Q3 2019 Earnings Call
Welcome and thank you for joining ran years third quarter 2019 teleconference call. At this time all participants are in a listen only mode.
During the question and answer session. Please press star one on your Touchtone phone.
Today's conference is being recorded if you have any objections you may disconnect at this time and now I will turn the meeting over to Mr., Mark MCU Senior Vice President and CFO , Sir you may begin.
Thank you and good morning, welcome to Rayoniers Investor teleconference, covering third quarter earnings our earnings statements in financial supplement released yesterday afternoon and are available on our website Iranian dot com.
I'd like to remind you then in these presentations. We include forward looking statements made pursuant to the safe Harbor provisions of Federal Securities laws, Our earnings release and Form 10-K filed with the FCC lists some of the factors that may cause actual results to differ materially from the forward looking statements. We may make their also referenced on page two of our financial supplement.
Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure in our earnings release in supplemental materials.
That lets start teleconference with opening comments from David units, President and CEO , Dave Thanks, Mark.
First I'll make some high level comments before turning it back over to Mark to review our consolidated financial results. Then we'll ask Doug long Senior Vice President of Forest resources to comment on our U.S. and New Zealand timber results and following the review of our timber segments, Mark will discuss our real estate results as well as our outlook for the remainder.
At 2019.
We generated adjusted EBITDA of $43 million and break even U P. S for the third quarter, our third quarter results were well below last quarter and the prior year quarter, primarily due to the timing of real estate transaction activity as anticipated and discussed in our last earnings call.
And our southern timber segment volumes declined modestly versus the prior year quarter, well average prices were also lower due to weaker export demand and an oversupply of saw timber in the domestic market. The pulpwood market also experienced some pricing pressure due to excess supply from dry ground conditions during the quarter.
Despite these near term headwinds we remain on track to achieve record adjusted EBITDA in our southern timber segment for the full year 2019, bolstered by very strong year non timber income.
And that Pacific Northwest timber segment, we continued to contend with a soft market conditions, resulting from reduced to export demand and challenging lumber markets.
And on prior calls we've deferred plan harvest volume this year in response to these unfavorable market conditions, which was further impacted results.
In our New Zealand timber segment, we generated a modest increase in harvest levels versus the prior quarter, although pricing declined significantly as China demand weekend, and competitive log and lumber supply from Europe salvage European salvage timber increased significantly.
Well, we've seen a modest improvement in export pricing for mid year lows pricing still remains well below first half averages.
Lastly, real estate activity was relatively light this quarter well weighted average pricing remained strong due to a significant improve development transaction.
Overall, we were on track to achieve full year adjusted EBITDA toward the lower end of our prior guidance.
Let me turn it back over to Mark to review, our third quarter financial results.
Thanks, Dave let's start on page five with our financial highlights sales for the quarter totaled $156 million well operating income was $11 million and net loss attributable to Rainier was your point $4 million translating to roughly breakeven EPS for the quarter.
Third quarter, adjusted EBITDA of $43 million was significantly below the prior year quarter, adjusted EBITDA of $83 million, primarily due to a significantly lower contribution from our real estate segment as well as weaker results in our Pacific Northwest and New Zealand timber segments.
On the bottom of page five we provide an overview of our capital resources and liquidity at quarter end as well as a comparison to prior periods.
Cash available for distribution or see a de for the first nine months of the year was $116 million compared to $222 million in the prior year period, primarily due to lower adjusted EBITDA higher capital expenditures and higher cash taxes paid partially offset by lower cash interest paid.
Reconciliation of see 80 to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We closed the quarter with $57 million of cash and $975 million of debt, our net debt of $918 million represented 20% of our enterprise value based on our closing stock price at quarter end I'll now turn the call over to Doug's to provide a more detailed review of our timber results.
Thanks, Mark good morning.
Let's start on page nine southern timber segment.
Adjusted EBITDA in the third quarter of $23 million was $5 million and $400000 unfavorable compared to prior quarter and the prior year quarter respectively.
Third quarter harvest volume of approximately 1.3 million tons was flat compared to prior quarter, and 4% lower compared to prior year quarter.
The decline in volumes due impart to weaker sawtimber demand, particularly in export markets.
Quarterly volumes. This year I've also been impacted by the outsized stumped or most of which branch in the first quarter of this year.
The average pine pulpwood stumpage prices, a $15.53 per tonne was 9% and 7% on favorable compared to prior quarter in the prior year quarter, respectively.
The reduction in price compared the prior quarter due to an increasing supply as a result of dry ground conditions combined geographic mix as we harvested less volume from our strongest public market.
The reduction versus the prior year quarter was driven primarily by geographic mix.
The average pine sawtimber price of $23.16 per tonne was 10% and 9% unfavorable compared to the prior quarter in the prior year quarter, respectively.
The decline in pricing compared to both prior periods was primarily due to weaker export and domestic them as domestic demand, resulting from continued Chinese tariffs on southern yellow pine logs.
Coupled with an increase in tariffs on southern yellow pine lumber, which impacted domestic production.
Our non timber revenue team continued to deliver strong results year to date revenue of $27 million is 29% higher and the same period in the prior year.
Primarily as a result of increased recreational license income and pipeline isn't sales.
Now moving so the northwest timber segment on page 10.
Adjusted EBITDA of $3 million.
What's happened late dollars favorable compared to prior quarter and $7 million unfavorable compared to prior year quarter.
Third quarter horse line of 261000 tonnes was 4% higher than the prior quarter and 16% lower the prior year quarter.
That's true attentions with China continued 2019 your date log export volumes have declined to a 10 year low.
Resulting in continued pressure on pricing.
However, we've recently seen a modest uptick in demand, which should provide for increased volumes in Q4.
The average delivered sawtimber price of $78.26 per ton.
Flat compared to prior quarter, and 24% unfavorable compared to the prior year quarter.
Following the significant decline in pricing late last year. When do you just trying to trade dispute heated up pricing has been relatively stable over the last four quarters.
The average delivered pulpwood prices, a $37, an 87 cents per tonne was 10% and 23% unfavorable compared to prior quarter and the prior year quarter respectively.
The change in pulpwood prices compared to the park water, that's probably driven by excess supply in the market a small diameter export quality logs were downgraded to domestic pulp logs due to the weakening export them in.
The additional variance relative to the prior year was driven by reduced export demand for chips, which you will increase fiber supply for domestic mills.
In summary, we can do see various negative impacts related to the U.S. trying to trade dispute across all product categories in the region.
Page 11 shows results and key operating metrics for our New Zealand timber segment.
Adjusted EBITDA in the third quarter of $18 million was $2 million and $6 million unfavorable compared to prior quarter in the prior year quarter, respectively.
Third quarter horse volume of 754000 tonnes was 10% and 14% higher than the prior quarter prior quarter respectively.
The increase in volume in the third quarter was primarily due to export vessel timing and increased domestic demand.
Some competitors harvesting and lower margin force curtailed operations due to fall in export prices.
The average delivered exports software price $95.51 per tonne was 15% and 17% unfavorable compared to prior quarter prior quarter respectively.
Many factors have contributed to the client and pricing, including alternative log and lumber spike from Europe slower consumption of logs and increased deliveries checked it started third quarter, which you'll elevated port inventories.
However, the situation generally improved towards in the third quarter, that's consumption increased and suppliers from higher cost regions significantly reduced shipments.
Customers have now had the opportunity trial European spruce salvage logs and our market intelligence suggest that while they're satisfactory for construction lumber.
He did not worked well for her and uses such as plywood moldings, and furniture, which radiata pine as preferred.
As a result by the end of third quarter beat up on inventory at Chinese ports had dropped by almost 30%.
The average domestic sawtimber price of $75.29 per ton and U.S. dollar terms was 9% and 7% unfavorable.
Our quarter in the prior year quarter, respectively.
Partially due to fall in the New Zealand U.S. exchange rate, but also due to the impact of declining export prices.
No thats domestic pricing tends to lag behind export pricing as lots applies to bring it back in domestic markets when export prices come uncompetitive.
Excluding the impact of foreign exchange rates domestic pricing and there's the on dollars was 7% and 4% of favorable compared to prior quarter in prior quarter respectively.
The average domestic pulpwood price of $38.47 per tonne was 2% unfavorable compared to prior quarter, and 2% favorable compared to prior year quarter <unk>.
Zealand dollars pulpwood prices were flat compared to prior quarter, but 6% favorable compared the prior year quarter.
Now turning segment, we generally a breakeven results which were.
$200000 favorable compared the prior quarter and Threeone thousand dollars unfavorable to the prior year quarter.
I'll now turn it back over to Mark to come about real estate results and outlook for them enter the year.
Thanks, Doug as highlighted on page 12, our real estate segment had a relatively light third quarter.
Third quarter sales totaled $9 million on roughly 1300 acres sold at an average price of $6500 per acre.
$400000 a deferred revenue was also recognized in the quarter due to the completion of post closing obligations on prior improved to develop development sales adjusted EBITDA for the quarter was $5 million.
Sales in the improved development category totaled $4.5 million, driven primarily by the $4.2 million sale of a 16 acre grocery retail site in our Wildlight development project since project inception, we have realized total commercial sales and wildlight of roughly $16 million on 76 acres sold at an average price of 215000 dollar.
As per acre.
Residential momentum at Wildlight also continues to be strong the development of our next phase of 122 residential lots is well underway with construction scheduled to be substantially completed by the end of Q1 2020.
And the rural category sales totaled $4 million on roughly 1100 acres sold an average price of $3400 per acre.
Rural sales comprised over 20 transactions across our southern footprint.
Lastly, sales in the non strategic and Timberlands category total zero point $4 million, consisting of 200 acres at an average price of $2100 per acre.
Now moving onto our outlook for the balance of the year.
As noted in our earnings release, we expect to achieve full year adjusted EBITDA toward the lower end of our prior guidance of $245 million to $265 million market conditions continued to be challenging across our timber segments driven in large part by the decline in the China export markets and our southern timber segment, we are reducing our full year volume guidance to range.
You have six to 6.1 million tons as we pulled back harvest activity in certain markets impacted by the decline in sawtimber demand.
Based primarily on this lower volume estimate we expect that full year adjusted EBITDA in our southern timber segment will be modestly below our prior guidance.
And our Pacific Northwest timber segment, we expect to achieve full year harvest volume inline with our prior guidance of 1.2 million tons and adjusted EBITDA toward the higher end of our prior guidance.
While market conditions through the first nine months had been very difficult, we're starting to see some momentum in demand, which should contribute to stronger results in Q4.
And our New Zealand timber segment, we remain on track to achieve full year harvest volumes at 2.7 to 2.8 million tons, while we expect to achieve adjusted EBITDA toward the lower end of our prior guidance.
Pricing in New Zealand has improved modestly from mid year lows, but still remains well below average pricing in the first half of the year.
Lastly, in our real estate segment, we expect a strong fourth quarter and remain on track to achieve our prior full year adjusted EBITDA guidance for the segment.
I'll now turn the call back today for closing comments.
Thanks Mark.
While market conditions across or timber segments had been challenging we remain focused on our core objectives of generating industry, leading returns and building long term value per share to this end, where we were pretty active with respect to capital allocation initiatives in the third quarter during the third quarter, we closed seven acquisitions totaling two.
23500 acres for an aggregate value of 55, and a half million dollars. The two largest transactions closed include approximately 4100 acres in New Zealand acquired for $29.1 million and 10000 acres located in coastal Florida acquired for $14.8 million.
The New Zealand acquisition has an older age class is heavily stocked with merchantable timber and is located in strong markets, where the good mix of domestic and export log demand. The Florida acquisition has a relatively young age class profile, but is situated within one of our strongest markets and as highly complimentary to our existing footprint.
Year to date acquisitions through the end of the third quarter totaled nearly 38000 acres for an aggregate value of $82 million.
Our acquisition so far this year reflect our disciplined growth strategy, which is focused on select acquisitions that upgrade our land portfolio grow our sustainable harvest and are accretive to long term cash flow generation. We've also enjoyed success through direct negotiations of smaller bolt on acquisitions and some.
Of our top target markets. We currently have a good pipeline of opportunities and expect timberland acquisitions activity to remain robust going into next year.
During the third quarter. We also took advantage of the opportunity to to repurchase $8.4 million of our stock at an average price of $26.34 per share, which we believe is below our intrinsic value. We continue to be keenly focused on capital allocation, particularly given the volatility.
That we've seen in the market and the opportunities that this volatility can create we will continue to actively evaluate all capital allocation alternatives, including acquisitions in buybacks with a focus view toward building long term value for our shareholders.
In conclusion, I'm very proud of our team for the way that weve executed operationally amidst a challenging market backdrop. During the first nine months of the year US China trade dispute continues to generate some challenging market headwinds for our business, but I, Sir but I remain confident.
In the long term value potential of our underlying assets and the commitment of our team toward maximizing that value potential.
This concludes our prepared remarks, we'll now turn the call back over to the operator for questions before we turn it back the operator, just one quick correction I believe we said that third quarter harvest volumes in New Zealand were 14% higher than the prior quarter that should have been 4% higher than the prior prior year quarter.
Thank you.
Thank you and we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one.
Our first question comes from Anthony Pettinari City, you May go ahead.
Good morning, guys. This is actually Randy tole sitting in for Anthony.
Or any just wanted to folk I just wanted to focus on the southern pine sawtimber prices, which fell 9% mcwhorter think of a little surprising to us given the indexes were basically flat can you just talked about what happened more.
I had been there and a little bit more detail was that something that was you know right near specific or localized to a specific region any detail would be helpful.
Sure This is Doug.
Quarter over quarter, Kmart, south wide saltman prices.
Typically decreased net decrease told last 15 years from Q2 to Q3, so it's pretty normal trend. We see however, our sawtimber prices were simply impacted by just count associate with the continuance of our Alabama, Georgia export yards.
Sell some volume in the yard essentially pulpwood prices so during the quarter at the beginning this quarter, we decided that dumb.
Things have gotten pretty rough and export markets and so we certainly saw the collapse of the southern yellow pine exports from south as I've exporters', such as ourselves looked our trade winds and ceased operations that did have an impact that was kind of outsized wont be normal.
But as important also intermark, south or what the 5% to 7% correction in the Atlantic Coast, Baltimore markets and those marks had to be aligned themselves with increased about sawlogs coming in so we did have something that was a longer Atlantic coast. It will it change during the quarter. The market appeared to found its new balance, though and we don't expect someone a drop in Q4.
We actually anticipate some modest sawtimber price improvements and some are markets, but however has been the case for the past years, our Q4 sales out of Arkansas, well again, just simply a function butter and that partially offset somewhat anticipated games. So we did have a kind of a unique occurrence that happened in the quarter with a lot of thats, where operations shutting down and Atlantic coast.
Okay. That's helpful. Thank you and then just switching gears to New Zealand I think you said radiata pine inventories at Chinese ports, a 30% lower than average.
Seen a pickup in demand in October and how are those prices trending first the threeq you average.
Thank you.
Yeah. That's a great question. So yeah, we saw that from hi, almost finally in tons in Q1 trying to put inventories are protected around 3.57 times in September .
And finally mentor as you mentioned, which for a drop in was 30% in September so we're getting see a positive correction in pricing.
The inventory demand ratio something we tracked closely as falling from above two months, which is an oversupplied to around 1.6 months, which brings us back into more supplied about situation.
And so the reason we seem to that improvement the ratio our that significant decrease from marginal suppliers, such as South America and as I mentioned, the tariff constrained yourself.
Let me just on production and block trains from Europe on the one belts Road initiative from 300 150 per month during lumber.
And then a significant increase in plywood manufacturing, which typically favors radiata man. So in those those results have resulted in a meaningful price appreciation in the last month.
Okay. Thank you that's very helpful I'll turn it over.
Thank you. The next question comes from Ketan Mamtora with BMO capital markets. You May go ahead.
Thank you good morning, everyone.
Loss.
Maybe just.
There it is right now.
Yeah.
At the highs any sense.
We're still negotiating obviously as things go through but I can I can tell you that we've seen high single digit increases.
Got it Okay. That's very helpful and then.
Just.
European Fine.
It seems like it is working with some obligations.
Some of the obligation, but as it stands right now.
That you all have done any perspective.
Is it.
The out and then.
What kind of impact.
Log operations.
North West and then.
Implications potential.
The U.S. and.
Our southern timber position.
Yes, it's a great question as we mission our teach into.
You know.
We're still working on trying to understand the exact impacts of of European salvage and what's going on to be quite honest, we that we don't want to work on it and we're still focused on what the impact. So theres a lot of variation we've been told that for lot of the product uses that effort spend on the stone for six months, it's no longer ballads, and especially what has been.
Import over to China, So theres bearing estimates of everything from two to five years of how much volume can be out there would be harvested. So it's really a moving target at this point in time, we're trying to understand better, but we've been really pleased to find out that while customers chase the cheap would to start with their realizing that it's not meeting their needs and lot of the high end radiata demand areas. So.
It's been a positive impact for us and really seeing consumption increased radiata as we go forward.
With respect to lumber that I don't have as much much detail on unfortunately.
Okay that can I can speak to one thing that's important to keep in mind is as you think about lumber.
Yes, just like Nols need to find a home for residuals. They also need to find a home for low grade.
Lumber and historically a lot of that low grade lumber has flowed to China and so we're seeing kind of a second quarter effect, where you have that low grade lumber.
Having a harder time, finding a home as it ripples through the market and I think you also you also probably are going to have some some product substitution issues within European markets that may have a tendency to push more.
Lumber than otherwise would be the case into into us markets and so those are some of the things that were.
We're keeping keeping an eye on but this is this will still be this is going to take some time to fully understand and kind of follow some of those second third order effects. Yeah. I think one thing thats important that I forgot to add I mentioned earlier in my my text as.
And the comments that we've seen a reduction in those block trains from 300 150 month, so half and a lot that as we mentioned our teach and what was subsidized I'm getting that lumber back across the China. Other places. So so we don't know the exact reasons why that's happened, but it's encouraging to see that there's been a 50% reduction in those trains on that lumber crossed.
Alright.
Just a couple of.
Questions.
Uh huh.
China trade dispute <unk>, if you will see a D.
I've been Uh huh.
Things shaking out.
Do you expect things to come back from normal levels pretty soon.
Question.
Rebuilding confidence and trust and it might take some time to get back.
Yeah.
Okay, and I think I think from from our perspective, we're thinking probably more in the latter context I mean this this has become fairly protracted and in some cases sort of an emotional.
The dispute and so I don't see it as a case, where if things ended tomorrow, we see an immediate pick up and I think thats I think that this whole.
The whole specter of log and lumber substitution from the European.
Spruce issue also plays a role in that and so yes. It would certainly be helpful. But I think I think the both.
But those kind of the cultural aspect of this trade dispute as well as the presence of the European volume.
It's going to make it a slower recovery going forward.
One thing I'd add to that I was actually just got back from DC yesterday and was.
I mean with folks in the White House with Nash Economic Council and talk to the phase one deal we're looking at.
Purchase requirements and of up to $50 billion has been mentioned and forest products have gone from 3 billion to 1 billion and trades are about $2 billion opportunities there and so one thing that could change it would be if there are arms put into reach those $50 billion. It seem that them you know logs would be a good contributor that and then we'd look at whether it be.
Just targets and so we may see a quicker than normal recovery than we would but thats early days, that's literally having just come up back from DC meeting with the White House. So we still have a lot of room to work there, but there are some talks about having actual target purchases that would be above currents and so that could be a positive that we like said haven't factored in and news right off the press.
Yeah.
That's.
And then just one last question from my side.
The stress.
Markets.
Yes.
Kind of interesting.
What do you.
Interest is.
You know, what we see that opportunity primarily to leverage our science and technology and the softwood markets. So we're we're probably focused on softwood plantations. That's we think we have the ability to influence growth typically your software plantations. No 20 years in the south to to 40 years in the northwest words heart was often contain.
40, plus years up to 80 years type thing so a slow rotation. So we're we're typically focused more on softwood opportunities.
Got it they have good luck into Wendy.
Thank you.
Thank you.
Question comes from Curt Junior with D.A. Davidson you May go ahead.
Yes, thanks, and good morning, everyone.
First off obviously, some challenging market conditions. This year, if if we're to start thinking about 2020.
Thank you know your harvest expectations would be meaningfully different than where you came into the year in 2019, maybe with.
A little lower on Pacific Northwest because of the China situation or how might we start thinking about 2020 harvest volume.
I don't think were quite ready to start talking about 2020, yet, but as a general sense. You know, we generally have a view of operating at or around our long term sustainable yield and will flex that to some degree based on market conditions, but if you kind of look at that as a starting point our baseline.
Generally going to be in that vicinity give or take.
And could you maybe help us with fourth quarter guide for the Pacific Northwest harvests, I mean kind of implies.
A lot of volume versus what you've done through the first three quarters is that primarily the sort of uptick in export demand that you referenced.
No I'm just again, sorry, what we're seeing as some increased demand as we've had a wetter approach in the fall than normal and so supply is starting to be constrained from the.
I'm kinda nonindustrial private owners and so we've seen increased demand from domestic customers and so what the reason we're looking at increased as some stumpage sales out there that we have that what that increased demand domestically, we're looking to markets and what additional to our deliver cruise.
Okay. That's helpful and then on kind of the expectation for improved Pacific Northwest log realizations. I mean, do you think you know absent any change and the China trade dispute do you think next year that will be pretty well correlated to the domestic lumber market or how much impact.
A stronger year next year on the lumber side have on pricing in your view.
Well certainly you know historically if you go back if you go back to the northwest has enjoyed.
The volume of volume from heading to China since about 2009.
Is when volumes resumed and so a lot of this I think you know in an optionality sense is going to depend on how this trade dispute.
Sorts itself out and if that Doug is describing ends up happening where you have kind of mandated.
Elements of a deal that force more export the northwest is.
It's certainly going to be one of those places that will will benefit from it.
Absent that I do think it will be more correlated to underlying lumber demand and the other thing to kind of keep in mind. As you think about 2019, then there's a lot of noise in 2019 associated with the the a permanent curtailment or the curtailment or permanent closure of capacity.
The in Western Canada.
And what would a lot of people.
Need to recognize is that every time one of those mills was being shut down you had a good six month lag before you really started seeing that in pricing I think we're just now starting to see some of the impacts on lumber pricing associated with those mill curtailments and so all else being equally I think you'd expect.
C.
More balanced lumber market and that should translate into.
Improve lumber pricing as well as as just elasticity from a pricing standpoint on logs.
I would agree I think we've seen over 2 million board feet of permanent.
Closures and British Columbia, another summer thousand million.
Men board feet of tempering Gentleman's, and so that's about 14% of.
Their production and I think that's what we're starting see some potential upside for us and domestic demand.
Okay that makes a lot of sense and then just lastly, going back to southern Sawlog pricing weakness, how much of that might be attributable to volatile weather and some.
You know discombobulated harvest patterns or kind of transitory items, because I thought southern log exports were pretty small percentage of sales in recent quarters and I wouldn't have thought that would kind of have.
Meaningful impact versus let's call it the realizations in the second quarter.
Yeah, Yeah, we did see the dry weather definitely had an impact on sawtimber pricing across the across the south which is bears out in business from our South report. So we did we didn't see an impact on that but we also.
Out of our coastal Resourcing and I'll never Resourcing. It a lot of volume that we're working on wasn't export market. So we'd have some amount of volume that was coming out that was going in those markets and so we did we did the pricing that we had to take like said selling at pulpwood prices had a significant impact on sawtimber pricing.
Okay. So I mean that the export market stays where it is today.
There wouldn't be I guess, much upside just because of that impact or I'm, just trying to figure out.
You know whether <unk>.
The 23 in change is a good way to think about it going forward or if you know it's more.
Situation of domestically this quarter things from a supply demand perspective, where it will out of whack.
Well were recognized what Doug described earlier some of some of that Q3 price was a function of having to basically sell sawlogs at a discount is we curtailed export operation. So there was a fair bit of noise.
That influence that bear that in mind that was not a normal run rate quarter.
Okay. Thanks for the details will turn it over.
Thank you. Our next question comes from Collin Mings with Raymond James You May go ahead.
Thank you just going first up on back to some earlier questions just given where are your into tariffs now I mean, just what do you think led to the acceleration in the shutdown of some of the export operations and again, Dan It sounds like in particular, you have curtailed some of your operations too, but it does sound to be a little bit more broad based what you didn't kind of is the trigger point for that and.
And just how has this volatility on the export markets may be factored into your acquisition underwriting in the coastal markets because I know for now the number of years that's been highlighted.
The favorable attribute of the U.S. out there the particular areas that you're focused in the U.S. south as far as that Optionality.
Sure gone off I'll start with the first first section of that.
Yeah. So.
I think what's happened is.
Almost all of us exporters', particularly folks like Rainer had been exporting for a long time to China one to work through this process with our customers, we had supply chain set up and so.
Basically we were an investment mode and as we thought about it so.
Obviously, the returns weren't great with 25% margin, but we felt like we want to keep those supply channels open and keep things going so we were in investment mode trying to keep that going and so our peers and competitors, but I think finally, everyone kind of got that feeling like okay. This this is not ending soon and how long would keep moving with that and what really added onto that was we were seeing.
Significant slowdowns on kind of the other side in China of getting cargo unloaded inspected and so there was cost that were beyond our control on the tariffs that we just couldn't anticipate and that's what really caused us to say. This is this is getting too painful when you. If you know what tariff and you can understand that you can work around it but when you start.
See on a non tariff trade related things that are impacting your recoveries realizations that was at the point, where we made this those decisions that were tough and having talked several my peers and other groups. That's they felt similarly that it was just can't point, where it was hard to figure out what was going to happen next and calling to your second question regarding underwriting recognize that we're typically.
We were typically doing very long term DCF models and when we think about.
Pricing, we look at some of the the market characteristics, where we look at underlying demand from from known manufacturing customers against the.
The would basin supply and that really helps inform our pricing and I think export export volatility just does not play that meaningful role when we think about it from a from an underwriting standpoint as it relates to price forecasting.
Okay very helpful color on both fronts and then another thing just in the prepared remarks. It was highlighted I think it was hot in the press release to just another strong quarter of non timber income and be U.S. out can maybe just speak the sustainability of that.
Sure Yeah that being obviously this has been an outsized year for us with respect to particularly pipeline easements, but we see this is a very strong business going forward and takes that we'd have more pipelines in the pipeline for upon but we do see opportunities to have another strong year next year. This this will be a peak year, though I can't say, we'd be able to rep.
These years, but still a very strong year when you compare ourselves on our run rate from prior years.
Okay, and then switching to New Zealand and I apologize I missed this but obviously a lot of focus there on the export side of the equation, but maybe can you just elaborate on what you're seeing on the domestic market and New Zealand.
Sure.
As we mentioned limit for domestic prices typically lag to export market by a month or quarter, depending on pricing arrangements. So we do anticipate there'll be some price corrections on domestic market as it actually export price fall over Q3, and then a significant increase that we've seen in Q4. So it's it's early on like I said, we have quarterly and monthly negotiations so it's a bit of mix.
Bag on what's going on it but we typically do see some lag after domestic pricing or after that's what pricing.
I I appreciate that Guy I guess I was getting more to just on the just the general demand side of things.
Oh, sorry demand, yes on the demand side of things.
We're actually still having fairly strong demand domestically so that hasn't been hasn't been too much of an issue has said in Q3, we had significantly stronger demand for domestic as we saw operators are working in very high cost horse when export prices fell to just couldn't work anymore. So we saw increased domestic demand that point in time.
So we were not seeing that typically falling off but we are.
As Dave mentioned last on the last call.
Typically with our.
Harvesting in New Zealand weak, we contract out almost 100% of that and some of those are on one to three agreements type thing and so its harvested to change the lever immediately but we have those things rolling So we can move that letter lever back and forth as we respond to markets and so we're kind of as move into Q4, we look at opportunities we might have to pull back a little bit.
Zealand as we think about those are some of those kind of crews roll off and we have the ability also that our contracts to scale back those crews, but it's not something we can just turn them off immediately so a new Zealand's a little more of a constraint labor market and so our contracts have us working in conjunction with our with our contractors over there, but would you have the ability as we as we kind of stage out those.
Contracts to roll off to bring crews offer different things were looking at how we handle our volumes based on markets as we go into Q4.
Okay. That's helpful detail there and then one last one from me Dave just I.
I appreciate the prepared comments just on the acquisition activity during the quarter and the pipeline if you look out.
Some of your comments, though do contrasts some of the peers that have just either not been active on the acquisition fraud or have again could characterize is a pretty quiet market out there I can you maybe just provide us maybe a little bit more color on what you're seeing maybe some of that some of the reasons behind you think better driving your success on the acquisition front.
I am calling it's a number of things I mean first of all their there there's a lot of.
Theres lot of activity out there there's a lot of properties out there I think as we and others have have a have noted.
There's a lot of properties that are average or even in some cases below average properties and we tend to be fairly disciplined about.
Looking for looking for properties that have a good fit we're always looking to improve our portfolio. When we are considering acquisitions, we're not interested in just growth for growth sake, and so we're very picky about what markets. We go into I think we tend to think of ourselves is very market centric.
When we when we look at our acquisition.
Targeting and so.
Having said that I think another aspect to this is that we've had a concerted effort this year to focus on both.
Negotiated transactions as well as a smaller transactions that are that we referred to as bolt on transactions and we have had some measure of success it doesn't move the needle.
Individually on those acquisitions, not not not as much and I think thats why a lot of.
A lot of larger timber owners tend to shy away from those smaller deals we intend to look at a more.
On the margin and we looked at them and in aggregate, we feel like we've had a good youre, adding really high quality properties, but in small increments and so we're happy with what we've done we think we've developed a nice niche and we're going to take these opportunities.
As they as they come in as we're able to develop them.
Okay. Thank you for the color.
Thank you then next question comes from Paul Quinn with RBC Capital markets. You May go ahead.
Yeah, Yeah, thanks, very much morning, guys.
Most of the question if I had been asked so I'm really I've only got one just in the U.S. doubt. We you guys talked about sawtimber pricing down, but what's the reason for the weakness in the pulp log pricing.
Sure Great question, so with respect to pulpwood, we had drier than normal summer, which yield excess supply across the operating area and this into the dry weather, we were able to work on a backlog offending because it was dry and that increased our lending volumes by 7% and typically those things not a lower stumpage do the increased marketing costs.
And then finally found third reason I'm geographic mix also play significantly ended the quarter I spoke with volumes from our house price region were down 15% and our lowest price reasons were up 8% and to give you a sense of different some price the pulp price, it's twice as high and the.
Hi in the highest region versus last reagents, there's a significant difference in volume and value there.
And that's kind of the main reasons, so with all the pulpwood pricing changes.
Well I mean, that's a that's still at best for like a thick.
Thank you then next question comes from John <unk> with Bank of America. You May go ahead.
Good morning, just just wanted to kind of tagalong on kind of the U.S. out a little bit here. What are your peers mentioned that they were seeing an increase on supply from industrial private landowners is this something consistent with what you're saying is that kind of part of the reason why a soft timber prices weakened obviously, just kind of had little bit of so many other kind of items you mentioned earlier, but just want to get some more color there.
Sure Yeah as I mentioned, when we have a really dry period time she'd like the summer. It allows folks you haven't invested the road networks and even folks you don't even have roads farmers, who might have 100 acres out there still to go in harvest and so we have significantly see an increase not available they supply and you know as the mills, they're smart when it was opportunities. They go after them. So it has.
Generated more supply for for the mills at this point in time as we start see as I mentioned northwest the wet weather started constrained supply in some parts of south we're starting to get more rain starts yet same thing, but it was a very dry.
Dry summer, which allowed us to do our things and allowed us as farmers and private owners out there and harvest timber that may not be able to you last two years.
And just quickly on that also where a prices currently based on a relative to where they were on average in the last quarter.
I mean, it varies pretty considerably by by market again, as we have you have a lot of regional differences in the U.S. south.
That are kind of driving that kind of quarter to quarter noise and so again I think Q3 for a variety of reasons you know the dry weather.
You know the kind of shutdown of the export operations.
We definitely saw a decline there.
Again unless were to go market by market product by product, it's hard to kind of make general commentary on that front.
That's fair and then just thoughts question.
You know with lumber prices kind of starting to trend upwards over the last week or so or use any pickup in demand from saw mills, either in the south or Pacific northwest.
I'm, mostly mention before Pacific northwest and particularly we've seen some some increased demand which has been nice expect the south we haven't really seen that reflect through but it's been very short term you mentioned so it's it has a chance to work through yet.
Okay. Thank you.
Thank you.
Next question comes from.
With Seaport Global Securities You May go ahead.
Hi, Good morning, this is actually Ryan on for Mark.
I just have one hi can you hear me.
Yes, yes, great I just have one quick one on the southern harvest guidance for the remainder of the year I. So you guys picked that down a bit citing a weaker demand. When your competitors are in the week mentioned that there was an influx of supply from the Nonindustrial landowners just want to know if that was in.
I think he was well thanks.
Yes as mentioned earlier do that dry weather, we are seeing that increase supply from from the folks who has been whatever the last couple of years and whatever bring what the market. So now they have this opportunity there, but a lot more with the normal to the market I would say in so we have had impact of increase supply from non national private forced owners that's impacted us.
But you have to also keep in mind that you've you know the U.S. South is as Mark mentioned is quite varied and and we've talked a lot about the the build in inventory of standing timber being very differential across you a south and so.
It does depend on where you are talking about because there's parts of the you assaulted that have really had a tremendous growth in their their inventory and you're just going to see both weak pricing and lower price elasticity than another.
So you have to be pretty careful and mindful of where that that footprint is when you're thinking about pricing.
Great. Thank you so much guys.
Thank you.
Minder for those on the phone if you would like to ask a question. Please press star followed by one.
Our next question comes from Chip Dillon with vertical research you May go ahead.
Hi, Good morning, Dave Mark and Doug I think Salter downscaling for cheap.
So a couple of questions for me Firstly building a little bit on the questions on the South do you think vis a you know the mom or at least excess supply from smaller owners. So do so now it was a one and done or either significant pent up you know capacity, there's timing timber inventory of up.
We see similar weather conditions in the next few years you could see you know temporary spiking supply.
I think it really gets back to what I just said.
From the last question that depending on the region I think there have you there where you've had a large builds in inventory and you have favorable weather with smaller nonindustrial privates, you're going to you're going to tend to see some of that that that pent up supply kind of flowing to market and so you just have to be mindful of.
What region, you're you're referring to and we pay a lot of attention to that kinda operationally.
As we look across the U.S.. So we're really across regions. When you see dry whether you're going to see greater accessibility and the non industrial private land owner for us and so you will tend to see some.
Some incremental supply coming in the market dry weather likewise, when you have a wet weather you'll tend to see that supply pull back and price and a price response in that regard.
Okay, Yeah, that's a that make sense.
No just a it'll be the with all the you know lumber capacity, that's shifting to the U.S. South can you just gave us a little bit them update you know it will be the where do we signed we fed lumber mills that have started what do you expect to starting the next couple of years and primarily DVD you know that lumber outlook price smell are going higher.
Slide but at least about the we've seen some curtailments do you see any capacity that.
You've got three commuters your timberlands and myself.
Yeah, I'll take that start with them the sawmill sides talked about coming going forward.
You know in our local area, we're tracking quite a few talked about for GP Albany is on track to complete in 2020 point we understand.
And that will add a significant amount of volume up to seven or 8000 tons of additional demand and in our wood basket that area not a mill them Dupont yard here more locally also maybe increasing capacity and so we're seeing potential additional hundred 50000 tons demand in that region.
And then Theres couple mills that have opened up but they're just getting started and that's that's where we see with a lot of the so abiel fiber in Alabama, you know that's expected to generate soon if amount of volume increases would afford Angela enforced products and left in Texas. Another one that sits right there and our wood basket. Another halfway in terms of impacts and then therefore much frazier pronounced.
Nothing in amount of upgrades are also doing so there's there's millions man's board feet of opportunity, but what we're seeing is that basically these are coming slow to start up and then so and I think Dave mentioned this earlier when we see these things growth guns curtailments. It typically takes six months to work through standing inventory and on start ups were often seen can take.
Once two years to get going in and so that's it that's little bit different they have name plate capacity, but rather this is there often functioning at 20, 30% as they get started so we haven't seen the real impact all this announced capacity coming online yet and really a lot of them operating it I would say 40, 50% as they work out the Kinks and work out getting labor and demand supply and things like that so it's.
There's a lot of high level, you know upsides and we think long term is great, but short term we haven't seen.
Exact impact although in some of our key markets, where these mills have come up even at 40%. We are seeing price since and that's why I mentioned before we do expect to see some positive.
Price appreciation and sawtimber going into Q4, some of our markets but.
The additional on volume or harvesting of Arkansas will will offset some of those upside.
Great. Thank and just a that allows sonobi don't cup that'll occasionally <unk>. It seems like you know you're you're signing little bit more optimistic on M&A delve a little more this quarter and you're thinking about next year.
How should we think a little bit above your capacity to you know use a to acquire timberland. So without issuing any shares a you know using cash on hand, or potentially issuing new debt or what would be kind of ultimate leverage will be willing to take.
Yes, we generally guided the market to a comfort level around leverage debt to EBITDA or net debt to EBITDA.
The leverage capacity is I'd say as we sit here today kind of based on our updated guidance for 2019 that would kind of imply somewhere in the sort of $250 million to $300 million of debt capacity.
But then they are kind of investment grade it within the investment grade targets that we specified.
Thanks.
Thank you and at this time there are no further questions I will call back over to speakers for any closing remarks.
This is mark MCU I'd like to thank everybody for joining US today. Please feel free to contact me with any follow up questions. Thank you.
Thank you and that does conclude today's conference. Thank you.
Updating you may now disconnect.