Rayonier Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

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 call is being recorded. If you have objections, you may disconnect at this time. Now, I would like to turn the call over to Hans Vanden Noort, CFO, sir, you may begin.

[Hans Vanden Noort:]

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 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, as well as our Form 10-K filed with the SEC lists some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our presentation material. With that, let’s start our teleconference with opening comments from Paul Boynton, Chairman, President and CEO. Paul? Paul Boynton – Chairman, President and Chief Executive Officer

[Hans Vanden Noort:]

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 Rayonier of $87 million. In accordance with GAAP, both operating income and net income included a $16 million gain from the acquisition of additional 39% of our 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 in liquidity. Our year-to-date cash flow was strong with 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 in debt, which now includes $211 million of New Zealand joint venture debt and $344 million in cash so on that 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 analysis. On page 4, we 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 non-strategic sale. Moving to Performance Fibers you can see price improvement in the sale the 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 cost. Corporate and other expenses were $5 million above last quarter due to the higher legal and business development costs. The first quarter also benefited from the favorable mark-to-market gain on New Zealand dollar hedges. Let’s move on to page five, and look at the year-over-year variances. The second quarter in year-to-date variances compared to last year generally have similar drivers. Our Forest Resources results reflect improved prices in volumes in all U.S regions and higher prices in New Zealand driven by strengthening demand in saw timber and strong Asian demand. The real estate results were profitable for the second quarter but favorable on a year-to-date basis due to the previously mentioned first quarter non-strategic sale. In Performance Fibers sales specialty prices and volumes were higher but fluff prices were weaker and the input costs were about last year. Finally to the increase in the corporate and other expense generally reflects the items noted on the previous page. Turning now to page six, on this page we reconciled from cash provided by operating activities which is the 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 to Lynn Wilson.

[Lynn Wilson:]

Thank you Hans. Good afternoon. Let’s start with page eight and the Northern region which primarily comprises our Washington state operation. Delivered saw log prices increased throughout the quarter despite weaker domestic saw mill demand as export demand especially to China continued despite strengthened prices. With our ability to capitalize on China demand saw log prices increased 10% from the first quarter on prior year quarter. Our stumpage prices declined from the prior quarter solely due to the mix of tracks 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 planned on maintaining the 2012 volumes levels and 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 client stumpage prices declined slightly from the first quarter, mainly due to mix as higher pulpwood spinning volumes drove up the increased total volume. Prices were above the same period last year for both saw log and pulpwood. We continue 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 the 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 a 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 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 harvest to match the age class distribution across the state. Overall Forest Resources operating income including New Zealand should be well above 2012. Due to stronger demands driving higher prices in all regions and New Zealand acquisitions. Now let me turn it over to Paul to cover real estate.

[Paul Boynton:]

Thank Lynn. Its Chris Corr, our new Senior Vice President –Real Estate joined us just last week and in the process of relocating, I will 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 prior year period but well below first quarter which included the sale of 5,450 acres in Washington State for $220 million. Compared with prior year quarter higher non-strategic property volumes in prices were offset by lower average raw HBU prices due to mix page 11 details of real estate raw HBU and development acres sale. Showing volumes generally comparable to prior period demand for row HBU property remained solid our gulf region markets remain strong and we’re starting to see increased interest in rural markets in Florida, Georgia and Alabama. On page 12, page 12 details per acre prices. Average rural HBU prices help firm helped by gulf region sales Texas Louisiana and Mississippi but we’re below prior year period which included a relatively large higher value sale in Florida we continue to experience strong interest in property from our recent acquisitions. Page 13 shows non-strategic timberland sales. Volumes in average prices were higher than prior period reflecting the mix of properties in the time of closings. Demand for our non-strategic properties has improved and we expect that for the full year that acres sold will be up significantly from each of the prior two years. I would like to also note that we received a mega site certification by our second industrial site the 1800 acres Crawford Florida industrial property in new Jacksonville. The certification that property is ready for industrial and commercial development has substantially enhanced the sites visibility and market ability to users. In summary, while our second quarter real estate operating income was relatively low due to the lumpy nature of this business in the timing of closings we are quite encouraged by the interest level we’re seeing in our industrial and commercial parched 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 in 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.

[Jack Kriesel:]

Thanks Bob and good afternoon. Compared to the prior year quarters strong sales especially sales volume were offset by higher costs due to the plan extended outage at Jacksonville for the sale of specialties extension startup and higher input costs. On page 14, you see net selling prices for true Performance Fibers product line. Compared to the first quarter, cellulose specialty prices increased $28 a ton or about 2% as a result of the fully elevation of 2013 price increase. Compared to the same quarter in the prior year sales specialty prices were up $10 a ton or less than 1% as 2013 price increase was partially offset by the strong 2012 sales mix. Price for absorbent material was consist principally fluff off 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 all prices. Moving on to page 15, and looking at volumes, our second quarter sales especially sales volume increased 7,000 tons over the prior year mainly due to the timing of customer orders. Second quarter 2013 absorbent materials sales volume decline 17,000 ton mainly due to lower production volume as we exit the market to accommodate the sales specialty expansion. Overall, we still expect that Performance Fibers operating income will be 10% to 15% below, 2012 record result primarily due to additional cost and lower volumes as a result of the sales of specialty expansion transition and higher wood in (inaudible). As Paul stated we are pleased to report that we successful started up the sales specially expansion project. Recall that we initiated this conversion project about 20 months ago with the objective of replicating our industry benchmark compared with active grade. The excellent job done by the design and implementation team enabled us to begin production as originally scheduled on June 28th. After a brief initial commodity viscose plan, we transition real estate by early July and we quickly realized quality levels and production rate far beyond our plan. We have hence switched back to viscose pulp while we fully evaluate the acetate top quality. Our ability to duplicate our customers’ processes and our R&D facility has enabled us to already complete the extensive end use testing of the pulp. In the positive results give us confidence to send samples of the pulp immediately to our customers worldwide. Again, while we had a plan. And lastly the cost to 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.

[Hans Vanden Noort:]

Thanks, Jack. Now, I would like to provide some estimates of our key metrics which 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 in the CSE project are expected to total about $160 million. We continued 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 between 16% and 18%. When you put all these elements together, we again anticipate very strong cash flow. We expect pro forma EBITA will be marginally 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 evidence 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.

[Paul Boynton:]

So, as you’ve heard, we had another excellent quarter and for the year we expect to achieve a slight improvements in operating income and marginally higher EPS even during this transition period for Performance Fibers. In the first half of the year, we realized benefits from the early stages of a recovering U.S. housing market as we look forward not only will this rising housing market supports saw logs prices and improve our saw logs pulpwood mix, it will also drive volume in prices in our real estate business. We’ve noticed that we are encouraged by the increased interest in our development properties and we believe that we are entering 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 the strong US economy. In Performance Fibers, we are excited about entering into the customer qualification phase of our cellulose specialty expansion. The team did an excellent job of maintaining schedule and assuring absolute quality in the project. Now with our just position of the wood product business in the first quarter and our exit from the pulp market, we are fully focused on unique potential in the high purity cellulose market, creating what is truly a specialty chemical business. And of course we are pleased to substantially raise our dividend. This increase reflects the top end we have in future cash flows. In summary, the improving timber and real estate market along with all-time 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 would like to close the formal part of the presentation, and turn the call back to the operator for questions.

[Operator:]

(Operator Instructions). Our first question comes from Mike Roxland, Bank of America/Merrill Lynch

[Mike Roxland:]

Thanks very much, good afternoon. Congrats on the quarter and startup of the new machine. First question is given that your production volumes and quality on the new line have surpassed your expectation, is there any way you could begin selling sales specialty sooner and I really because in the past you are going to face that in over 2014 but now that everything is being – is seems like it’s being done a lot better, a lot more quicker than you expected, could you actually bring on some of the acetate quicker rather than say slowly phasing then.

[Jack Kriesel:]

Mike, this is Jack and you know we still have to go that qualification period as stated but that can take anywhere from three to six months is which is the likely timeframe. So our plan right now is to any incremental sales would be into the commodity viscose pulp.

[Mike Roxland:]

Got you. So initially in commodity viscose but you know I think you are targeting mid-2014, late 2014 to have everything open running with respect to cellulose specialty could that be more now 1814 even rather mid early 14

[Jack Kriesel:]

We look at our transition in 2014 will be roughly around 90 to 100,000 tons of the cellulose pulp, that’s what we are finding out, that’s our expectation going forward as we farther in this over the next few years. So we don’t see a significant shift in that. Obviously as opportunities present themselves we will take them advantage of them.

[Mike Roxland:]

Got it, next question, there is 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?

[Jack Kriesel:]

Yeah, the ethers market is a pretty complicated market. It could have number of end uses, as construction and industrial grade 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 offers a 10% type growth year-over-year. And in the industrial type applications our foot marks specifically the construction grade, there is some weakness and that is really segmented towards the European market. And again that’s not a segment that we participate in a big volume.

[Mike Roxland:]

Thanks guys, good luck in the quarter.

[Jack Kriesel:]

Thank you.

[Operator:]

Next question Mark Wilde, Deutsche Bank. Your line is open.

[Mark Wilde:]

Good afternoon.

[Paul Boynton:]

Hi, Mark.

[Mark Wilde:]

Lynn, a couple of question for you. There has been reports may be there is a little bit easing in Pacific Northwest log pricing late in the second quarter. It didn’t sound from your comments like you guys were seeing any that.

[Lynn Wilson:]

Mark, we did see in the domestic lumber market, some of our customers because of the lumber mark 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 the export side in April and May. So we really didn’t see a tail off in our price realization despite what was going on in the domestic lumber market.

[Mark Wilde:]

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

[Lynn Wilson:]

Yes, Mark, we have done some trials our self out of Vienna with containers and Southern Yellow Pine log and tested that and we know from other reports that others have tested the same. Right, now we just don’t see that net timber margin and return to our shareholders so that’s right decision our domestic pricing still be that we have the ability. The largest difference is that currently there are no break or open ships to load so the transportation is the cost that is prohibitive or else in the Pacific Northwest because of the long history there you already have those larger ships with the break book loading facilities at all of the port that we deliver too or in the south we are still stuffing containers. So that’s really for us the decision is net timber margin of return and we just not say but we could ramp up over time but right now our other destination are better and more profitable decision.

[Mark Wilde:]

Okay, then just question about just sort how you see relative value on timberland we saw big acquisition in the West Coast announced during the second quarter but I am 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 view just generally and relative track to this? Where you see the best value opportunities?

[Paul Boynton:]

Yeah, hey, Mark, it’s Paul and certainly we have seen Timberland values hold strong, we are out there actively looking a lot, you know we’ve locked at over 800,000 acres already this year. We don’t have a lot to show, at the same time we think there is going to some uptick for us to continue to acquire but with your observation, we agree that the Timberland’s values are holding up we think very well and there is a very active markets so I think that’s all, any other comments, Lynn.

[Lynn Wilson:]

No. I think that’s consistent

[Mark Wilde:]

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

[Hans Vanden Noort:]

Sure, the largest part was just a legal accrual as we sale day an outstanding contingency.

[Mark Wilde:]

Okay, sounds good, good luck in the third quarter and through the balance of the year.

[Paul Boynton:]

Thanks, Mark.

[Operator:]

Next question from Steve Chercover, D.A. Davidson. Your line is open.

[Steve Chercover:]

Good afternoon. I guess my questions are – thanks primarily for Jack and I guess it’s almost for modeling purposes. Now that absorbent material is no longer in the mix, might you show us commodity viscose volumes and prices until the transition truly done.

[Jack Kriesel:]

Yes, as we ramp our CS production, the balance of this year we are looking at 60 to 70,000 tons of commodity viscose, obviously next year we do 90 to 100,000 of CS, there is about 40,000 or so 50,000 tons of commodity viscose, and again that’s assuming some of our decrease production rate as we are ramping up but again we are running at – we are seeing indication that we are going to be able to run at a higher rate, so by 2017 we are out of the commodity viscose. And regards to commodity viscose pricing, lot of capacity was brought online over the last few years roughly about 3 million tons and it probably some of that didn’t come to realization and then there is another million or two million tons slated to come online over the next three four years. That would should hold the commodity pulp pricing down somewhere between the 50 to 1150 type ranges just depending on circumstances. Obviously things can change dramatically you know bad cotton crops or whatever but all things considered that, that’s the type of price range we are looking at.

[Steve Chercover:]

Okay, that’s helpful. And I mean given that you’ve committed volumes to commodity viscose in order to keep the markets tight. Would you still characterize the relationship with your customer as being an allocation or can they get what they want now.

[Jack Kriesel:]

Well, I am not quite sure I understand the question but you know we’ve contracts for the majority of our customers so certainly there is an incremental volume out there and 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.

[Paul Boynton:]

And certainly Steve, just jumping here you know we were obviously extremely oversold over the last 10-12 years and as we come on and others come on there is more availability, that situation has certainly eased and that’s why you are referring to the allocation I am not sure but as Jack referenced you know our volumes under contract and we got solid sales going out and up to the year.

[Steve Chercover:]

Yeah, that’s – thanks for clarifying Paul that, that exactly what I mean is that I think you could have sold more especially pre-recession if the capacity was available and so I guess now the tension is not quite there but it’s still fantastic to have the commitment nonetheless. Okay, that covers it for me. Thank you.

[Paul Boynton:]

Thanks, Steve

[Operator:]

Okay, next question Chip Dillon, Vertical Research Partners. Your line is open.

[Chip Dillon:]

Yes, good afternoon, it looks like the things could be heading up quite a bit for the real estate business especially given that as we talk to the people in the real estate and builders, builders in particular the biggest park owners land, and I guess could you give us some I guess may be wedge or range of what kind of – we could see that segment duo I mean obviously last year was a low point at 32 million and I guess year-to-date your income is 23 but I mean could we be seeing $100 million number or not, that we are going to hold like in 14 or 15 as you entitle, and secondly unrelated question, what are your thoughts about how far down the development processes you are willing to go in order to capture more value although there is more risk the further you do go down that line.

[Paul Boynton:]

Hey, Chip, thanks for a question. Somewhat reluctant to say exactly where that will go in the near future but certainly it’s got the upper potential and you are right we reached the low point, last year we’ve already guided this could be real strong year. This year relative to last year and we continue to see that moving north. So we are encouraged, we are very encouraged by the level of activity, we are back having conversation with national, regional, local home builders, talking to retailers, distribution network about our industrial property. These are all things that we have had conversation on and sometimes so again that gives the optimism, but we don’t have anything in shelf there, don’t quite yet that things are certainly have turned and we are going to see a much more positive outlook in our real estate business. So I cannot specifically answer your question but generally saying it’s going to be much stronger business for us going forward, and again we got very unique properties, you have seen Chip, and we think we are going to have a lot of nice value accretion from those properties.

[Chip Dillon:]

Okay, that’s very help. And I guess turning back to the specialty sale of – I know that most of the demand drive I think with the acetate grade that you are expanding and this tied largely to tobacco in China, that’s my perception but is that market or target changed at all or are you thinking you know is it broadening to other areas or is that still basically where most of the incremental go through?

[Jack Kriesel:]

When we look at our expansion little bit our intent is to grow all of the primary segment so acetate, ethers, high domestic variant and specialty in high value, specifically in the tobacco end of it you know that market continues to grow at roughly 2% or so primarily in China region. And even with the summation type efforts that growth rate is forecasted to continue well on to the future and in fact some forecast say 24 (inaudible) still going to be a growth in that type of a range.

[Chip Dillon:]

Got it, thank you.

[Paul Boynton:]

Chip, you try to go back the other question I realized I knocked out the second part of your question which how far we willing to go and the development side of river state and just want to comment on that because we are not developers, we don’t plant 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 will give you the couple of examples. In Nassau County, we’ve got six miles of river front along the same area as river which divide Florida and Georgia, of that we went a couple of years ago and had invested some modest capital to protect that mile of that blockade to keep it preserved for future opportunities and optionality so again more example of protecting our real estate business. Another one we have this industrial property in Belfast, we thought Belfast industrial just south of Savannah and in there we are looking at some modest capital in terms of utility, sewage water to get that industrial property up to speed so they can quickly take on new opportunities for investor so those are something that we have done and we will continue to do and again relatively modest ways on capital on real estate.

[Chip Dillon:]

And I guess this quick – thanks for answering that. And just as quick related point, are there any I guess an orthodox for timber reach properties that just make a lot of sense to may be acquire that are contagious to what you can develop in Northern Florida or South Eastern Georgia.

[Paul Boynton:]

I don’t know from REIT perspective how to answer that, if there is any property that sit adjacent to our or near our are that we can think create value for the shareholders, we will take a look at it but I don’t know if there is anything from REIT perspective that wouldn’t allow us to do anything differently. Hans, would you?

[Hans Vanden Noort:]

No, if there was something that we were had a development type of interest and we were thus required in TRS and just have it alongside other property there.

[Chip Dillon:]

Yeah, got you, okay, thank you.

[Operator:]

Okay, next question comes from Mark Weintraub, Buckingham Research. Your line is open.

[Mark Weintraub:]

Thank you. Just a bit longer 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 overtime and perhaps expand and growing, or is it really you are just taking advantage of opportunities that came out of the timberland that you held. How should one be thinking about your mindset on it?

[Paul Boynton:]

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

[Mark Weintraub:]

Is it any area where on go forward basis you might be making selective acquisitions, where you think that you can add some value obviously not to say bring it all the way through the development process itself but is it in the area where again you might be looking to go outside of your existing holdings and think that you can add value.

[Paul Boynton:]

Yeah, it’s question as mark to go and buy a property that’s already into 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 acquisition with a heavy eye to the real estate component and see how we can extract that value with a talent that we have on our team.

[Mark Weintraub:]

Okay, that’s helpful. Thank you.

[Operator:]

Okay, next question Collin Mings, Raymond James. Your line is open.

[Collin Mings:]

Hi, good afternoon, congrats on the CSE project. I know you guys are typically pretty reluctant to share too much detail on the CS price outlook and top price negotiations are completed, but may be you could offer some of the key talking points from both side of the table this year just in context of both new supply but also some of the strongest results still being reported by particularly your acetate customer and their corresponding businesses.

[Paul Boynton:]

Hi Collin, Paul, just real quick it’s a way too early for us to discuss pricing and as you know we are very consistent with this, we’ll talk about pricing in January in our January call and not in advance of that. The component to pricing remain the same though. So we will obviously consider first and foremost the supply demand dynamics to the equation. We will look at our cost of input materials, we look at the financial help of our customers including the health of the market that they serve and the dynamics related to it, and then finally we will consider global currencies. So we will take all that into our thought process and into our discussion process with our customer and we will come out in January and then let you know where we are sitting.

[Collin Mings:]

Okay, fair enough, but as I mean on the cost increases you kind of alluded in the prepared remarks within the CS category, can you talk a little bit about what are you seeing on that front?

[Jack Kriesel:]

Yeah, Collin, while we certainly have slight increase in wood cost and then some chemicals as well, we have little bit of energy increase as well.

[Collin Mings:]

Okay. And then Lynn, just on a last few calls you guys have highlighted some specific wood basket in the south where seemed demand as well as pricing in terms of improve. Can you update us on where are you seeing really that the most positive momentum in the south in pricing.

[Lynn Wilson:]

Yes, Collin, we are seeing specific market there really being the rest and if you think about our East Texas West Louisiana market that’s strong both on the pulpwood and log pricing side. And then heart of real strong market continue to be Southern Alabama and that Eastern Mississippi, those are some of our newest acquisitions as well as our Legacy Timberland and 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. So those are the hearts of our very strong demand.

[Collin Mings:]

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

[Paul Boynton:]

Yeah, you know we had nice kick off of that property with local official congressmen, the governor Scott was out for – certainly it generated and sparked a lot of conversation on the property, our website hit went off the chart for us anyway which is obviously not a consumer website so it’s great for us to see that. So it is kind of just generating lot of good conversation around to the property and the 1800 acres we have there and what we can do – it has two class one railroads running right through the middle of it, so it’s one of the very few railroad diamond as record in the US, so makes it really ideally for the manufacturing for large scale distribution. And we know that the governor has personally gone out and talked about it and have traveled around as well as we got lot of great interest from site selectors, so again it’s off in the right direction, we had good conversation already and as you noticed it’s just been six weeks into it so we are pleased.

[Collin Mings:]

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

[Paul Boynton:]

Thanks, Collin.

[Lynn Wilson:]

Thank you.

[Operator:]

Next question Paul Quinn, RBC Capital Markets. Your line is open.

[Paul Quinn:]

Yeah, thanks very much, good morning or we guess afternoon for you guys. Just couple of question on specially dissolving pulp markets. One, we’ve got the Chinese investigation that said there may be you could just comment on how you respond to that and what the expected timeline on decision?

[Jack Kriesel:]

We filled out all the necessary documents and we actually had face-to-face meeting with the appropriate Chinese officials. And as you probably note, 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. So again it’s not very transparent, we’ve done all we can at this point in time.

[Paul Quinn:]

If you could just comment on how are they looking at you guys specifically I mean you do fair amount of specialty into China but I guess also an increasing amount of commodity as you as suggest a conversion volume hits market, how are they looking, are they – have they differentiated at two market?

[Jack Kriesel:]

They are continuing to look at the market as a whole, when you – the dissolving pulp market and I mean that includes acetate and commodity viscose, and the reason they do that is when comes into the port they have a little bit of difficulty concerning which pulp is which. Our approach – again we don’t how they are viewing us but we put this very little the commodity of viscose pulp during this injury period that they were doing compared to the amount of acetate that put into China. So our exposure we feel is very low.

[Paul Boynton:]

Again Paul reminds you that the analysis period for them was 2012 and so that’s what they have been looking at. So again to Jack’s point very small amount of our volume went in there viscose as you know just kind of moved a little bit on an opportunistic point of view relative to fluff and the bulk of our sales as Jack has noted cellulose specialty and acetate in the China. So it’s hard for us to tell it’s a very non-transparent process of where it’s going to go.

[Paul Quinn:]

Yeah thanks I appreciate the color. Just on 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%?

[Jack Kriesel:]

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

[Paul Quinn:]

Okay then just had a question for Lynn on timberland I mean just taking a look at the US pine timber sales it looks I mean you’ve got the pricing up a little bit in terms of stumpage but we haven’t seen a material move up. When do you expect those prices to move up?

[Lynn Wilson:]

Paul, we are starting to see Paul the pricing move up but because of the heavy rains we moved up a little bit more during upward during this period. So we are starting to see in certain markets both the chip and saw and the grade volume began to move up and additional capacity either through chip or through startups of certain facilities. So 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 Boynton:]

And Paul let me just add to that because in the Northwest certainly we are seeing the combination of pressures from the stronger lumber markets as well as exports to Asia combined and drive that price up and then talked about those prices. And in the south we’ve got to get to the housing starts that come of that new normal level which we think is between 1.3 million and 1.5 million starts so really support saw log prices as we think they should be. Now there will be allies till we get that point but that’s the point we need to have and again that’s 2015 type timeframe.

[Paul Quinn:]

Great. Well great quarter. Thanks very much

[Operator:]

(Operator Instructions).Mark Wilde, Deutsche Bank. Your line is open

[Mark Wilde:]

Yeah just a couple of follow ups Jack I think you mentioned when you’ve talked about those four variables you think about with respect to see as pricing one was currency I’m just curious which currency relationships would you watch most carefully there?

[Paul Boynton:]

Hey Mark its Paul I just want to make this comment about the pricing component. 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 just got to make sure that we understand the operating environment of all our customers and we just take that into consideration. So I think you know well where our different major customers are but they are in China they are in Japan they are throughout in Europe particularly Germany even obviously in the US. So we watch the combinations of not only how they are operating in terms of their raw material cost but also how they are selling their products and we just take that into consideration really that just kind of help us gauge the health of our customers and make sure we understand that one or the other is going to be adversely or positively affected by currency translation.

[Mark Wilde:]

Okay. And then the other question I had you’ve talked 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 sort of what the progress is on that industrial site?

[Paul Boynton:]

Yeah that’s our built as industrial built as commerce site that’s on the 70 miles South of Port of Savannah it’s got a CSX rail line going through right through the property along with I-95. So it’s a well-positioned industrial property about 1,100 acres. We did the same sort of thing there. We had a mega site certification that was completed last spring and sorry last December. And we are actively marking 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 have appeal this year and few more things about the property and our success there in the near future.

[Mark Wilde:]

Okay sounds good. Thanks

[Operator:]

At this time I have no further questions.

[Hans Vanden Noort:]

Alright. Well, it’s Hans Vanden, thank you everybody and please call up with Ed Kiker with any additional questions. Thank you.

[Operator:]

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