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Longview Fibre Reports First Quarter Loss

May 10, 2006 - Longview Fibre Company today announced financial results for its first quarter ended March 31, 2006.

Consolidated sales for the first quarter of 2006 were $220.1 million, a decline of 4.6 percent compared with sales of $230.8 million for the same period last year. The company reported a first quarter net loss of $11.0 million, or $(0.22) per share. First quarter 2006 results included non-recurring advisory fees and costs related to the company's conversion to a real estate investment trust (REIT) totaling $7.1 million after tax, or $0.14 per share. The company also wrote off in the first quarter of 2006 debt and equity issuance costs totaling $1.7 million after tax, or $0.03 per share. In the first quarter of 2005, the company reported net income of $6.4 million, or $0.12 per share.

Cash provided by operations totaled $24.0 million in the first quarter of 2006, compared with $28.6 million in the comparable period of 2005. During the quarter the company declared a quarterly dividend of $0.25 per share which was paid on April 4.

Richard H. Wollenberg, President, Chief Executive Officer and Chairman of the Board, said, "The management team is actively executing on the improved operating plan we announced last month and fully expects that our results for the second quarter of 2006 will reflect the significant progress we are making against this plan. Specifically, we expect our future results to benefit from the accelerated timber harvest that we have already begun to implement, as well as the execution of other major components of the operating plan and completion of the REIT conversion and related refinancing."

Mr. Wollenberg continued, "In the first quarter, we generated solid cash flow despite unfavorable weather conditions that hampered our timber harvest, and funded our first increased quarterly dividend. Over the remainder of 2006, we expect strong seasonal demand in each of our three operating segments and favorable pricing momentum in our manufacturing segments."

"The Board and management are committed to the principle of enhancing shareholder value," Mr. Wollenberg said. "The improved operating efficiencies and over $200 million reduction in borrowed debt we achieved over the last four years illustrate our commitment and ability to execute. We intend to complete by the end of the third quarter the remaining steps for our REIT conversion, including obtaining an additional term loan facility under our senior secured credit agreement; repurchasing our outstanding senior subordinated notes; and distribution of our pre-REIT earnings and profits through a special taxable distribution to shareholders of approximately $385 million, including up to approximately $77 million in cash."

Mr. Wollenberg concluded, "We are confident that our improved operating plan, in combination with our REIT conversion, will further accelerate our ability to deliver additional value to our shareholders. In conjunction with the implementation of our plan, we increased our annual dividend rate by 20% to $1.20 per share (on a pre-special-distribution basis), emphasizing our confidence in the benefits of our plan and the REIT conversion."

Timber Segment

First quarter 2006 timber segment sales totaled $41.9 million, a 22.0 percent decrease compared with sales of $53.7 million in the first quarter of 2005. Logging operations at the company's nine tree farms in Washington and Oregon were hampered by unusually wet weather conditions throughout the Pacific Northwest. As a result, sales of 55.9 million board feet in the first quarter were not proportionate to the company's original planned full year sales of 250-260 million board feet. Timber segment operating profit totaled $17.6 million, including $1.4 million in allocated non-recurring advisory fees and REIT conversion expenses, compared with operating profit of $26.2 million in the same period last year.

Paper and Paperboard

The company's paper and paperboard segment recorded first quarter sales of $66.6 million, a 4.3 percent decline compared with sales of $69.6 million in the first quarter of 2005. The segment incurred $3.5 million in allocated non-recurring advisory fees and REIT conversion expenses, contributing to an operating loss of $9.4 million in the first quarter of 2006 compared with an operating loss of $2.3 million in the first quarter of 2005. Volume declines from lower export sales were partially offset by increases in average prices. Compared with last year's first quarter, costs of energy and labor per ton of production increased 17.6 percent and 11.6 percent, respectively, primarily due to the effects of higher fuel prices and increased wages and benefits. Fiber costs increased 9.5 percent as wet weather hampered logging operations throughout the region, creating supply shortages at the sawmills from which the company purchases the majority of its fiber.

Converted Products

The company's converted products segment reported first quarter 2006 sales of $111.6 million, up 3.8 percent compared with sales of $107.5 million in last year's first quarter, reflecting increased volume and higher average prices. The segment incurred $6.2 million in allocated non-recurring advisory fees and REIT conversion expenses which, together with increased costs of paperboard, and higher labor and administrative costs, contributed to an operating loss of $14.7 million compared with an operating loss of $4.9 million in last year's comparable period.

Selling, Administrative & General

First quarter 2006 selling, administrative and general expenses totaled $25.3 million compared with $22.1 million in last year's comparable period. This 14.5 percent increase primarily reflects higher consulting costs associated with Sarbanes Oxley, legal and audit fees, costs associated with the company's enterprise resource planning system implementation and higher salary, wages and benefits.

Advisory Fees, REIT Related Costs and Other Expenses

During the first quarter, the company recognized a total of $11.1 million on a pre-tax basis in non-recurring advisory fees and REIT conversion costs, which were allocated to the company's three operating segments. In addition, the company wrote off $2.7 million on a pre-tax basis of debt and equity issuance costs, included in "other expense", related to common stock and debt securities that the company had previously expected to issue in early 2006. Instead of that issuance of common stock and debt securities, the company is pursuing and has obtained commitments for bank financing.

Interest Expense

Interest expense for the first quarter of 2006 totaled $8.6 million compared to $9.2 million in the first quarter of 2005. The decrease reflected lower outstanding debt balances and lower interest rates on the new 5-year, $400 million senior secured credit facility put in place in December 2005, which the company used to refinance its higher interest senior notes and the balance of its previous credit facility.

Provision (Benefit) for Taxes

The company recorded a benefit for income taxes of $6.3 million in the first quarter of 2006, representing an effective tax rate of approximately 36 percent, compared to a tax provision of $3.7 million in last year's comparable period.

For federal tax purposes, the company's election to qualify as a REIT will be effective January 1, 2006. As a REIT, the company is generally not subject to corporate income taxes on income and gains from investments in real estate, including proceeds from the sale of standing timber, to the extent that it distributes such income and gains to its shareholders. The company expects to distribute to shareholders all of its 2006 income and gains from investments in real estate. Longview TRS will continue to be subject to corporate-level income tax on its earnings.

For financial reporting purposes, the company's deferred tax liabilities and deferred tax assets related to its REIT qualifying activities will be eliminated after the company makes its pre-REIT earnings and profits (E&P) purge as part of a special distribution to shareholders. This one-time reduction of net deferred tax liabilities incurred prior to January 1, 2006, will reduce tax expense by approximately $8.1 million in the period during which the special distribution occurs.

If the company had reported as a REIT for the three months ended March 31, 2006, the benefit for taxes on income would have been approximately $16.6 million, a positive difference of $10.3 million from that reported in the Consolidated Statement of Operations. The $10.3 million difference is comprised of the $8.1 million of net deferred tax liabilities as of December 31, 2005, a $2.1 million benefit on REIT income for the three months ended March 31, 2006 that would not have been taxed, and other net differences.

Capital Expenditures and Debt

Capital expenditures totaled $6.5 million during the first quarter of 2006 compared with $12.3 million in last year's first quarter. The company expects capital expenditures for 2006 to total approximately $40 million to $50 million including timber purchases. Borrowed debt of $429.0 million at March 31, 2006, was virtually unchanged from December 31, 2005. The company ended the first quarter with a cash balance of $14.3 million an increase of $12.7 million from December 31, 2005.

Increased Dividend

On April 4, 2006, the company paid a cash dividend of $0.25 per share. This represented the first quarterly dividend to be paid under the company's REIT dividend policy. On April 17, in connection with the company's announcement of an improved operating plan designed to enhance and accelerate the delivery of shareholder value, the company announced an initial 20 percent increase in the annual cash dividend rate to $1.20 per share (excluding the effect of shares to be issued in the special distribution).

2006 Outlook

In addition to the tax and interest benefits anticipated from the REIT conversion, the company's improved operating plan is expected to generate a substantial increase in cash flow in 2006 and beyond by accelerating the company's timber harvest rate, remaining consistent with Sustainable Forestry Initiative (SFI) practices; implementing a program to monetize the company's higher and better use (HBU) lands; and restructuring the company's manufacturing operations, including exploring the potential divestiture of the company's sawmill and select converting plants.

Consolidated Cash Provided By Operations

The company expects 2006 consolidated cash provided by operations to be $130 million to $145 million, excluding the impact of $25 million to $30 million of non-recurring costs associated with early debt retirement, advisory fees and REIT conversion expenses. 2006 consolidated cash provided by operations including the effect of those items is expected to be $100 million to $120 million.

Timber Segment

The company has begun to implement an accelerated harvest schedule, consistent with Sustainable Forestry Initiative (SFI) practices, as a primary component of its improved operating plan. As a result, the company now expects to achieve log sales of 280 to 295 million board feet in calendar 2006 compared to its original sales target of 250 to 260 million board feet. Strong housing market demand and increased demand from new Pacific Northwest sawmills is expected to result in stable or increasing log prices throughout the remainder of the year. The company has also increased its efforts to monetize its higher-and-better-use (HBU) lands and expects to generate $4 to $5 million in incremental cash flow from sales of such acreage during the balance of 2006. Currently, eight HBU parcels with a combined appraised value in excess of two million dollars are actively for sale. Partially offsetting these favorable developments, the company believes higher fuel prices will continue to negatively impact logging costs.

Paper & Paperboard

The company expects a strong U.S. economy to drive demand and provide a favorable pricing environment for its linerboard and kraft paper. Price increases on domestic linerboard of $40 per ton in January 2006 and $50 per ton in April have been implemented. The January increase will be reflected in all months of the second quarter and both increases are expected to benefit segment results throughout the second half of the year. The company expects capacity utilization rates at its Longview mill to average in excess of 90 percent during the remainder of the year based on anticipated continuation of strong demand and the rationalized industry-wide supply environment. The company expects utilization rates, together with effective use of alternative fiber and energy sources and operating efficiencies, to reduce costs below those in the first quarter.

Converted Products

The company expects favorable agricultural conditions in the Pacific Northwest and the generally strong U.S. economy to generate increased demand for its converted products over the remainder of 2006. The segment's 2006 financial results are expected to benefit from continued operating improvements, price increases the company implemented in March and additional price increases it plans to implement in June following the linerboard price increases mentioned above. The company's improved operating plan includes exploration of the potential divestiture of up to eight of its central and eastern region converting plants, proceeds from which would primarily be used to pay down debt. However, because of the unpredictability of the timing of such potential divestitures, no provision is assumed in the company's outlook at this time.

REIT Conversion

The company currently expects to complete the last major step of the REIT conversion process by September 30, 2006, with the payment of a special taxable distribution to shareholders totaling approximately $385 million, of which up to $77 million, representing approximately $1.50 per share, is expected to be distributed in cash, with the remainder to be distributed in shares of the company's common stock.

The company recently secured commitments for $300 million in term loan financing from Bank of America, N.A. and Goldman Sachs Credit Partners L.P. which it intends to use to repay the $215 million outstanding principal balance of its high-interest senior subordinated notes and related fees and expenses, and to fund the payment of the cash portion of the special distribution to shareholders.

About Longview Fibre Company

Longview Fibre Company is a diversified timberlands manager and a specialty paper and container manufacturer. Using sustainable forestry methods, the company manages approximately 587,000 acres of softwood timberlands predominantly located in western Washington and Oregon, primarily for the sale of logs to the U.S. and Japanese markets. Longview Fibre's manufacturing facilities include one of the largest pulp-paper mills in North America at Longview, Washington; a network of 15 converting plants in 12 states; and a sawmill in central Washington. The company's products include: logs; corrugated and solid-fiber containers; commodity and specialty Kraft paper; paperboard; and dimension and specialty lumber.

Longview Fibre press releases, SEC filings and Annual Reports are available at no charge through the company's Web site at www.longviewfibre.com.

SOURCE: Longview Fibre Company




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