Q1 2020 Earnings Call
Welcome and thank you for joining rain years first quarter 2020 teleconference call. At this time all participants are in listen only mode. During the question and answer session. Please press star one on your Touchtone phone today's conference is being recorded it do you have any objections you may disconnect. At this time now I will turn them.
Turning over to Mr., Martin Q, Senior Vice President and CFO, Sir you may begin.
Thank you and good morning, welcome to Rayoniers Investor teleconference, covering first quarter earnings earnings statements and financial supplement were released yesterday afternoon and are available on our website at Rainier Dotcom I'd like to remind you that 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 list filed with the Fccs list. Some of these factors that may cause actual results to differ materially from the forward looking statements. We may make their also reference 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.
Leasing supplemental materials with that let's start teleconference with opening comments from Dave Newness, President and CEO Dave.
Thanks, Mark and good morning, everyone.
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, our senior Vice President of Forest resources to comment on our U.S. and you see on timber results and following a review of our timber segments, Mark will discuss our real estate results as well as our outlook for the remainder of.
2020.
Before discussing our results for the quarter I'd like to briefly address our response to cobot 19, as well as provide an update on the Pope resources merger and recent financing transactions.
First on behalf of our company I'd like to extend our sympathies and best wishes to all of those who have been impacted by this global pandemic.
Here at Rainier, we've responded by prioritizing the health and safety of our employees and contractors.
Well as their families while working to ensure business continuity.
In mid March we implemented a work from home model for all office employees in instituted enhanced safety guidelines for field employees in an effort to do our part as a company to mitigate the spread of cobot 19.
On March 19th U.S. Department of Homeland Security issued a memorandum providing guidance on these central critical infrastructure workforce, which designated the forest products industry as a critical infrastructure industry, where the responsibility to continue operating during the.
During the response to the Cobot 19 emergency.
This designation was important to allow our industry to continue to supply critical items, such as tissue paper cardboard boxes and construction grade lumber end users.
As we manage through this crisis.
In New Zealand, however, the government instituted more stringent lockdown measures across a broader range of businesses, including four street beginning in late March You Zealand ended these locked down measures effective April 28, and we're currently in the process of restarting our operations there on a phase the basis.
Overall, while this has certainly been a tumultuous period. We believe we are managed managing through it well I'm very proud of how our employees have answered the call to keep our business running amid this pandemic, while observing the necessary social distancing and safety protocols to mitigate the further spread of cobot 19.
Yeah.
On a more positive note our previously announced merger with Pope resources is proceeding as planned and we expect to close the transaction on May eight pending a successful vote of Pope's unit holders at a special meeting scheduled for May 5th.
I'm also pleased to report that we recently completed a series of transactions to secure financing for the cash component of the merger consideration, which mark will discuss later in more detail. Additionally, during the first quarter, we closed a large disposition consisting of roughly 60000 67000 acres in Mississippi.
Repeat for net proceeds of $116 million taken together these transactions significantly strengthened our balance sheet bolstered our liquidity position and completed the financing required to close the Pope acquisition.
Extremely proud of our team for their dedication and focus on completing these transactions over the last several weeks, especially given the unprecedented market conditions that we were facing.
I'd also like to thank the team at Pope for their perseverance as we've worked through our integration planning process, primarily the via phone calls and video conferencing I can't speak highly enough about their professionalism in the midst a very unusual circumstances and I'm very excited to welcome them into our Rainier family.
Working through this integration process has really reinforced the strong cultural fit between our respective companies and we're all very excited about the future prospects of our combined organization.
With that I'd like to now switch gears to briefly discuss our quarterly results for the first quarter, we reported adjusted EBITDA of $47 million and pro forma net loss of $300000 or roughly breakeven S.
Overall, I'm pleased with how our team navigated challenging market conditions amid the cobot 19 pandemic to deliver strong operational results across our timber segments.
Our southern timber segment reported adjusted EBITDA of $33 million for the quarter, which was below the prior year quarter, but well above the last three quarters and generally in line with our expectations and prior guidance.
We enjoyed another strong first quarter volume results driven by continued strong pulpwood demand overall, our southern timber segment continues to enjoy very high margins and relatively low cash flow volatility.
In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $10 million, which was our strongest quarterly result, since the second quarter of 2018.
Well delivered pricing stayed relatively flat versus 2019, we enjoyed some very strong stumpage sales early in the quarter, reflecting a significant pickup in domestic mill demand.
Market conditions understandably deteriorated towards the end of the quarter with Cobot 19 related mill shutdowns. So we're very happy to have taken advantage of these strong stumpage sale opportunities early in the year.
And our New Zealand timber segment, we reported adjusted EBITDA up $10 million, which represents a significant decline from the prior year quarter. The New Zealand timber segment experienced significant headwinds in the export market in Q1, as China instituted strict locked down measures to contend with the impacts of Cobot night.
Team.
Which significantly limited the flow of export logs later in the quarter is China reopened its markets and demand came back online New Zealand implemented its own lock down measures to contain the spread of cobot 19, which further limited our ability to move volume.
As discussed earlier, we're currently in the process of restarting operations in New Zealand and are encouraged by the near term demand response.
Lastly, our real estate segment reported first quarter adjusted EBITDA of negative $1 million as we sold fewer than 1000 acres during the quarter, excluding our large disposition in Mississippi. While this result is certainly below our average run rate expectations for the year, we had anticipated a very late first quarter in real estate.
Due to the timing of closings and we further expect a significant pickup in transaction volume in the second quarter with that let me turn it back over to Mark for a detailed review of our consolidated financial results.
Thanks, Dave let's start on page five with our financial highlights sales for the quarter totaled $259 million well operating income was $39 million and net income attributable to reengineer was $26 million were 20 cents per share.
Form a net loss was $300000, which translates to breakeven EPS for the quarter.
Form items. This quarter included a $29 million gain from a large disposition and $2.5 million of costs related to the Pope resources merger.
First quarter adjusted EBITDA of $47 million was below the prior year quarter, primarily due to lower results in our southern timber New Zealand timber and real estate segments, partially offset by favorable results in our Pacific Northwest timber segment.
As a reminder, adjusted EBITDA on a real estate segment excludes the impact of the large disposition that we closed during the quarter.
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 period.
Our cash available for distribution or CD was $27 million compared to $62 million in the prior year period, primarily due to lower adjusted EBITDA higher capital expenditures and higher cash interest paid which were partially offset by lower cash taxes a.
A reconciliation of see 80 to cash provided by operating activities and other GAAP measures is provided on page seven the financial supplement.
We closed the quarter with $132 million of cash and roughly $1.1 billion of debt our net debt of $925 million represented 23% of our enterprise value based on our closing stock price at quarter end.
As Dave noted during the month of April we completed a series of financing transactions in preparation for the closing of the Pope resources acquisition, specifically, we increased the size of our revolving credit facility from $200 million to $300 million and extended the maturity date to 2025.
We also extended the maturity date of our existing 350 million dollar term loan facility from August 2024 to April 2028.
Lastly, we entered into a new five year 250 million dollar term loan facility to finance the Pope transaction.
This term loan facility with syndicated through the farm credit system is eligible for patronage payments taking into account facilities current spread over LIBOR estimated patronage payments and interest rate swaps, we entered into in anticipation of this financing we expect that the all in cost of this facility will be approximately 3%.
We're very pleased to completed these transactions on attractive terms amidst the very challenging and on an uncertain economic backdrop with these facilities in place along with the large disposition that we closed during the first quarter. We now have ample liquidity to fund the cash portion of the resources merger consideration refinance pope's existing debt.
And pay fees and expenses associated with the transaction pro forma for the financings in the closing of the post transaction, we expect to have available liquidity of over $300 million I'll now turn the call over to Doug to provide a more detailed review of our timber results.
Thanks, Mark good morning.
Let's start on page eight with our southern timber segment.
Adjusted EBITDA in the first quarter of $33 million was $5 million favorable compared to prior quarter, an $8 million unfavorable compared to prior year quarter.
First quarter harvest volume, approximately 1.8 million tons was 17% higher compared to prior quarter, and 5% lower compared to the prior year quarter.
In general, we often experienced stronger demand in the first quarter as markets pickup on the holidays and as wetter weather often limit supply those landowners operable ground conditions.
Although this winter was significantly dryer from the prior year period. The first quarter of 2020 was still a relatively strong quarter renewals.
We also made decision to pull forward, some production where possible due to uncertainty over the near term impacts of the cover 19 dependent.
The average pine pulpwood, so much price $16.05 per tonne was 8% favorable compared to prior quarter, and 11% unfavorable compared to prior year quarter.
The increase in price relative to prior quarter with a combination of reduced removals from our lowest price market and improved supply demand demand dynamics in other markets.
The decrease in price relative to the prior year quarter was driven by increased availability of log supply due to the relatively dry or ground conditions.
The average pine sawtimber, so much price of $26.67 per ton.
15% and 1% favorable compared to prior quarter in the prior year quarter, respectively.
The increase and pine sawtimber pricing relative to the prior quarter was due to increased demand for gray logs for large dimensional lumber plywood and engineered products.
This reflects the growth from the housing market, we'd experienced at the beginning of the quarter.
First quarter non driver income of $6 million was $4 million below the prior year quarter due to reduction in pipeline reasons. It's important to note that this comparison is being made against a record how your burn onto our income business in 2019.
Now moving to our Pacific Northwest tumor segment on page nine.
Adjusted EBITDA of $10 million was $1 million and suddenly dollars favorable compared to prior quarter in the prior year quarter, respectively.
First quarter harvest volume of 476000 tonnes was 14% and 68% higher compared to prior quarter in the prior year quarter, respectively.
The volume increase was driven primarily by significant increase in Lumpsum stumpage sales and delivered log sales to meet improve domestic sawlog demand.
The average delivered sawtimber price of $74 $75.40 per tonne was 4% unfavorable to both the prior quarter and the prior year quarter.
The decline relative to both periods was primarily due to an increase mix of chip and saw which have been saw removals, increasing by 13% during the quarter.
It's worth noting that sawtimber pricing, excluding chip and saw one MBF basis was up 6% from the prior quarter and flat compared to prior year quarter.
Overall, we saw quite a bit of volatility in market sentiment to the quarter progressed.
Early in the first quarter, we experienced strong demand and pricing driven by favorable housing data.
By late February market sentiment had turned negative due to growing concern about the covered 19 situation.
Then towards the end of the quarter demand for export Timur picked up as trying to tariffs were waived.
Exports from New Zealand halted due to their lockdown in European spruce exports have slowed down.
We generally expect that mark conditions are going to continue to be choppy as these dynamics evolve.
Given the different regional responses to the end of it.
The average delivered pulpwood price of $38, an 11 cents per tonne was 3% and 16% unfavorable compared the prior quarter in the prior year quarter, respectively.
The supply of pulp chips on the open market continues to keep prices lower versus the prior year period, particularly Oregon.
However, as lumber mills curtailed production towards mid March we began to experience increased demand for pulp logs in Washington.
Page 10 shows results and key operating metrics for our New Zealand tumor segment.
Adjusted EBITDA in the first quarter of $10 million was $6 million and $12 million unfavorable compared the prior quarter and the prior year quarter respectively.
First quarter harvest volume of 481000 tonnes was 30% and 20% lower than the prior quarter in the prior year quarter, respectively.
As a result of significantly reduced demand driven 19 pandemic.
Which first impacted China export markets beginning in January and eventually led to a lock down in New Zealand by quarter end.
Lot processing mills in China were closed for extended period of time after Chinese new year, and then were solid restart as employee struggle to get back from their hometowns do travel restrictions.
Which led to growth important inventories over seven link meters.
Our New Zealand team did an incredible job of quickly responding to the situation in China. As we were just productions, 80% plan and reported sales domestic markets and export destinations other than China.
In late March the New Zealand Government Institute Lockdown measures on all non essential businesses, including forestry.
However, the Zealand recently lifted these measures effective April 28, and we're currently in the process reopening our operations on the base basis.
The average delivered export saltzman price of $94, an 86 cents per tonne was 8% and 18% unfavorable compared the prior quarter and the prior year quarter, respectively, which reflects the reduction in demand through the covered 19 pending it.
The average domestic sawtimber price of $69.97 per tonne U.S. dollar terms was up 1% compared to prior quarter, but 16% unfavorable compared to prior year quarter, partially due to the fall in the New Zealand U.S. exchange rate, but also due to the impact of declining export prices.
Note that domestic pricing tends to lag behind export pricing.
Excluding the impact of foreign exchange rates domestic pricing in New Zealand dollars was 1% and 12% unfavorable compared the prior quarter prior year quarter, respectively.
The average domestic pulpwood price of $33.84 per tonne was 3% and 14% unfavorable for the prior quarter in the prior quarter, respectively, driven by the same factors as domestic sawtimber.
And our trading segment, we generated breakeven adjusted EBITDA in the first quarter, which was $500000 unfavorable compared to prior year quarter due to challenging export market conditions that we've already discussed.
I'll now turn it back over to Mark to cover it real estate results.
Thanks, Doug now moving onto our real estate segment results as highlighted on page 11 first quarter real estate sales totaled $119 million on roughly 68000 acres sold which included a large disposition in Mississippi, consisting of roughly 67000 acres. Excluding this large disposition first quarter sales totaled 2.4 million.
Dollars on 624 acres sold at an average price of $3800 per acre on our rural sales category Real estate segment adjusted EBITDA for the quarter was negative $1 million as discussed on our last earnings call. We had anticipated very light transaction activity in our real estate segment during the first quarter due to the timing of closings.
Now moving onto our outlook for the remainder of the year as we noted in our earnings release, we expect that market conditions over the next several quarters, we'll continue to be very challenging and volatile due to the impact of the cobot 19 pandemic due to these continuously evolving conditions, we're updating our prior 2020 financial guidance based on our current outlook for the back.
So the year.
Page 13 of our financial supplement provides our updated financial guidance by segment for 2020 and scheduled GE of our earnings release provides a reconciliation of our adjusted EBITDA guidance to net income attributable to rayonier and EPS.
Please note that our updated full year 2020 guidance does not include the impact of our anticipated merger with put resources, we expect to update our guidance for the impact of the Pope transaction on our second quarter earnings call. Following the expected closing the transaction.
For full year 2020, excluding the impact of the Pope resources transaction. We now anticipate full year net income attributable to rainier of $33 million to $46 million pro forma net income of $7 million to $20 million EPS of 26 cents to 36 cents pro forma EPS of five cents to 15 cents and it.
Adjusted EBITDA of $200 million to $230 million.
And our southern timber segment, we expect full year harvest volumes of 5.7 to 6.0 million tons due the disposition of 67000 acres in Mississippi as well as the reduction of harvest volumes in certain markets impacted by weaker demand, resulting from the cobot 19 pandemic. We further expect that southern timber pricing will be relatively flat versus 29.
In average pricing has continued strong pulpwood demand favorable geographic mix and increased export demand generally offset weaker domestic sawtimber demand overall, we now expect 2020 adjusted EBITDA in our southern timber segment of 100 $106 million.
And our Pacific Northwest timber segment, we expect full year harvest volumes of 1.3 to 1.4 million tons based on our strong start to the year, coupled with improved export demand, which is partially offset declines in domestic sawtimber demand due to mill curtailments. We further expect the Pacific northwest pricing will be somewhat volatile and dependent on the duration of domestic mill.
Curtailments as well as potential changes in China export demand and the availability of competitive supply as different regions cope with the impact of Cobot 19.
Overall, we now expect 2020 adjusted EBITDA in our Pacific Northwest timber segment of $17 million to $20 million.
In our New Zealand timber segment full year harvest volumes are expected to decrease to between 2.1 and 2.3 million tons, primarily as a result at the shutdown of all non essential activity in New Zealand during parts of March and April we expect some near term upside in New Zealand pricing, resulting from pent up demand following the shutdown while longer term pricing will be driven by the time.
Aiming resumed economic activity and the resultant level of domestic and export demand overall, we now expect 2020, adjusted EBITDA and our New Zealand timber segment of $46 million to $52 million.
Lastly, in our real estate segment, we anticipate a significant slowdown in improved and unimproved development sales for the balance of the year due to the impacts of Cobot 19, Although we continue to expect reasonably strong rural and timberland sales activity based on our current pipeline of transactions. Overall, we now expect 2020, adjusted EBITDA and a real estate segment of 60 to 70.
$5 million.
Details on other elements of our financial guidance, including Capex DDNA noncash basis of land sold interest expense taxes and minority interest are provided on page 13 of the financial supplement and scheduled GE of the earnings release I'd also like to know that due to the market uncertainty surrounding coven 19, we've added new supplemental cost disclosures.
With respect to our timber segments that appear and section three of our financial supplement this data should allow our investors and analysts to run more accurate EBITDA sensitivities on a range of different volume and pricing scenarios.
Lastly, I'll offer a few comments on our balance sheet and liquidity position before turning it back today for closing remarks.
Following the closing of the Pope resources transaction, we expect to have a combination of cash and revolving credit capacity of over $300 million, which we believe provides us with ample liquidity and financial flexibility as we contend with the near term challenges associated with the coven 19 pandemic, our nearest debt maturities in April 2022 or $325 million.
Senior notes mature our next debt maturity thereafter is that $250 million term loan maturing in 2025 overall, our weighted average cost of debt is approximately 3.2% and we've entered into interest rate hedges to swap all of our funded term debt to fixed.
We have to financial covenants in our credit facilities leverage ratio calculated as consolidated debt to consolidated debt plus net worth and an interest coverage ratio calculators consolidated EBITDA consolidated interest expense under our credit agreement, we must maintain a leverage ratio of no more than 65% and an interest coverage ratio of no less than 2.5 times.
As of March 30, Onest are calculated leverage ratio was 43% are calculated interest coverage ratio was over 10 times. So we have plenty of headroom within both covenants and we expect to maintain plenty of headroom, even with the anticipated decline in adjusted EBITDA in 2020, and the anticipated closing of the Pope resources transaction next week in summary.
We're certainly not immune to the market challenges associated with the cobot 19 pandemic, we feel very confident in our ability to contend with these challenges given our strong balance sheet and overall financial flexibility I'll now turn the call back to date for closing comments.
Thanks Mark.
The Cobot 19 pandemic is an unprecedented challenge for the global economy, and its near term and longer term impacts remain largely uncertain.
Nobody yet knows how long is pandemic and its economic impacts will last but as we sit here today, we certainly expect continued market dislocation and volatility over the next several quarters. Despite the significant challenges ahead, we remain keenly focused on executing against our strategic priorities and achieving our mission.
Generating industry, leading returns and building long term value per share.
In conclusion, I believe that Rainier is well positioned to weather the storm, specifically I've seen firsthand the dedication and resiliency that our people have demonstrated through this crisis and im further extremely confident in the strength of our balance sheet liquidity position and financial flexibility as a pure play timberline right. We.
Enjoy strong margins and sustained and substantially less volatility than downstream manufacturing businesses and we have a geographically diverse portfolio that further mitigates our exposure to any single region or product category. We expect that this diversity and optionality of our port.
Folio will be further enhance when we closed the Pope resources merger transaction next week following the successful vote of Pope's unit holders.
When we held our last earnings call in early February we were anticipating a very busy first quarter, given the pending Pope resources transaction as well as it up the financing and other portfolio management moves that we're already well underway.
However, the quarter became exponentially busier and more challenging as a result of the cobot 19 pandemic and the ensuing economic fallout.
I want to reiterate how proud I am of our employees and how they responded and continued to manage through this crisis with poison determination I feel very fortunate to be surrounded by such exceptional talent and dedication that at all levels of the organization.
This concludes our prepared remarks, and we'd like to now turn it back to the operator for questions.
Thank you if you would like to ask your question. Please press Star one you will be problems with record your first and last name. Please UN mute your phone me for recording your name and to withdraw your question.
Q.
Our first question comes from Collin Mings with Raymond James Your line is open.
Thank you good morning, guys.
Dave Morton sorry can you.
Dave Sorry can you elaborate on where the restarting of Youre dealing operations fan base process of ramping backup activity you referenced what does that mean for volumes near term and along those lines you reference really a couple of times in the prepared remarks as well as in the press release that there could be some pricing tension in the market due to pent up demand can you just allowed.
Right on that.
Yeah, I'm actually going to turn that over to Doug who is a little closer to that to address morning, Kolon, yes, so as of.
Tuesday, basically new Zealand allowed to reopen and we're essentially lottery open.
At full force, but for safety reasons have people haven't been up for a month, we took a staged approach and so really this week. We're operating in the kind of 80, 90% trying to gear up mix for the people one were safe after a month being off work into can handle the new guidelines around coded. So when we say stays in phase, it's really matter of safety and so this first.
We're working on that once our staff in our contractors feel that they can safely operate underneath the new guidelines and social distancing and are back to work in there but use their jobs again, then we'd actually look to make up some the production that we lost over the last really since middle January on the export side, so our contractors.
We reduced them to 80% production.
I have in February and parts really starting late January so there's some opportunity there. So we do expect volumes to pick back up as we as we move in over the next couple of weeks. So we look to actually produce above 100%. If we can do that safely.
Both domestically and export side. There is there's a lot demand. So there you mentioned the pent up demand domestically. The obviously they've been without logs for a month. So theyre looking for logs, we did have some some logs or cut in the forced.
And on the skin sites and so we're able to quickly move those to the domestic customers and then there were some unlock still ports also and so we have a couple of shipments are leaving early on within the next week or two but thats really not take four to six weeks for New Zealand supply chain to get kind of backup and fully running and that those export yards and export port some fully operational.
Yes, calling if I could just to add to that kind of keep in mind that in the backdrop of the shutdown in New Zealand, you had China kind of getting back into operation and so.
Following following the the Chinese new year and the build in inventory.
Associated with their their co bid locked down where inventories grew to 7 million.
Cubic meters as they started to operate we've seen those inventories come down to roughly five and a half million cubic meters. A lot of that we believe initially was restocking of log inventories at mills.
And so as a result of that we have seen some pricing pressure.
And keep in mind as well that a large portion of of inventory was coming from the European spruce volume that as it aged deteriorated and has become sort of less.
Economically viable to process and so thats put a lot of pressure Doug touched on this in his prepared remarks has put a lot of pressure on the need for.
Green or fresh would and so we're seeing that translate really in all three of our segments right now.
That's helpful detail there, Doug one day maybe.
Also served as really a segue to my next question, which is focused on the Pacific Northwest and again, you elaborate a little bit there, but just again in the prepared remarks, a lot of focus on just the fact that you've seen China demand has improved a bit given the tariff relief and less supply again coming from Europe, and New Zealand, but you also cited market choppy market.
Conditions going forward, maybe just talk a little bit more about that I. Appreciate the update on the inventory situation in China, but just how long what's your latest understanding on how long the tariff for lease might be in place and how do you think about that push and pull as it relates to the export markets versus domestic market in the Pacific Northwest right now.
Yeah, I'll start and then Doug can can tag on if I've missed anything but so keep in mind that in the course of Q1, we saw.
Quite quite an evolving market in the northwest as we started the year, we had a strong uptick in.
Domestic.
Demand from our from our domestic mills really in response to strong housing markets and then as we.
As we saw as we saw China come back.
On online towards the ended the quarter, we started to see.
A pickup in demand on the export side and keep in mind that in the Q1, we only shipped a 2% of our volume into the export market and so the export market by and large was not present in Q1, but I'd say the preparation for export shipments was starting to pick up as we as we were into the last.
Month of the of the quarter, but that was also occurring at the same time that we saw a number of our domestic mills, taking downtime so you've got.
A lot of moving parts set of that have had some offset hence our our reference to.
Expected volatility in that market going forward. One one thing that we have seen really across North America is.
Some pretty aggressive.
Downtimes taken by sawmills throughout the throughout both USA and Canada, and we've seen those effective operating rates.
Go up to a level that's much higher than has historically has been the case.
And recognize as well that that a higher proportion of mill downtime was taken out of.
Western Canada and so.
It will be interesting to see as we go forward sort of how that how that plays out.
In our particular market footprints narrative, Doug if you have anything to add to that.
No I would agree I mean, when Dave references the lumber curtailments, we've seen approximately 15 billion word feet of annualized sawmill capacity reductions are closures announced to the codependent, Nick that's equivalent roughly 1 million single family housing starts on annual basis. So we kind of daves point, we think that the amount of curtailments was was right sized and actually are seeing a demand.
Thats a ratio running about 95% so kind of suggest that we may have seen the curtailments.
One thing I'd add to kind of the export demand is an interesting thing. That's this is probably more long term, although we're seeing short term somewhat that too is that down.
Countries are definitely rethinking their diversification of the supply chains and.
So we've seen some long term customers of South Korea, and Taiwan gain market share over Chinese imports of both lumber and plywood.
And then while there is the lock down in our other major export country of India, which is starting some short term demand. We believe they may experience. Some similar supply chain diversification benefits the longer term, we're starting to see that trend before the pandemic with increased pine demand for packaging in particular, so there is there some interesting things some that volatility. We mentioned is there's a lot of moving parts right. Now is this countries are rethinking.
Supply chains, where they're getting it would from how things move around so there's a lot of lot different things and play, but there are some posit spots there.
A presale the color there switching gears.
Mark.
I know you reference available liquidity of $300 million moving forward more specifically just given the timing and magnitude of the Mississippi Timberland sale, how much additional focus will you place on de levering following the closing of the Pope you over the balance of the year.
Yes, sure I mean, when we announced the Pope transaction. We obviously said that we're committed to the investment grade rating, we are taking leverage up a bit above our comfort zone, and we would look to bring that back down likely through some asset sales in the near to medium term and so with the $160 million Mississippi disposition.
Yeah, we largely completed I would say that targeted de de leveraging in the sense that.
Pro forma for the Mississippi disposition and the cash need for the for the Pope transaction plus the expected kind of annualized contribution from Pope.
It was largely kind of never left leverage neutral taking all those together.
That said, we're obviously now in an environment, where EBITDA is under pressure and so the extent that we had been anticipating that leverage was going up into the kind of high for is on a debt to EBITDA basis, and we'd be bringing that down through asset sales were probably now kind of back in that range just with the anticipated decline in any EBITDA over the near.
Your term and so yeah, I would say that it on you know we're still very focused on the balance sheet very focused on on maintaining the investment grade rating and obviously there are lot of moving pieces right now and we're having to take all that into account, but suffice it to say that with lower EBITDA. We certainly don't have the same leverage capacity that we would have had.
Prior to this cobot 19 pandemic.
Okay, and one last housekeeping one from me and I'll turn it over just Mark just make sure. We're clear we should expect updated guidance for the Pope transaction in conjunction with the Twoq earnings early there won't be like a separate update concurrent with the deal closing.
Yes, I mean, we want to get under the Hood, obviously and kind of get a sense as to what the balance of the year looks like me. We're obviously somewhat limited while we remain separate companies on in directing their business are getting getting.
You too far into that so.
Again, we want the time to close the deal get under the Hood get a sense as to where theyre at relative to their expectations for the year.
What's remaining for the balance of the year and then we'll update guidance I mean again I don't think that on a long range basis, we would expect that the run rate expectation would be materially different than what we announced at the time that transaction, but given the covered 19 pandemic. It all the moving pieces right now and it also just not having a great sense as to where they are right now.
Relative to their full your expectation, we're going to need some time to digest that.
Again call and the only thing I'd add to that is just sort of keep in mind that one of the one of the objectives.
With respect to the to the Pope transaction was gaining additional optionality and certainly that applies and in both good markets and in challenging markets and right now.
Having more Douglas for having a higher proportion of of ground based logging lands, having a more diverse domestic mill footprint as well as exposure to export all those things are going to be.
Improved after this transaction so we remain pretty excited about adding it to our portfolio.
Thanks, guys I'll turn it over jump back in queue. Thanks.
Our next question comes from John Babcock with Bank of America. Your line is open.
Good morning, since I guess I just wanted to talk quickly about kind of your long term supply agreements and generally how those work I mean, obviously like we're facing a pretty difficult time here as far as housing and in some of the numbers that have been forecast that are pretty dire and so.
Recognizing them it sounds like you've seen operating rates recover at some of the mills.
The Pacific Northwest and maybe even in this out to the comment on that but also wanted to get a sense for how those kind of supply agreements probably work.
Hi, This is Doug I'll have to take that question. So.
We have very few long term supply agreements actually as a company.
Lot of our wood is sold picking the south on stumpage more delivered and New Zealand in the northwest. Some here also but most of our most of our dealings are either quarterly or maybe annual at the length. So I think we only have one agreement it's beyond a year length on supply agreements. So our would that they transact mourn off on a quarterly basis.
Okay. Thank you that's helpful.
And then I guess.
We'll just with regards to kind of the Mississippi land sale, what made that property and attractive wanted to sell and also.
Kind of additional color you could provide as far as volumes are what contribution that made to the business would be helpful.
Sure. This is Dave ill take that.
Yes. This was a process that we started it was a competitive sale process that we launched last September.
And we concluded that that process.
I think some of the aspects of this.
This.
This sale keep in mind that this was our remaining holdings in Mississippi.
And we felt that we had both limited scale in that market and a limited ability to really grow too to an appropriate scale and so that was one of the key decision points as we thought about the longer term prospects of that market. It was it was certainly a very productive.
Property and.
It had it had 69% pine plantations.
Average age was 15 years old.
So it was a good there was a good property. It was just really a question of all else being equal.
We prefer to be in places, where we can have.
Better operating scale, and and stronger long term market and the ability to impact that market.
Okay. Thanks, then.
Wondering nextcity and kind of talking about how end market demand in North America is kind of trended over.
The last few weeks I guess, particularly this out since you already comments about the northwest.
Yes, I mean, the one thing to keep in mind is is the market, particularly the lumber market is fairly diverse market and with the with the.
Certainly with this.
Coded situation you now you now our reinforcing the strength of the repair and remodel.
Portion of the of the market, which is the largest portion of lumber demand.
Demand at roughly 30% and whereas.
Single family housing is 22% and industrial is about 20 and so.
That's an important thing to keep in mind it does tend to get.
A disproportionate amount of the attention the other thing the other thing that I'd point out is is we've had a backdrop of strong.
Demand from our pulpwood customers throughout this period of time, you think about.
All the news coverage of late of things like tissue and the strong.
The strong numbers coming out of the of the linerboard side for for boxes and so.
We find it generally when we have markets that have that foundational demand.
It affects positively all markets and so all else being equal we like to see.
Nice diversity of products.
Product demand across the market classes.
Okay. Thanks, and just last question before I turn it over I was wondering if you could kind of talking about how we should think about working capital over the coming quarter to just kind of with a pandemic and how thats kind of changing receivables and inventories and.
Payables all that.
We generally don't carry a lot of working capital John So I wouldn't expect significant changes there.
Okay. Thanks.
Our next question comes from Anthony Pettinari with Citi. Your line is open.
Good morning, guys. This is excess randy's whole sitting in for Anthony.
I think for the U.S., so you're now forecasting flat pricing for the year and previously had expected.
Quite decline due to geographic mix.
Yes, looking at the midpoint of for your guidance suggests EBITDA per ton is expected to be lower than previously expected can you maybe just some color on what has changed besides harvest levels within that for your guide on the U.S. So thank you.
Yeah, Randy recognize that when you have there's an element of costs in the business that is fixed in nature and so when you have lower volume you're going to be spreading that fixed cost over over a lower number of tons and so that's certainly going to contribute to all else being equal you bring harvests down and you're going to have a lower EBITDA per ton.
So generally speaking I think our expectation around overall pricing for the year Hasnt hasn't really changed materially.
The decline in the forecast for the year has really been more volume driven as well as probably some more muted expectations around non timber income we had a really strong year last year and pipeline easement sales, but with where oil prices are today in particular, I think we're being up a bit more measured in our expectations for non timber sales on but those are those.
Essentially the different moving pieces, there and also recognize that.
With respect to the decline in the guidance for southern timber roughly half of that was probably driven by the volume decline associated with the Mississippi disposition and so just kind of looking at it prior guidance relative to revise guidance do you need to kind of factor that in as well because that would that was a pretty big driver there.
I'd say roughly half of the volume decline that we're projecting in the revised guidance was was associated with the Mississippi disposition.
I would just add one point, where theres a slight mix Haggard pulpwood now and what was predicted for so thats, causing the average composite price look like at slightly lower when you look at EBITDA per ton and that's some of the weakness that we're seeing some additional volume that's coming out is really around saw log demand. So.
Something we can differ and recover in future years or future quarters and things get better.
Okay, Okay understood I think in the release.
In prepared remarks, there was.
Increasing export demand you itself.
Is that just on the margins or is that business ramping back up and just to clarify the Chinese tariff waiver I voted just on logs coming out of the Pac northwest or does that cover southern timberland as well.
Sure so as part of the phase one resolution.
China agreed to waive tariffs on logs for a year and that's both the northwest and the South now. These waivers are actually applied for shipments online and they are good for a month. So its while they've agreed to defer year, they're actually the physical mechanism as one month our customers at all it takes about three days to get it and there's been no. One has been denied so it's pretty.
So far it's been pretty seamless to get those things. So both operations from the northwest and South and we have seen on based as Dave mentioned, you know while the.
Well, we've gone from Suddenlink meters down to the 5 million range I'm in China. There is a lot of demand for Greenwood that lock down in New Zealand.
This is really impacting amount of let's say Greenwood kind of fresh would they have which gives more optionality for what they can cut. So that has resulted increased demand for fresh logs both out of the northwest in the south so.
We have resumed during the third party exporters in Washington, and Florida, and we've actually restart our own operations, our Savannah, Georgia Mobile Alabama.
Offset that curtailed domestic demand so right now it's it's not just at the margins. This actually something we're seeing to help us meet our volume targets and as I said offset that that domestic demand that's been curtailed.
Keep in mind, though that exports out of the south or are done by container, whereas in the northwest and New Zealand their break bulk and so you have different shipping dynamics at play.
That that influenced.
Yes, that's a good point we've seen.
We've seen ocean freight rates I'm really fall to cover 19 impacts and global trade and there's also been significant reduction in fuel costs with respect to going into this year, we've talked about the change the IMO changed with very low sulfur fuels and those have fallen from $730 per ton to $207 per ton from the start of your until now so really there is an advantage on the break bulk.
Shipping that that's not we're not experiencing containers.
But we mentioned earlier about the decreased supply of spruce from Europe, one things we have seen to this global and balance is on spot rates for freight have gone up over 70% year over year from Europe to China, and so that's that's really reduced the amount of volume coming from from Europe home into China over the last last couple of months in them.
Expect that to persist for a while and while we're not experiencing the same kind of rate increases idea south we are experiencing more blank sailings, whether the ships that are going because that freight things wrapped a match our boxes and do things like that but we are seeing that opportunity for us, but that the U.S. and Australia ports on containers.
Okay understood. Thank you very much.
Our next question comes from Mark will deal with BMO capital markets. Your line is open.
Hey, Good morning, guys. This is just the burn on for Mark just one quick one for me or do you have any deal and kind of the length of the curtailments in the U. US specifically in the USL did you guys have any exposure to the Klaus and bill that showed in Florida.
Yes, I mean, the length of curtailments no I mean, we've heard rumors I mean, we're encouraged it's hard question. So I'll start the Pacific Northwest.
Where we are encouraged that recent framing lumber prices is up 5% year over year. So while the not prefund highs, we've seen lumber and northwest kind of settle back down year over year. So we've heard rumors of mills looking at restarting the next couple of weeks.
In the South Similarly, we've heard some rumors about that but no one's committed and when they are actually going to come out there curtailments best to my knowledge. So it's more more rumors right now but.
Well there was lumber prices firming up really do that as Dave mentioned had a large reduction on a British Columbia before the pandemic and then another 44% production kind announced dependent we're really seeing that west coast pricing firming up first.
Back to Klausner, yes that we do have a small amount of whether it goes that market, but we.
We did have some some properties are proximal to that but they were up there were a small customer of ours overall.
I mean, the duration of the middle of the mill Curtailments. The end of the day is going to be determined by the magnitude of the decline in housing for the year and estimates of that are still all over the place. So yes, I think we should we still need to see kind of coven 19 pandemic in the U.S. response, and the regional response settled down a bit and then get a sense as to kind of what is going to be.
The 2020 impact on housing starts before we can get a sense as to what the duration of those mill curtailments will be I'd like to Doug said I think that there are some some encouraging sign certainly relative to where we were even just a couple weeks ago.
The only thing I would I would reiterate from from earlier comments is looking at a macro level you look at mill operating rates.
And have tended in north America to sort of be in that.
Call it call it 80% to 90% range and we're currently now in the mid Ninetys and so that suggests a pretty tight environment and would suggest to us that as we see inventory levels rebalance and as we see demand pick up that you'll start to see some of that capacity.
Come back on and also.
To reiterate a point that Doug had made.
If you look at if you look at the breakdown of where those cut capacity curtailments have have come.
There's been a 44% reduction in British Columbia and.
You wonder whether some of that could be linked really as well to remnant mountain pine beetle impacts and so.
We think relative to our footprint, we're in better shape relative to how we see those mill curtailments over over the U.S.
Alright, Thats Super helpful. Thanks, I'll turn it over.
Our next question comes from Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks, very much morning, guys.
Good morning, good morning.
And that surprised with the reduced guidance and a lot of the the lower Herbert.
Kind of in the loan defaults, but just one looking for some additional detail on real estate, which always seems to be a very hard for me to predict.
Maybe you could just give us an outline of.
You gave the EBITDA.
Expectation 60 to 75 million just.
Maybe the expected acreage by bucket.
That that drives that that forecast.
Yes.
I'm going to get into that level of detail Paul and the guidance you recognize that there are lot of moving pieces in the real estate and like you said, it's hard for you to forecast is your rest assured it's not always easy for us to forecast now because so much of it is driven by the binary nature of real estate transactions, either closed or they don't close kind of within any given quarter.
When they close is important in that obviously, we had a very light quarter in Q1, which we anticipated we talked about last quarter, but we continue to have a pretty strong pipeline for the year I'd say generally speaking.
Decline that we forecasted relative to prior guidance is mostly driven by.
Again, more muted expectations around improved in unimproved development sales I'm, obviously, that's the area of the business that we see kind of the greatest greatest risk as it relates to the cobot 19 pandemic I mean, I think a lot of of home builders and developers are either not operating or kind of hit the pause button on land acquisitions, and so I'd say, if you kind of look.
At the mix that we were anticipating coming into the year recognized that our initial guidance for 2020 and real estate I'd say was was very strong probably above a more normalized expectation I think but as we sit here today and we're kind of looking at the risks around those unimproved unimproved development sales for the year I think that's that's been the bulk of what.
It is drove the reduction in guidance.
Okay.
Thanks, guys.
Once again ask your question. Please press Star one our next question comes from Collin Mings with Raymond James Your line is open.
Colin Bank a bank just a couple of quick follow ups for me I think Doug just in the U.S. out and you touched on that a little bit him and the remarks as far as expecting pulpwood remain pretty pretty solid, but just just given that there's going to be less residuals available from saw though can you maybe just expand on what you're seeing in terms of pulpwood.
Demand and pricing right now.
Yes on I mean, we're seeing really strong demand for pulpwood. This typically a season when mills take downtime for their spring maintenance, but to my knowledge I think just everyone of our customers as postpone that.
Unfortunately, we haven't really seen increases in prices and that's due to a lot of crew shifting from cutting sawtimber with these mills are curtailed to producing pulpwood. So while there remains strong we're not seeing.
Really changes in pricing price has been pretty flat. So on the demand increased demand is being met by increased shifts from people cutting sawlogs to pulpwood, but very strong very strong demand unless which is great Singh.
Okay sticking with.
The U.S. out here in particular, Doug I mean, mark referenced in response to Randy's question just that.
Some of the moving pieces that relates to non income, but can you maybe just elaborate a little bit more what did 19 as well as the plunging oil prices really mean for non timber income moving forward.
Yes. Good question, so no last year, a lot to strengthen our your front in non to income was around easements and oil and gas and what the low oil prices.
We have built into our guidance expectation that capital investments and in that business are going to slow down. So we do thing they're going be weakness in our oil and gas seasons. This year. There was a lot of a lot of things.
No pun intended in the pipeline and we haven't missed the been told there all cancelled, but we're being very cautious thinking that we're going to see see some pullback in that area.
Okay and then.
Mark going back to Paul's question on real estate have you actually seen any rule or recreational land sales fall through because of the change in economic outlook.
I don't believe we saw seen any fall through certainly none.
Size and I'd say overall.
Or real estate transaction pipeline for the year is still very strong we have a number of transactions under contract.
I think if anything we've certainly seen some slippage and some on the improved about development side. So again, we see that real estate guide down is probably more more of a timing issue.
The value, we believe is still there but with this.
With all the stay at home orders underway right now you just not going to see a lot of housing activity for the near term in all likelihood, yes, we and call and we saw that both on the the improved development side and then to a lesser extend on the on the.
The rural side, where you just you're seeing some you're seeing some delays in transactions that were in the pipeline and again, we don't view that as soon as a.
An impact to value, but more an impact to timing. It's important to note to me a lot of these development transactions both in the improved and unimproved side have very long lead times. There's a lot of work a lot of investment that goes in on the part of the buyer that goes into.
Making these.
Purchases and so.
Situation like this.
Maybe some of those buyers just determined to walk away but.
The number them have some sunk costs in those deals that they're probably not going to be very reluctant to walk away from.
Mark to that point and recognizing it will probably evolve as you kind of review things.
Okay, but have you maybe dialed back any of your real estate expenditures are the capital outlay on that front, recognizing again very concentrated very small numbers overall, but just given that that that kind of balance of near term demanding a little softer and longer term either our long term projects and a lot of lead time.
Have you.
Kind of brought that in at all.
I mean recognize like with with much of our capital as has been in the Wildlight project and much of that infrastructure capital is already in the ground and so there isn't there really isn't as much there.
To delay incremental capital is really associated with getting residential lots.
In.
Into the pipeline.
But if you look at some it's a moving target and it's going to be a continuous reevaluation of whether it makes sense to make certain investments and when it makes sense to make certain investments. So that will absolutely flex to some degree with our expectation around the pipeline for improve development sales.
Got it and then just one one last one for me just bigger picture. It does look like you closed on a $24 million acquisition during the quarter and again recognizing.
The fluid environment, but just maybe just update as that you think about balancing different capital allocation priorities going forward, obviously folks that the near term focus here, but just you bought back stock during the quarter. You made an acquisition just maybe talk a little bit more about the balance as you go forward.
Yes ill touch on the acquisition Collin and then Mark can touch on the on the on the buyback Yeah. We completed in January the acquisition of 12.5 thousand acres in Louisiana. This was a direct negotiation process that we started last summer.
We purchased this for $24 million or 1920 per acre very excited about the property has a high percentage, 76% plantation average plantation age of 15 years.
And it improves.
Really the quality of our Louisiana portfolio, both from a logging conditions as well as a percent.
Plantation perspective, and we'd like to markets, its and its and really nice tensioned wood baskets with diverse mill ownership as well as product demand and so kind of getting back to some my comments earlier on the Mississippi disposition. This was in a lot more exciting market for us and an.
In an area, where we felt like we were gaining incremental scale. So really happy to have completed that in early January.
Hi, just more broadly on capital allocation priorities.
Look we certainly think that share buybacks are still an attractive use of capital in the current market environment and we did a small amount of buybacks last quarter.
But leverage is obviously going up with the closing of the post transaction and EBITDA is currently under some pressure from the code 19 pandemic. So I'd say that the top priority today is probably carefully managing the balance sheet with a focus on some some modest deleveraging over the medium term.
Yeah with respect to acquisitions I'd say, we're always in the market, we're always evaluating what's out there, but I think it's fair to say that given our current focus on the integration of Pope and our and our current leverage profile is probably not a top priority right now.
Understood makes sense thanks, guys.
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