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Rayonier Third Quarter Income Up Sharply

Oct. 23, 2007 - Rayonier today reported third quarter net income of $71.5 million, or 90 cents per share. This compares to $33.3 million, or 42 cents per share, in second quarter 2007 and $55.1 million, or 70 cents per share, in third quarter 2006.

There were no special items in this quarter. Second quarter results included a special item charge of $10.1 million, or 13 cents per share, for timber damaged by forest fires. Third quarter 2006 included a special item gain of $5.3 million, or 7 cents per share, for IRS audit settlements including associated interest expense."

Lee M. Thomas, Chairman, president and CEO said, "Our financial performance reflects the strength and diversity of our core businesses. Real Estate and Performance Fibers provided strong operating results and cash flows. In Timber, cash generation remained solid due to our ability to shift product mix in response to strong pulpwood demand. In our Real Estate business, we benefited from continued interest in our rural properties, as evidenced by our recent $46.6 million, 3,100 acre land sale in Florida.

Sales of $334 million were $34 million and $22 million above second quarter 2007 and third quarter 2006, respectively.

For the nine months ended September 30, cash provided by operating activities was $264 million, or $41 million above the comparable 2006 period. Cash available for distribution (CAD) of $217 million was $70 million above 2006, primarily due to improved earnings. (CAD is a non-GAAP measure defined and reconciled to the nearest GAAP measure in the attached exhibits.)

Debt of $622 million was $37 million below year-end 2006, while the debt-to-capital ratio of 38.7 percent improved from 41.7 percent. Cash and cash equivalents of $92 million were $52 million above year-end 2006.

Timber

Sales of $50 million and operating income of $12 million were $6 million and $9 million below second quarter, respectively, reflecting reduced demand for sawlogs and lower salvage value for fire-damaged timber, somewhat offset by favorable demand for pulpwood. Compared to third quarter 2006, sales increased $6 million largely due to increased pulpwood and salvage timber volumes, while operating income declined by $5 million due to product mix.

Real Estate

Sales of $56 million and operating income of $48 million were $27 million and $24 million above second quarter, respectively. Compared to third quarter 2006, sales and operating income each increased $10 million. For both comparative periods, the improvements were driven by the recent $46.6 million sale of 3,100 acres in Florida to an industrial buyer.

Performance Fibers

Sales and operating income of $189 million and $43 million, respectively, were $21 million and $12 million above second quarter, and $25 million and $22 million above third quarter 2006. As compared to both prior periods, the improvements were primarily driven by increased pricing and volume, coupled with lower costs.

Wood Products

Sales of $24 million were comparable to second quarter. An operating loss of $2 million was unfavorable by nearly $1 million to second quarter. Compared to third quarter 2006, sales declined $2 million although the operating loss was favorable by nearly $2 million, as cost reductions more than offset lower prices.

Other Operations

Sales of $15 million were $8 million below second quarter and $17 million lower than third quarter 2006, reflecting the closure of the company's wood products trading business in the Northwest U.S. Operating results for the quarter were essentially breakeven.

Other Items

Corporate expenses were $9.0 million, up $0.4 million from second quarter and $1.9 million above third quarter 2006, primarily due to stock-based and other incentive compensation expenses.

Interest expense of $15.0 million was $1.4 million above second quarter and $4.0 million above the prior year period largely as a result of $2.3 million of interest related to a tax reserve adjustment for the 2003 and 2004 IRS audits and higher average debt balances.

The third quarter effective tax rate before discrete items was 9.7 percent, compared to 14.2 percent in the 2006 comparable period primarily because of higher REIT income. Including discrete items, the effective tax rate was 9.6 percent compared to 4.8 percent in third quarter 2006.

Debt Offering

On October 16, Rayonier TRS Holdings, Inc. (TRS) closed on $300 million of 3.75% Senior Exchangeable Notes due 2012, with a 22 percent exchange premium. In order to limit potential dilution to Rayonier shareholders from the possible exchange of notes, TRS and Rayonier entered into separate exchangeable note hedge and warrant sale transactions which will have the effect of increasing the exchange premium from 22 percent to 40 percent, or to $62.90 per share. A portion of the proceeds will be used to refinance higher cost debt, generating significant interest savings.

Outlook

"We expect another good year, with 2007 earnings between $2.25 and $2.32 per share, excluding special items," Thomas said. "The diversity of our core businesses should position us to generate favorable results through a range of economic conditions."

"In Performance Fibers, we should realize strong earnings and cash flow as a result of our market-leading position in high-value cellulose specialties. In Real Estate, we expect to receive entitlements on 3,300 acres in coastal Georgia in the near term. In addition, we are seeing continued interest from industrial buyers for rural properties, especially where population growth is driving infrastructure needs. In Timber, our ability to manage product mix allows us to take advantage of strong pulpwood demand while waiting for sawlog markets to recover. The success of our $300 million convertible debt offering provides us lower interest cost and greater flexibility to pursue strategic growth initiatives. In all, we're well positioned to deliver solid results for our shareholders."

SOURCE: Rayonier




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