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Rayonier Reports Lower First Quarter Income

April 25, 2006 (Press Release) - Rayonier today reported first quarter net income of $23.3 million, or 30 cents per share. This compares to $56.4 million, or 73 cents per share, in fourth quarter 2005 and $34.4 million, or 45 cents per share, in first quarter 2005. There were no special items in the quarter, however, fourth quarter 2005 included a gain of $30.5 million, or 39 cents per share, on the sale of New Zealand timber assets to a consortium including Rayonier, while first quarter 2005 included a tax benefit of $9.5 million, or 12 cents per share, resulting from an IRS audit settlement.

Lee Nutter, Chairman, President and CEO, said: "We had a good quarter, in line with our expectations, with continued strong demand and prices for U.S. timber and cellulose specialties. Also, our real estate subsidiary, TerraPointe, continued to experience very strong interest in its Southeast coastal corridor properties. As expected, real estate operating income was below the comparable periods due, in part, to our strategy of moving up the real estate value chain and away from traditional bulk land sales, and also the timing of transactions."

First quarter net income was below fourth quarter, excluding the special item, primarily due to lower real estate sales, a higher tax rate and the impact of expensing stock options. These were partly offset by improved performance fibers results. On the same basis, earnings were also below first quarter 2005 primarily due to reduced real estate sales and higher performance fibers costs.

Sales for the first quarter of $277 million were $39 million below the fourth quarter but $2 million above first quarter 2005.

Cash provided by operating activities of $51 million was $25 million below first quarter 2005 primarily due to lower operating earnings and higher working capital. Cash Available for Distribution (CAD) of $24 million was $39 million below first quarter 2005 primarily due to reduced earnings and increased capital spending. (CAD is a non-GAAP measure defined and reconciled to GAAP in the attached exhibits.)

Debt of $558 million and the debt-to-capital ratio of 38.9 percent at quarter-end were comparable to year-end 2005. Cash at March 31, 2006, was $126 million.

Timber

Sales of $54 million were $1 million below fourth quarter 2005 while operating income of $24 million was essentially unchanged, as lower Northwest prices were offset by higher volumes in that region as well as increased Southeast prices. Compared to first quarter 2005, sales improved $3 million primarily due to higher Southeast prices while operating income was unchanged as the improved prices were offset by lower New Zealand earnings and increased costs in the Northwest.

Real Estate

Sales of $13 million and operating income of $10 million were $7 million and $6 million below fourth quarter 2005, respectively, primarily due to pricing for development properties that, while very strong, was below the exceptionally high prices received in the previous quarter. Sales volume and pricing for rural properties increased from the fourth quarter. Compared to first quarter 2005, sales and operating income decreased $11 million and $5 million, respectively, mainly due to fewer development and rural acres sold, partly offset by higher per acre prices for both development and rural properties.

Performance Fibers

Sales of $146 million were $27 million below fourth quarter, however, operating income of $10 million increased $4 million as higher cellulose specialties prices more than offset lower volume and absorbent materials prices. Compared to first quarter 2005, sales increased $3 million largely due to cellulose specialties prices partly offset by reduced volume and absorbent materials prices. Operating income, however, decreased $2 million mainly due to higher raw material and energy costs.

Wood Products

Sales of $32 million were $3 million below fourth quarter 2005 primarily due to lower volume while operating income of $3 million was essentially unchanged. Compared to first quarter 2005, sales improved $1 million while operating income declined $1 million due to increased manufacturing costs partially offset by higher volume and prices.

Other Operations

Sales of $32 million and essentially break even operating results were $2 million and $1 million below fourth quarter 2005, respectively, primarily due to lower coal royalties. Compared to first quarter 2005, sales improved $6 million while operating income declined $1 million mainly due to lower trading margins.

Other Items

Corporate expenses of $9.5 million were $0.9 million below fourth quarter 2005 as lower incentive compensation accruals were partially offset by $2.1 million of stock option expense. Compared to first quarter 2005, corporate expenses were $1.9 million higher, principally due to the impact of expensing stock options.

Intersegment eliminations and other income of $0.3 million was $3.2 million favorable to fourth quarter 2005, primarily due to a $3 million increase in disposition reserves in 2005, and comparable to last year's first quarter.

Interest expense of $12 million was in line with both fourth and first quarters of 2005.

Interest and other income of $2.2 million was $2 million below fourth quarter 2005 but $1.8 million above first quarter 2005. The unfavorable variance to the fourth quarter was primarily due to a gain on the sale of a manufacturing asset in that quarter, while the favorable variance to the first quarter was mainly due to higher interest income.

Excluding discrete items, the effective tax rate for the quarter was 16.4 percent compared to 17.2 percent in first quarter 2005. Including discrete items, the first quarter 2005 effective tax rate was substantially lower due to the favorable IRS audit settlement in that period (see Schedule J for details).

Outlook

The company said second quarter 2006 net income is expected to be somewhat above the first quarter with improved cellulose specialties volume and product mix as well as higher Northwest timber prices, partly offset by increased performance fibers manufacturing costs. However, earnings are expected to be somewhat below second quarter 2005, excluding special items, primarily due to higher performance fibers manufacturing costs partly offset by improved prices for cellulose specialties and Southeast timber.

Nutter said: "With strong demand and pricing for cellulose specialties, U.S. timber and Southeast real estate, we continue to believe that full-year earnings will be somewhat above 2005, excluding special items. The second half of the year should be much stronger than the first, particularly due to increased real estate transactions."

Rayonier owns, leases or manages 2.5 million acres of timberland in the U.S., New Zealand and Australia. Its real estate subsidiary, TerraPointe LLC, is focused on maximizing the value of its higher-and-better use properties, particularly in the fast growing counties along Interstate 95 between Savannah, Georgia, and Daytona Beach, Florida, where the company owns approximately 200,000 acres. Rayonier is also the world's leading producer of high performance cellulose specialty products. Approximately 40 percent of Rayonier's sales are outside the U.S. to customers in more than 50 countries.

SOURCE: Rayonier




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