment. Forecasted capital expenditures of $65 million to $68 million are lower than our preliminary 2015 guidance as we refined our capital budget for the year. Also to assist you with your models, we expect our U.S. income tax expense as well as cash taxes to be minimal in 2015 as the performance fibers business will no longer impact our tax expense going forward to any significant degree. We also expect our interest expense in 2015 to be approximately $33 million, excluding any incremental interest expense that we may incur from debt finance timberland acquisitions. I will now turn the call back to Dave for closing comments.

Thanks Mark. Last November, we announced our realigned strategy designed to enhance long-term shareholder value. And to recap the five key elements of that strategy are to manage timberlands on a sustainable yield basis for a long-term result, increase the size and quality of our timberland holdings through acquisitions, optimize our overall portfolio value by capitalizing on HBU opportunities, focus on timberland operations rather than timberland sales to support cash flow generation, and finally promote best-in-class disclosure for our investors and responsible stewardship throughout our organization. In the fourth quarter, we began implementing our new strategy. We reduced harvest volume in the Pacific Northwest as we begin the path to a long-term sustainable harvest for those timberlands. During the quarter, we acquired two timberland properties in Alabama and Florida totaling proximately 15,000 acres for $36 million. For the full year, we acquired 62,000 acres of highly productive timberlands, almost all in the south for $130 million. And we closed on an additional 12,000 acres in Louisiana in January of this year for $22 million. We are very pleased with the quality and complementary nature of the timberlands that we have acquired and expect that they will provide solid returns going forward. Late in 2014, we began to implement our strategy of reduced reliance on sales of timberland to augment cash flow as we focus on generating cash and supporting our dividend primarily through harvesting of timber and ongoing HBU real estate sales. And beginning in the third quarter and now further this quarter, we have expanded our disclosures to provide investors with comprehensive information to evaluate our asset, our long-term growth prospects and the results of our business strategy. We plan to include additional disclosures in our 2014 Form 10-K as we aim to have transparent and best-in-class disclosure. As we look forward through 2015, we expect further improvement in southern pine prices as the housing market continues to slowly recover, but we also expect some headwinds in the China log export markets. Long-term, however, we believe China will remain an important source of additional demand for our logs from the Pacific Northwest and New Zealand. Further, we continue to identify attractive opportunities to grow our timberland portfolio through acquisitions, particularly as timberland holdings reenter the market. In our real estate business, we are excited about our shift in strategy to place more emphasis on adding value to selected properties and less on sales of unimproved timberlands. And finally, I am confident that with our high-quality assets and the dedicated people of Rayonier and our new strategy firmly in place, we are laying the foundation for enhanced long-term growth in shareholder value. And so that concludes our prepared remarks. I would like to now close the formal part of the presentation and turn the call back to the operator for any questions that you may have.

Thank you. [Operator Instructions] Mark Wilde, BMO, your line is now open.

Hi, Dave. Hi, Mark.

Hi, Mark.

Dave, just to kind of startup, can you give us some sense of how much of that CapEx is going to be going into kind of development properties or development situations in 2015 and beyond?

Hey, Mark, it’s Chris Corr in.

Yes.

In 2015, the CapEx expected is in the $3 million to $5 million.

Okay.

And beyond that’s still the work in progress, but at this point we are focused on 2015, okay.

Okay. And Chris, as I recall from November what you guys said is that you will probably focus on no more than kind of three or four development situations at any one time. Is that – do I recall that correctly?

Yes, you should, Mark, that’s still right.

Okay, alright. And then Dave I wondered if you could give us just some update on how you read the situation in China and related that with the weakness in the Russian ruble has that actually opened up more supply out of Russia I mean we know it’s made a more competitive against sort of dollar-based, but I also wonder just whether it makes it economic to stretch further into kind of Russian inter-land or kind of away from existing roads for timber?

Sure Mark, I mean that’s a question that we have been spending some time on internally. And I think the short answer is that both of those things are happening. You certainly have – if you think about the log export business is largely priced in U.S. dollars and so the value of Russian log sales has since last summer has roughly doubled in terms of the local currency. And so that certainly speaks to the ability to go deeper into stands that add more cost and still have it be a net positive in the market. And then when you factor that element into the inherent quality characteristics in the market recognize that you have got a lot of fine-grained wood coming out of Russia that’s generally higher quality. So when you add the higher quality wood with the lower cost it quickly moves up the – up the chain in terms of priority. And then kind of working down from that where you are mixing quality and cost, you have got exports from BC, so you have got currency there, you have got some high quality fiber. And then you have got radiate, it would probably come next in terms of that mix of quality and cost. And then the U.S. Pacific Northwest which unfortunately comes out at the low end of that spectrum based on a combination of cost as well as fiber. And so that’s why we see probably greater headwinds for our Pacific Northwest operations than we do for our New Zealand operations. We do expect that New Zealand will have some negative impacts. But as we said in the prepared remarks we expect a fair bit of that to the offset by lower freight rates. We are seeing freight rates now that are as low as they have been in a decade. And so that’s helping to take a little bit of the sting out of the market pricing. But from a planning standpoint we are certainly expecting a much more challenging year in the Pacific Northwest and we have seen early signs of that already.

Okay. And then the last question Dave I wondered if you could just talk at all about sort of what you seeing going on in the timberland market right now relative to both valuation and M&A/deal flow?

Yes, I mean this has traditionally been sort of the slower part of the year with respect to deal flow. So it’s hard to have too much of a gauge on how we see that coming out for the year. I think certainly as you looked at recent transactions, quality transactions are getting quality pricing. I think there is still a lot of capital trying to get into the asset class and we have seen that. We have seen that translate into compressed discount rates and strong valuations. And I think until we see more properties coming on the market deeper into the year we will have a better sense of both from a quality and pricing standpoint how that looks for 2015.

Okay, great. Thanks Dave. That’s really helpful. I appreciate the additional disclosure and good luck in 2015.

Thank you.

Mike Roxland, Bank of America Merrill Lynch, your line is now open.

Thanks for taking my questions and congratulations Mark on your new role.

Thanks.

Can you give us a sense of you are thinking about the dividend and the ability really of the company to sustain the dividend given the weaker cash generation out of the business and really the question in light of now the headwinds that you face with respect to the Pacific Northwest?

Sure. When we have conducted the exercise and that led to our November results, we did quite a bit of a scenario testing long-term on the dividend. And as we said and in our third quarter results, we do not anticipate that we will fund that dividend fully in 2015 but that we will close that gap pretty quickly thereafter certainly the change in the Northwest results will have some impact on that, but I don’t think it’s material enough to wear. We are worried about not being able to fund that dividend within the next couple of years. So, I think it’s still consistent with the longer term planning that we did with respect to the dividend level.

And Dave, is that more a function then of your expectation that Pacific Northwest will come back robustly in 2016?

Well recognized too that we have built into our expectations, a pretty significant decline in the harvest rate out of the Northwest. So, the Northwest is going to play a much smaller role than it had been traditionally playing in terms of the company’s overall cash flow generation. And so on the margin, that’s part of the answer. And I think certainly longer term, we are still quite bullish on the generation or the direction of log pricing, whether it’s the China market or the U.S. housing market. And so I think you will see some factors that will offset the current description that we talked about with respect to Northwest impacts on the China market.

Got it. And then one last question, I will turn it over. If conditions remain challenging in the Northwest and realizing obviously that the Northwest now will comprise a small part of the mix given that you are just not harvesting as much. Would it be fair to say that in evaluating the dividend that you will look at base HBU rural land sales to help supplement the weaker cash generation out of the core timberland business, because I remember that you mentioned on the last call that when considering the dividend, you consider base HBU rural land sales. So, if conditions remain challenging from a harvesting vantage point, would it be fair to say that we could see an increase in those land sales just to support the dividend?

Well, I don’t think we look at it that way. I mean, we have a pretty good – we have a pretty good disciplined process of looking at the HBU sales. One thing to keep in mind is that the HBU land sales have to provide an attractive alternative relative to the underlying timberland value. And we have certainly seen some of our geographies, particularly in the Southwest as you had rising timberland values and at the same time falling oil prices that have reduced wealth to some degree of potential buyers. You are seeing spreads narrow there. And so if anything you can see some downward pressure on some of those HBU sales in those geographies, but we are trying to get away from looking at land sales as a way to make up the difference in terms of our – in terms of our cash flow and we are really focused on long-term value creation. And so we are willing to – we are willing to keep our eye on that long-term ball at the expense of the short-term ball if need to be.

Thanks very much. Good luck for 2015.

Thanks.

Our next question comes from Collin Mings, Raymond James. Your line is open.

Hey, good afternoon guys. Thanks for the enhanced disclosures. I guess my first question, Dave, I know you stepped out personally and bought some stock in December, but can you maybe update on how you and Mark are thinking about maybe allocating some cash in your balance sheet to repurchase some shares or are you just going to keep that as far as dry powdering to have some flexibility as it relates to acquisitions and some of the dividend questions that have already come up or how do you think about that cash balance and the potential [indiscernible] on a company level virtually just a personal level?

Thanks, Collin. I think that certainly at a company level, there is a couple of things that come into play. One is we are in the process of figuring out how our debt capacity looks going forward. As Mark mentioned, we feel very comfortable with our debt to enterprise value of roughly 14% as we ended the year. And so now we are in the process of – now that we have emerged as a new company figuring out what that debt capacity is going forward. And then in the context of allocating that capital to various priorities, I think right now our priority still remains growing our timberland base. So, while there remain – as long as they remain attractive opportunities that we feel we can acquire at discount rates below our cost of capital, we are going to continue to look at those very actively. And we will judge the buyback opportunities really in the context of how we see the stock price settle out.

Okay, that’s helpful. And then Dave, while you – again, sounded pretty cautious and I would argue probably more cautious than some of your peers in Pacific Northwest, can you talk a little bit more about what you are seeing in the U.S. stock, I think you call it for 3% to 5% kind of sawlog price appreciation this year? What wood baskets are you seeing the most momentum and has that changed at all? And then just talk a little bit more about that cost, that’s [indiscernible] I know you guys have some property in North Florida, South Georgia talk a little bit about that if you could?

So, Collin, I won’t pretend to be the Southern expert that I am not, until I get my feet more firmly on the ground, but I will turn it over to Doug who can speak at length on both of those questions.

Good afternoon, Collin. Yes, I think we have seen some regional differences, particularly in the Atlantic, where we have kind of heavier inputs by the pulp mills and the wet weather, we are seeing prices drive up there. And as we said, our customers there have a strong product mix, but we do see that a lot of it was driven by wet weather. In Gulf, we are a little more open to our leverage basically to the sawtimber demand and then housing starts. So, we would see as housing starts pick back up there, we would probably have some more strength in that area. With respect to Klausner, real excited to see them, they start operations as you probably know and they have been active and purchasing some timber from basically our stumpage through some of our wood buyers in Q4 and starting in Q1. And we see that as a meaningful shift in the wood basket basically. And we own about 570,000 acres within 80 miles there. And so we have seen them like I said actually purchasing. So, we do see that as an interesting area. We should see some growth in our southern pricing. As housing starts as we mentioned come back forward, also a lot of strength we possible see there and that’s a lot of demand with increases from the Canadian companies that have bought from South Georgia and all the way across, all the way through to Arkansas basically. So, we are excited about the increased capacity and investments that those Canadian companies have been making. And one last thing that also is pretty exciting we have just seen recently, in live oak, we have seen announcement of pellet mill going in that location. And so we think that’s also a good thing for our area too. So, we see some strength in the Atlantic as we often see, but also going through our Gulf States as the housing starts pick back up.

Okay, I appreciate all that detail there. Just two more kind of housekeeping questions, just as it relates to the potential legal liability associated with some of the restatements announced November, I know that’s very difficult at this stage to be very specific, but can you maybe discuss to what extent or how those legal proceedings are progressing and to what extent there might be some insurance protection as it relates to any sort of settlement that might ultimately come out of it?

Yes, Collin, this is Dave again. It is certainly very early in the process to discuss it and we would be pretty speculative on our part to try to answer those questions too much. There have been a handful of shareholder suits that have been filed. There is a process that is currently underway, where those firms are applying for lead plaintiff status. As that works its way through, then the process will continue. And really until that gets resolved and until we actually start having those proceedings go down the path, we really won’t have much of a sense of what is even being asked that would then inform any sort of approval. So, this process is in good hands, but it’s going to be a slow process.

Okay, thanks for that, Dave. And then just one more last one and then I will turn it over. Maybe I missed this Mark, but can you put some color around the reduction in the expected CapEx relative to what you came out with in November?

Yes, there are really two things driving that. And keep in mind, when we put out guidance back in November, it was pretty early in our sort of budget and long-term planning process. I think that the company felt compelled to do that just given the magnitude and significance of the disclosures that came out at that time in trying to give folks like yourselves, Collin, some guidance as to kind of what to expect in the next year. Really, as we refined our capital budget, there are two things that came out of that. First of all, in the U.S. south, our harvest volume is going to be heavier to thinnings than it is typically. And so that pulls some CapEx out of stand, kind of stand reestablishment and replanting. And secondly, there are actually some contemporary roads or harvest roads that were in the New Zealand budget that actually we are also part of the expense budget. And so that was just a re-characterization that, that came out. So, that were really the two components that drove it, but I mean, it really wasn’t a change in our sort of view of putting capital into the business, but that really just a refinement of the capital budget is obviously we went through that process.

Okay. Well, thank you for all detail again. And thank you for the enhanced disclosures and good luck in 2015.

Thanks.

Our next question comes from Chip Dillon, Vertical Research Partners. Your line is open.

Yes. Hi, good afternoon David and Mark. First question is on the basis of the land, you mentioned you expect to sell to 25,000 to 30,000 acres for $60 million to $75 million in 2015 and is there a rough idea what you think land basis will be for those sales?

Yes. I mean that’s really going to be pretty broad spectrum of lands because recognize you have got properties throughout the south that have quite a bit of different basis. And so that’s a hard one to speculate on. I don’t know Chris if you?

We do give guidance on what we expect to be the non-cash basis of land of $10 million, but again in terms of where any individual sale might fall out there is a pretty wide variation. The question was around the book value or actual sort of holding value or sort kind of valuation of the land, but the guidance on what that recapture basis is $10 million?

Got it. So less than 20% I got it, that’s right. And then when you look at the – next question is on the higher – well, in terms of the care point stuff we used to hear about back in before the crisis and you mentioned one development property that is available it sounds to me that it would not be included in these – in this number this 25,000 to 30,000 acres and if you can affirm that and or not. And sort of how should we see the developed property flow come out I mean I know it’s early days in terms any kind of ability in recovery, but could we see say in 2017, 2018, 2019 a ramp of property that could sell for many thousands of dollars per acre, because you have improved them?

Yes. Chip another big question that I will try to answer for you. But on the first part of that the project I mentioned is the Belfast Commerce Center and you might remember that’s an industrial park, South of Savannah, Georgia that we developed, partially off of the sale to a piece of land there to accompany that’s in the manufacturing business and opening this year 260,000 square foot plant with about 180 employees. So that project there has help to provide a lot of momentum for the site, it’s getting a lot of traffic and looks and notoriety. It’s got some great natural features, but the industrial markets are competitive along and so you get what you can in that market. But we expect to get our fair share and in our market interactively.

But small acres.

Yes. To your question about the 25,000 to 30,000 acres this would be a small fragment of that, okay.

Good. And then last question is I noticed you changed the way you account for a hunting license income I saw where I guess it tended to be skewed more towards the third and fourth quarter and you are going to prorate it out throughout the year, could you just talk a little bit about why you made that change?

Yes. And really this change came about – this is Mark, Chip. This change came about in June around the time of the spinoff. And I think as we just look at the issue more closely it seems like the right thing to do. And I think a number of our peers, it’s our understanding that that’s the way that the timber sector in general is accounting for it. The company – again it’s not really a change and the annual income is just kind of how that income is recognized over the term of the lease. It used to be that that income was recognized concurrent with the actual hunting season. So most of that net income was actually recognized in Q3, but primarily in Q4 and that change was made back in June to spread that over the year. And that was really what drove the lion share of – the fact that sales were up in the southern resources segment, pricing was up, the volume was up, but operating income was actually flat. That was really the key driver there. That drove about 6% delta and what otherwise would have been recognized in Q4 have we not made that change.

And maybe said differently, it looks more obvious now that you have had to spinoff whereas before it was probably more of rounding error?

Yes, that’s right. And that’s also one of the reasons that we chose to disclose what our non-timber income is both now and on a go forward basis just to give more some clarity around that, that particular element of income.

And then just last question and you might have answered this and I missed the answer, but when we look out and let’s leave out the developed or development properties when you look at the other categories. What would sort of be a normal progression of how many acres per year you would expect to sell? I would imagine, Dave, on your comments that as you want to depend less on sales – to land sales for covering the dividend that, that number would go down, but is there sort of a range of what we should expect over the next 5 years?

Well, recognize that when we talked about the real estate acres going down, that was predominantly in that non-strategic or core timberland category. And we talked about – we talked about before of having kind of what we viewed as a stable supply of the portfolio in the HBU category, that rural category. We are talking about roughly 1% of the Southern ownership a year. So, you are in the 19,000, 20,000 acre a year range that we see as kind of a normal run-rate. And that was factored into our thinking getting back to the broader dividend question, because we saw that as a fairly stable amount of land going forward.

What will be incremental to that is again when we do receive unsolicited offers on our timberland properties that again we are perfectly happy to own us timberland, but the price is compelling, that’s what would fall into the non-strategic category as well as out-parcels that we may choose to monetize from time-to-time.

Okay, thank you.

If you look over an extended history, you actually see that if you just kind of take the rural sales, it’s generally been in that range of 1% of the southern acreage.

Okay.

That kind of seems to be the natural place where the market is.

Thank you.

Mark Weintraub, Buckingham Research Group, your line is open.

Thank you. Couple of questions focusing on log exports in Pacific Northwest. First off, one thing I was just trying to get a sense of was when you are talking about the 5% projection on the realization side. Is that a sense as to where it is today or does that build in an expectation that there would be either further deterioration and/or improvement later in the year?

Mark, this is Doug. The 5% as you described I guess probably builds in an expectation that we will see some deterioration, further deterioration from where we are now, but then also some possible upswing towards the end of the year too. So it’s not the current pricing, that’s a mix over the year.

Okay. And if we were to look at current pricing, where would that come out relative to that 5%, but is it higher or lower, what do you say?

Sorry, you mean currently are we 5% higher or lower than before – in the prior year or?

Yes, basically as you mentioned, you are actually expecting it to go down and then back up, so the question though I guess you left it unclear as to whether or not if things were to basically stay where they are today, would your projection be at roughly 5% below for the year, above or below?

We can get back to you with that answer, Mark.

Sure. And then I just wanted to clarify roughly how much of your harvest is being exported overseas? And I am assuming that’s predominantly Hemlock or correct if I am wrong on that score?

Yes, it is predominantly Hemlock in the Northwest and it varies, but I would say rule of thumb, 30%, 35% is typical.

Okay. And then curiosity and recognizing that you are primarily Hemlock, are you seeing the same dynamics in Doug Fir, for instance, I imagine you do have a little bit of that, but do you – are you using the same dynamics or was your commentary largely specific to the Hemlock market?

The commentary was largely specific to the Hemlock market. And generally there certainly is some that a) we have a smaller mix of Doug Fir and b) from a export standpoint, you have Doug Fir that closed to Japan which for us is a fairly small proportion of our mix, somewhere in that 5% range and there is going to certainly be a portion of that’s in the China market, but the comments were really geared mostly at that heavier mix of Hemlock.

Okay. And then lastly there was quite a build of log inventory at the Chinese ports, how was that factoring into your thought process, do you have sense as to where that is today and do you think that that is quite secondary to the dynamic with what’s going on with currently in Russia our have you kind of lay out the picture for us that was one element that you may have referenced but didn’t get as much discussion as perhaps some of the currency issues?

The log inventories are very much part of that picture. And recognize that you are going to have differential inventories of species from different regions, it’s our understanding that the inventories are relative to consumption right now are heavier for Pacific Northwest logs. I think overall we have seen inventories build as we get into the Chinese New Year into that neighborhood of the 4 million cubic meter range which is higher than everybody would like to see it. And so you are really dealing with where our incremental supplies going to be coming from. And as you have those high inventories and combining that with where the ruble is price, you are just not going to see as much flow coming out of Pacific Northwest. And you see indications – we are seeing indications of that already just in terms of buying behavior in the Pacific Northwest where you are seeing people addressing ships that are currently under contract, but not – you are not seeing additional volumes and that ripples back through the rest of the market.

Okay, interesting. And we can certainly come back and discuss this offline if it makes more sense, but just wanted to clarify when you talked about going back up to 4 million cubic meters, my understanding was there had been about 4.5 million middle of the year it actually comes down to about 3.25 million so by the end of the year are you suggesting – do you have later intelligence that’s indicating that it’s actually going back up subsequently or?

Yes. We understand that it has indeed gone back up.

Okay. Thank you very much.

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

It’s still morning here on the West Coast, so good morning. I have three quick questions, first of all I think on the surface the notion that New Zealand radiata pine would be better fiber than the Pacific Northwest, just to maybe beat the dead horse, that’s primarily because you are skewed towards Hemlock as opposed to Doug Fir, right?

No, Steve my comment was really the combination of the currency value and the fiber. So I think the Northwest fiber is generally viewed as better fiber. But then the New Zealand radiata pine but it’s not when you factor in the higher cost in a dollar basis when you think about the movement of the New Zealand dollar. So that was the statement that kind of took into account both factors.

Well, that’s how I understood it. And then maybe I went down a rabbit hole when we started talking about Hemlock, but in the Pacific Northwest is your site class amenable to planting Doug Fir when you do you replant?

Yes. We have – I would say that Doug Fir has – is a very strong component of what has been planted for quite a number of years. And so while our mix today is a heavy Hemlock mix if you fast-forward 10 years, 20 years plus you are going to see that mix gradually improve and increase on the Doug Fir side.

Great. Thanks for that clarification. And then switching to the Southeast, I believe if I was looking properly I understood that despite sawtimber being up 3% your average log realizations would have down in 2015 because of the thinning?

That’s correct. We have identified a backlog of thinnings that we are going to undertake to try to increase the long-term value basically. So even though we are having increased pulp product pricing, we do see slightly down in the overall average price. And it’s really volume by grade and also purpose by region.

I guess Steve part of that is a function of – this was a very, very wet year this last year, so you just don’t want to get into those stands with machinery that will damage soils. And so to some degree, it’s a function of the wetness, but also we are trying to look out into the future where we see stronger long-term sawlog pricing characteristics and so we are wanting to make sure we get that thinning taken care of in the near-term.

Yes, that makes sense, but….

Some of our pricing data, Steve, we are getting the extraordinarily strong pulpwood pricing in certain markets. And so part of it is just a function of geographies that we anticipate harvesting in next year to the extent that it’s in market that aren’t as strong on the pricing side. So, we see average product prices on a market by market basis going up, but our weighted average product price going down just slightly because of the geographies in which anticipate harvesting.

Well, thanks. I think that might be a little surprising, because through the downturn, a lot of people had leaned on the thinnings to offset the decline in sawlog demand. My final question is with respect to the non-timber income, in addition to the hunting leases you have, do you have much potential for minerals or aggregates and have you explored that?

Yes, we have. We have a geologist on staff and we are constantly looking at those opportunities and working on several things right this minute. So, we do look that a lot and have one active heavy minerals operation going on in Georgia and looking at other opportunities we move forward.

But it’s not a big component of the non-timber income at present, right?

Not at the present, it’s something we are building on right now.

Hopefully we will hear more about that. Thank you.

Paul Quinn, RBC Capital Markets, your line is open.

Yes, thanks very much and good morning. Just couple of questions, one just a comment on the increased disclosure, it’s thankful – it’s actually almost too much now. It’s actually quite a bit of work to revise the model given all the new information that you have got, but thanks for the direction. Question on just following up Mark Wilde’s question on the Russian response, definitely understand that competitive nature with respect to the Russian ruble, just wondering whether you have seen or got evidence of on the ground activity that’s increased in Russia. I mean, we have always heard for a long time biologically, you see it significantly higher than the current harvest, so heard about all sorts of infrastructure issues in railroad, truck, logging, contractors, etcetera and just wondering if – how long do you expect if the ruble stays down here? Is there a significant ramp up over ‘15 and how pronounced you think that will be?

That’s a fabulous – I think the short answer is there is elements of truth to a lot of that. There clearly are infrastructure challenges in Russia that irrespective of where the ruble is, those are very challenging issues. And so that’s going to face the market, I think under all circumstances. And I suspect that, that does indeed limit the ability of any short-term impacts in the market. And my own suspicion is that some of this may come down to the interplay of oil prices and the relationship that, that has been in an oil rich country like Russia of just what they do from a labor standpoint and in an investment standpoint, whether they decide to take on any of these infrastructure projects faster than they might otherwise do. But I don’t see that as a short-term fix, it’s still probably a pretty far off.

Okay, thanks for that. And then just if you could give us some additional details on your Q4 ‘14 and Q1 ‘15 timberland purchases and how they relate to your acquisition metrics, especially cost of capital? And then just adding on that, just what your expectation is for additional timberland offerings in 2015?

Sure. I mean, the acquisitions that we acquired in Q4 and the one we talked about in January, the three acquisitions, all three of them are in geographies that these properties fit into geographies, where we had an existing presence. And so they were very much kind of bolt-on type acquisitions. They all had strong stocking. And so we saw them as attractive from the standpoint of fitting into our management structure with little incremental cost as well as feeding incremental harvest volume going forward. And so those were the types of transactions that we are going to continue to look upon favorably. They are smaller perhaps than the company has looked at in the past. But I am quite pleased when you think about the amount of timber that we have purchased this year and relatively small doses. And so we are continuing to look for those opportunities and we think that some of those smaller deals are well suited for the some of the types of deal flow coming forward. As to ‘15 deal flow, I think it’s still too early, at the end the end of first quarter - second quarter we are probably going to have a much better sense of how the deal flow looks for the year.

Okay, that’s all I had. Best of luck.

Thank you.

Daniel Rohr, Morningstar, your line is open.

Thanks a lot. First I just want to thank you again for all the additional disclosures in the supplement, great. You mentioned you expect harvest volumes in the south to be modestly higher than 2014 around 5.36 million. I think you had mentioned if I am not mistaken on the last call that 5 million tons is the ballpark expectation for the south over the next 5 years, so my question is, is 5 million tons still the base case and how do you expect next affair over the next several years in the south?

I think there are a couple pieces to that, recognize that when we put that announcement out there, there were still a number of the timber acquisitions that we closed down were not completed yet. We estimate that roughly 300,000 tons a year are coming off the acquisitions that we added this year. And then in addition we have done some further refinement on our hardwood volumes going forward. And so it’s a little bit of a mix of the new acquisitions and the hardwood volume going forward. But 5.3 that Doug talked about that is a more refined going forward number than the 5 million that we talked about in round terms back in November.

Great. And would you expect the pulpwood share of that 5.3 million stayed towards 2018?

Of the acquisitions or…

Of the total 5.3 million, I think the pulpwood share is going to be a little bit higher this year than last due to the thinnings but as you look into ’16, ’17 and ‘18 with hopefully a stronger housing market do you expect that pulpwood share to decline?

We do Dan, we started our thinning regime primarily in about 2007, so as those stands we give them about 10 years to come of age. So we are looking as going into 2017, 2018, 2019 that we should see a shift in mix. Some of the stands have already – we are starting to harvest this year for the first time. So as we go through the last of the thinning backlog that we kind of see really this year was identified as primarily that we will see a mix shift as we move forward in the kind of 2017, 2018 and 2019 in particular.

Okay, great. And then discount rates have come up a few times in the past what sort of rates do you think institutional investors are using nowadays and what sort of rate do you have in mind for Rayonier when you are looking at timber property?

Well, I am not sure I want to describe what we are using in a discount rate standpoint and I think that you are going to find a mix of institutional investors that are both above and below the current market clearing discount rates that are out there.

Alright. Thanks.

Mark Wilde, BMO, your line is open.

Yes. Just a couple of follow-ons so if I look out there in the 2018, 2019, 2020 in the South what would be the proportion you would suppose between soft timber and pulpwood?

We would probably have to get back you on that Mark. I don’t know that we have that refined of a sense other than directionally we know it’s kind of go in and that moving. I think some of it is probably also going to be a function of the pace of the housing recovery.

Alright, that’s fair Dave. Another question I had you have been in about 6 or 7 month now Dave I am just curious on your thoughts around sort of overhead and staffing levels at Rayonier are there areas where you think you can pare back and are there areas where you think that company might actually want to be spending more money on kind of staffing expertise?

Yes. I would say that following our November announcement that is something that we have spent more time on as a management team. I think that there is a mixture really of both of those categories. Certainly, there have been areas in the real estate area, in particular, and to some extent, in some of our staff areas, where we – as we pulled the company into two, we had some holes here to fill from a staffing standpoint. And then going forward, what we are really taking a more comprehensive look at is making sure that our various business processes are right-sized for our business activities and that really will get to kind of that bigger picture of do we have opportunities to look for cost reductions on the overhead side, but that’s I would say that’s still in the early stages. One of the areas that we have acted on already is we have taken a layer of management out within our timber operations. We used to have a divisional layer, where we had six different resource units report through two division leaders, but then reported into Doug’s role. And what we have done is essentially eliminate that layer and have those divisions reporting, those resource units reporting directly to Doug. And that was done very intentionally to push decision-making down deeper into the organization and flatten the organization, but at the same time it’s going to have some positive cost effects as well. So, that’s an example of some of the early things that we have done. And there will be more to follow as we do more detailed assessments.

Okay. And then the last question I had, just you got so much land in the Southeast and it’s probably one of the faster growing areas in the U.S. One other revenue stream I am kind of curious about is just things like mitigation banking, which some of the – I know some of the big private landowners have gone into down there. Is that another stream that you could see being significant in the future?

We have talked about that question. I think to some degree the scale of conservation sales that we have done that have probably limited some of that potential for us going forward. If we had a large – we completed a large land classification effort last year and we just did not have a huge component of our land base that’s fell into the category that would be a likely home for mitigation banking, but I agree with you that it’s definitely an emerging area. And there is a number of people that are trying to sort of develop that expertise and help companies like ours unlock some more of that value.

Okay, alright. Good enough. That’s all I have got. Good luck this year.

Thank you.

And our last question comes from Collin Mings, Raymond James. Your line is now open.

Hey, thank you. Just want a couple of quick follow-ups. Just Dave, I am just curious your perspective, given you have see the fall in the Pacific Northwest markets for a long time. And clearly during the call, there have been a lot of issues as far as the headwinds that are out there right now. I am just curious do you think that this could lead to a softening or cooling of timberland values in the region at all? Recognizing obviously, you don’t have quite the deal flow in the south that you have in the south and it’s also an area that a lot of investors want to own. Just curious if you think timberland values there might have gotten too inflated in context with some of the headwinds that we are seeing in 2015?

Net-net, that would surprise me for a couple of reasons. One, when timber evaluations are done, you are looking out across the full rotation age of harvest values. A good example of this was during the downturn of the global financial crisis, where we did not see a commensurate decrease in timberland values that we did in log values. And so – and this certainly won’t be anywhere near that type of price decline. So, I don’t necessarily see that occurring. And then number two, we are just that much closer to the ultimate recovery in housing markets. And then when you combine that with a shrinkage of supply coming out of Canada and even a more modest export market, you are still going to see a fair bit of underlying pricing pressure. So, I am not sure that I would see that having a material effect on timberland values. It certainly will have a near-term effect on log values from perhaps recently acquired properties that have a heavy merge component, but I would be surprised if you saw a big movement in timberland values.

Okay. And then just the very last one I have is just kind of tying together the questions about the G&A as well as just kind of the internal review you guys conducted. How do you think about structuring incentives for employees out in the field for different managers as far as trying to kind of balance obviously kind of optimal outcomes in the short-term as far as cash flow and earnings? But then kind of some of the long-term issues that maybe in the past the company had gotten too far ahead of itself as far as on the cutting and harvesting in the west. How do you think about designing a finished structure that kind of keeps the sustainability, if you will of the harvest activity going forward?

Yes, that’s a great question and it was something that we very intentionally looked at as part of our effort in November. And we started a process this last fall of basically taking our incentive compensation structure and starting fresh. We brought in a new compensation consultant. We are also moving away from a system where we had quite a number of different incentive systems for different parts of the company. For example, we had systems, incentive structures for our corporate employees, ones for our Forest Resources employees, ones for our real estate employees. And that gets hard to have multiple systems that work in conjunction. And so what we are going to be doing is going to a system that is one system for all. We are using the term, One Rayonier here in a number of the initiatives that we are looking at in terms of the company and the incentive system is certainly part of that. And so we are in the final stages right now of that design effort. And it will have a long-term focus to it. It will have a focus that is more cash flow based. The old system had a heavier influence on net income. So, we are moving away from that. And we really feel that this system both having everybody on the same one and having it be long-term in nature is going to be a lot more consistent with the goals that we laid out and the strategies that we laid out going forward.

Thanks again guys. I really appreciate the color on the call today.

Thank you.

I show no further questions.

Alright, thank you everybody and we will talk to you next quarter.