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Rayonier 2nd Quarter Earnings Rise on Demand, Pricing

July 25, 2006 (Press Releaase) - Rayonier today reported second quarter income from continuing operations of $42.8 million, or 55 cents per share. This compares to $23.3 million, or 30 cents per share, in the first quarter and $41.6 million, or 54 cents per share, in second quarter 2005. Second quarter 2006 included a special item gain of $6.5 million, or 8 cents per share, on the sale of a portion of the company's investment in a New Zealand timberland consortium. There were no special items in the first quarter, while second quarter 2005 included a tax benefit of $7.2 million, or 10 cents per share, resulting from an IRS audit settlement.

Net income equaled income from continuing operations for both the second and first quarters of 2006. Net income for second quarter 2005 was $16.9 million, or 22 cents per share, which included a discontinued operation loss of $24.7 million, or 32 cents per share, almost entirely due to a write-down of the company's medium-density-fiberboard business.

Lee Nutter, Chairman, President and CEO, said: "Second quarter results reflect the strength and balance of our three core businesses as demand and prices remained strong, particularly for cellulose specialties and U.S. timber."

Second quarter results, excluding special items, were above the first quarter primarily due to increased volumes and prices for Northwest timber and cellulose specialties. Compared to second quarter 2005, earnings were up due to higher prices and Northwest timber volumes, partly offset by increased performance fibers manufacturing costs and lower lumber prices.

Sales for the second quarter of $312 million were $35 million and $22 million above first quarter 2006 and second quarter 2005, respectively.

Cash provided by operating activities of $133 million for the six months ended June 30 was $10 million above the 2005 comparable period primarily due to lower working capital requirements partly offset by reduced earnings. For the same period, Cash Available for Distribution (CAD) of $82 million was $14 million below 2005 principally due to capital spending for a major energy cost reduction project partly offset by increased cash provided by operating activities. (CAD is a non-GAAP measure defined and reconciled to GAAP in the attached exhibits.)

Debt of $557 million and the debt-to-capital ratio of 38.6 percent at quarter-end were comparable to year-end 2005. Cash at June 30 was $165 million.

Timber

Sales of $61 million and operating income of $30 million were $7 million and $6 million above first quarter, respectively, primarily due to higher Northwest volume and prices. Compared to second quarter 2005, both sales and operating income increased $7 million principally due to higher prices and Northwest volume.

Real Estate

Sales of $18 million and operating income of $11 million were $5 million and $1 million above first quarter, respectively, due to a significant increase in the number of rural acres sold. Compared to second quarter 2005, sales were up $3 million while operating income was essentially unchanged due to a higher proportion of rural versus development acres sold.

Performance Fibers

Sales of $166 million and operating income of $16 million were $20 million and $5 million above first quarter, respectively. The results reflect higher prices and volumes partly offset by increased costs. Compared to second quarter 2005, sales increased $13 million mainly due to higher cellulose specialties volume and prices. However, operating income decreased $3 million as higher raw material and energy costs more than offset increased sales.

The company recently announced that it has secured long term contracts into 2011 with its key customers for nearly 80 percent of its high-value cellulose specialties production, representing almost 2 million metric tons and more than $2 billion in revenue at current pricing.

Wood Products

Sales of $32 million were $1 million above first quarter while operating income of $2 million decreased $1 million. The improvement in sales was mostly due to higher volume partly offset by lower prices. Operating income declined principally due to lower prices partially offset by reduced manufacturing costs. Compared to second quarter 2005, sales and operating income were both down $4 million primarily due to lower prices.

Other Operations

Sales of $35 million were $3 million above first quarter while essentially break even operating income improved by $1 million due to stronger trading activity and coal royalties. Compared to second quarter 2005, sales and operating income improved $4 million and $1 million, respectively, mainly due to stronger trading activity.

Other Items

Corporate expenses of $7.1 million were $2.4 million below first quarter and $1.2 million below second quarter 2005, primarily due to lower stock-based incentive compensation.

Intersegment eliminations and other expense of $0.7 million was $1 million unfavorable to first quarter largely due to an increase in disposition reserves, but comparable to second quarter 2005.

Interest expense of $11.9 million was comparable to first quarter and $0.9 million below second quarter 2005 mainly due to lower debt.

Interest and other income of $1.8 million was comparable to first quarter, but $0.8 million above second quarter 2005 primarily due to higher interest income.

Excluding discrete items, the effective tax rate for the quarter was 14.0 percent compared to 16.4 percent in the first quarter largely due to foreign earnings taxed below the U.S. statutory rate. The second quarter 2005 rate was 14.1 percent. Through June 30, the effective tax rate, before discrete items, was 14.9 percent compared to 15.7 percent for the comparable period last year mainly due to U.S. taxes recorded on undistributed foreign earnings in 2005 (see Schedule J for details).

Outlook

The company said third quarter 2006 results are expected to be above the second quarter (excluding special items), due to higher real estate sales partly offset by seasonally lower Northwest timber volume. Also, earnings are anticipated to be above third quarter 2005 primarily due to increased real estate sales and higher cellulose specialties prices partly offset by lower lumber prices and higher performance fibers manufacturing costs.

Nutter said: "As we previously indicated, the second half of the year should be much stronger than the first due to increased real estate revenues - particularly from transactions involving our high-value development properties - and stronger performance fibers operating income. As a result, we still expect full-year earnings to be above 2005, excluding special items."

About Rayonier

Rayonier is a leading international forest products company with three core businesses: Timber, Real Estate and Performance Fibers. It owns, leases or manages 2.5 million acres of timber and land in the U.S., New Zealand and Australia. The company's holdings include approximately 200,000 acres with residential and commercial development potential along the fast-growing Interstate 95 corridor between Savannah, Georgia, and Daytona Beach, Florida. Its Performance Fibers business is the world's leading producer of high-value specialty cellulose fibers. Approximately 40 percent of the company's sales are outside the U.S. to customers in more than 50 countries.

SOURCE: Rayonier




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