Q2 2022 Rayonier Inc Earnings Call
Welcome and thank you for joining <unk> second quarter 2022 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 telephone Keypad. Today's conference is being recorded if you have any objections you may disconnect at this time.
Now I will turn the meeting over to Mr. Collin Mings, Vice President capital markets and strategic planning.
Thank you and good morning, welcome to Rangers Investor Teleconference, covering second quarter earnings our earnings statements and financial supplement were released yesterday afternoon and are available on our website at <unk> Dot com I would 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 forms 10-K, and 10-Q filed with the SEC list. Some of the factors that may cause actual results to differ materially from the forward looking statements. We may make they are 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 and supplemental materials.
With that let's start our teleconference with opening comments from Dave Nunez, President and CEO Dave.
Thanks, Colin good morning, everyone.
First I'll make some high level comments before turning it over to Mark Mchugh Senior Vice President and Chief Financial Officer to review our consolidated financial results. Then we'll ask Doug long Senior Vice President of course resources.
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 balance of 2022.
We achieved earnings per share of <unk>, 16, and adjusted EBITDA of $83 million in the second quarter.
Adjusted EBITDA was 13% below the prior year quarter as favorable results.
In our southern timber Pacific Northwest timber segments were more than offset by lower adjusted EBITDA, and our New Zealand timber and real estate segments.
Drilling down further.
Southern timber segment generated adjusted EBITDA of $39 million in the second quarter, which was 27% above the prior year period.
Weighted average net stumpage realizations increased by 18% driven by strong demand for both pulpwood and sawtimber, while favorable logging conditions further contributed to a 4% increase in harvest volumes.
The construction of our southern.
Timberlands portfolio with 73% of our ownership located in top quartile markets helps us benefit from some of the most tension markets across the U S South which in turn allowed us to registered higher stumpage realizations, despite increased cut and haul costs.
In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $14 million up 3% from the prior year quarter.
The year over year increase was primarily attributable to 19% higher weighted average log prices, partially offset by a 6% reduction in harvest volumes and higher costs.
Our operations in the region continued to benefit from favorable domestic lumber markets as well as incremental pension created by export market demand.
In sum our U S timber segments continued to generate strong financial performance and pricing gains driven by favorable end market demand as well as localized supply attention.
And both segments are on pace to achieve record adjusted EBITDA for the full year.
Conversely, our New Zealand segment continues to be impacted by various export market headwinds.
Quarter, adjusted EBITDA of $15 million declined 46% from the prior year period as our team contended with compressed margins due to significantly higher fuel shipping and port costs, coupled with lower delivered log pricing.
Export demand continued to be impacted by China's strict lockdown measures in response to our buys in COVID-19 cases, which in turn led to persistently high court inventories.
In our real estate segment, we generated adjusted EBITDA of $25 million down from $29 million in the prior year period and significantly higher per acre values in the current quarter were more than offset by a 41% reduction in acres sold.
While the timing of land sales will remain lumpy quarter to quarter, our real estate team continues to capitalize on strong demand for rural land as well as positive momentum across both our wildlife and heartwood development projects.
As Mark will discuss in greater detail later in the call. We are updating our full year adjusted EBITDA guidance.
$310 million to $330 million following an excellent start to 2022, we are on track for a stronger year than we had originally anticipated in both our southern timber Pacific northwest timber segments and expect that both segments will post record years.
In addition, our real estate segment outlook is fairly consistent with our prior guidance. However, in our New Zealand timber segment export market headwinds have persisted longer than we had anticipated and have negatively impacted our full year outlook.
Overall, the net impact of our revised outlook by segment translates to a modest reduction in the upper end of our total full year adjusted EBITDA guidance versus our prior guidance with that let me turn it over to Mark for more details on our second quarter financial results.
Thanks, Dave let's start on page five with our financial highlights.
For the second quarter totaled $246 million, while operating income was $36 million and net income attributable to rayonier was $24 million or <unk> 16 per share.
Pro forma EPS was also <unk> <unk> per share as we had no pro forma items in the quarter.
Second quarter, adjusted EBITDA was $83 million down from $95 million in the prior year period.
On the bottom of page five we provide an overview of our capital resources and liquidity.
Our cash available for distribution or <unk> for the first half of the year was $120 million versus $111 million in the prior year period. The increase was primarily driven by higher adjusted EBITDA and lower cash interest paid partially offset by higher cash taxes and capital expenditures.
Note that cash taxes were elevated in the first half of the year due to the required timing of estimated tax payments for our New Zealand subsidiary following the full utilization of its Nols in 2020.
A reconciliation of <unk> to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We closed the second quarter with $279 million of cash and $1 $3 billion of debt. Our net debt of $1 billion represented 15% of our enterprise value based on our closing stock price at the end of the second quarter.
We continue to believe that our balance sheet is well positioned for higher interest rate environment. Following the steps we took in 2021 to extend our debt maturities and lower our average cost of debt.
Currently our weighted average maturity is roughly seven years, our weighted average cost of debt is two 7% and essentially all of our debt is fixed I'll now turn the call over to Doug to provide a more detailed review of our second quarter timber results.
Thanks, Mark good morning.
Let's start on page nine with our southern timber segment.
Adjusted EBITDA in the second quarter of $39 million was $8 million above the prior year quarter. The year over year improvement was primarily driven by a significant increase and thats. So much pricing higher non timber income and modestly higher harvest volumes, partially offset by higher overhead costs.
Strong customer demand and drier weather conditions across most of our operating areas allowed us to execute on our harvest plan with volume increasing 4% versus the prior year quarter, despite ongoing challenges with trucking availability.
Average saw log stumpage pricing was roughly $34 per ton, a 22% increase compared to the prior year period.
The improved pricing reflects robust demand from sawmills, which continued to benefit from strong lumber prices as well as increased competition for chip and saw volume from pulp mills.
Pulpwood net stumpage pricing also improved significantly from the prior year quarter, increasing 18% over $21 per ton despite an.
An unfavorable shift in our geographic mix versus the prior year period strong end market demand and competition. Among mills, just curious by allowed us to capture favorable price increases.
Overall weighted average stomach prices improved 18% year over year.
We have been encouraged by our ability to maintain strong pricing throughout the summer and believe there has been a step change in log prices in many of our markets as compared to the past several years.
As expected, though our net stumpage realizations in certain markets have moderated relative to early 2022 as mill inventories have normalized and rising costs led by diesel fuel have compressed margins on delivered log sales.
While domestic demand for both sawtimber and pulpwood remained strong across our operating areas.
Log exports remain constrained by the Pinewood nematode policies implemented by China earlier this year.
As previously discussed several exporters and yourself.
The market and we have largely pivoted, our U S south log exports to Vietnam and India.
While these markets are relatively small compared to China, we saw a significant increase in log exports to both countries. During the second quarter and are excited about the potential to further expand our presence in these markets over the long term.
Also of note second quarter, non timber sales of $8 million were up over $2 million versus the prior year quarter with a large pipeline easement sales driving the increase.
Moving to our Pacific Northwest timber segment on page 10, adjusted EBITDA of $14 million was 3% above the prior year quarter with higher net stumpage realizations more than offsetting lower harvest volumes and higher costs and lower non timber income.
Volume declined 6% in the second quarter as compared to the prior year quarter as wet weather conditions and our production early in the quarter.
At nearly $117 per ton our average delivered solid price during the second quarter was up 19% from the prior year quarter, driven by continued strong demand from domestic lumber mills as well as a favorable species mix as a higher proportion of Douglas fir salt timber was harvested in the current year quarter.
Meanwhile, second quarter pulpwood pricing of $45 per ton was up 56% year over year, reflecting strong end market demand as well as the resumption of chicken chip exports, which resulted in greater competition from partners to secure supply.
Page 11 shows results and key operating metrics for our New Zealand timber segment.
Adjusted EBITDA in the second quarter of $15 million was $13 million below the prior year quarter.
The decline in adjusted EBITDA was largely driven by higher costs and lower delivered log pricing.
Partially offset by higher carbon tread sales favorable foreign exchange rate impacts and a slight increase in harvest volumes as compared to the prior year quarter.
Average delivered export sawtimber prices of $140 per ton were down 5% as compared to prior year quarter, reflecting reduced demand stemming from the COVID-19, Lockdowns in China.
Net stumpage realizations for export sawtimber were further reduced by elevated fuel prices.
Higher pork costs and freight costs and increased demurrage charges due to port congestion.
While log inventory levels in China continue to gradually trend lower they are still elevated as the offtake from ports remains weak given the country's zero COVID-19 strategy and strict lockdown measures.
Ongoing COVID-19 containment efforts in China will likely continue to negatively impact log demand over the near term and there remains uncertainty regarding the degree to which these Chinese policymakers will implement stimulus measures as they look to balance COVID-19 prevention economic growth and growing inflationary pressures.
Despite these near term headwinds, we expect that log inventories in China will continue to normalize as year progresses.
Which should lead to improved export pricing.
Longer term, we remain optimistic that ongoing supply side constraints, including a reduced flow of European logs in China. The continued ban on Australian log imports by China, and the ban on Russian log exports, which commenced at the end of this year will collectively translate to a more favorable export market backdrop as COVID-19 related headwinds ease.
Shifting to the New Zealand domestic market demand has remained quite resilient due to strong construction backlogs that said the sharp decline in the New Zealand dollar drove a 10% decline in U S dollar domestic software prices.
<unk> foreign exchange impacts domestic sawtimber prices decreased 2% in the second quarter.
Acting less competition from the export market.
Domestic pulpwood prices in New Zealand were likewise impacted by foreign exchange rates declining 20% in U S dollars versus 14% in New Zealand dollars.
The decline in New Zealand dollar domestic pulpwood prices was driven by less competition from export markets for lower quality logs.
While log markets in New Zealand have been challenging this has been partially offset by higher non timber income, which increased to $3 $8 million in the current quarter.
Non timber income in New Zealand, primarily reflects carbon credit sales.
Carbon pricing has generally stabilized and remained well above 2021 average pricing playing a sharp pullback earlier this year when carbon markets globally were disrupted by the rest of your framework.
Moving ahead, we plan to remain optimistic in our sale of carbon credits, depending on current market conditions and pricing expectations.
Lastly, in our trading segment, we posted a slight operating loss in the second quarter. As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business.
I'll now turn it back over to Mark to cover our real estate results Mark.
Thanks, Doug as detailed on page 12, our real estate segment delivered strong second quarter results real estate sales totaled $34 million on roughly 4700 acres sold at an average price of nearly $7500 per acre real estate adjusted EBITDA in the second quarter was $25 million sales.
In the improved development category totaled $12 million and our Wildlife development project North of Jacksonville, Florida, We closed on $10 $5 million of sales during the quarter, including a 22 acre multifamily apartment site for $4 8 million or 31 acre of single family build for rent site for $4 4 million and 19 residential lots for one.
$3 million or roughly $70000 per lot.
Heartwood development project South of Savannah, Georgia, we closed on $1 $1 million of sales during the quarter consisting of 26 residential lots at an average price of roughly $42000 per lot. Overall, we are encouraged by the momentum that continues to build across our wildlife and heartwood development projects and expect that both projects will continue to benefit from <unk>.
Both migration and demographic trends.
Turning to the rural category sales totaled $23 million, consisting of approximately 4600 acres at an average price of roughly roughly $5100 per acre, notably over half of our rural sales. During the quarter consisted of a 'twenty 300 acre sale in St. Johns County, Florida for $13 7 million or $58 50 per acre.
On the rural sales front, we have seen some indications that higher interest rates and recent financial market volatility are impacting the willingness of certain buyers to transact transact. However, the overall level of demand and pricing that we're seeing for rural land, especially larger tracks remains favorable relative to pre pandemic levels as buyers continue to be attractive.
The space privacy and recreational opportunities offered by these properties in a post pandemic environment.
Now moving onto our updated outlook for the full year based on our first half results and our expectations for the balance of the year. We now anticipate full year adjusted EBITDA of $310 million to $330 million, reflecting a modest reduction in the upper end of our total full year adjusted EBITDA guidance relative to our prior guidance.
With respect to our individual segments, we now expect that our southern timber segment will achieve full year harvest volumes of 6.4 to $6 6 million tonnes.
Which is at the higher end of our prior guidance, reflecting strong year to date production.
We further expect that pricing in the U S. South we remain relatively strong although we expect that stumpage realizations in the second half of the year will moderate to some extent, primarily due to increased cut and haul costs.
Overall, we expect to achieve record full year adjusted EBITDA in our southern timber segment of $156 million to $162 million, which represents a 7% increase at the midpoint from our prior guidance and roughly a 30% increase from the prior record we set in 2021.
In our Pacific Northwest timber segment, we now expect full year harvest volumes of one six to $1 7 million tons due in part to a modest adjustment in our harvest plan to reflect land sales as well as reduced China export volume. We further expect a weighted average delivered log prices will remain well above prior year levels for the balance of the year.
However, we anticipate these pricing gains will be partially offset by higher cut and haul costs due to elevated diesel fuel prices.
To our southern timber segment, we are on track for a record year in our Pacific Northwest timber segment and are now expecting adjusted EBITDA of $59 million to $63 million.
And our New Zealand timber segment, we now expect full year harvest volumes of two six to $2 7 million tonnes, while domestic log demand was strong throughout the first half of the year export market dynamics were negatively impact impacted by ongoing COVID-19, Lockdowns in China, we remain optimistic that export sawtimber prices will stabilize in the.
Half of the year in response to improved offtake from Chinese ports and a reduction in competing work supply. However, we expect that net stumpage realizations on export volume will continue to be constrained by elevated port and freight cost in the domestic market. We anticipate log demand will remain strong, although we expect that pricing will be modestly lower in the second half of.
The year as compared to the first half of the year due to added supply pressure from reduced export volume.
Partially offsetting these headwinds we expect increased carbon credit sales for the second half of the year as compared to the first half overall, we now expect the New Zealand timber segment will generate full year, adjusted EBITDA of $55 million to $60 million.
In our real estate segment, we now expect full year adjusted EBITDA of 74 to 79 million.
Following a strong start to the year, we expect relatively lighter real estate transaction activity in the third and fourth quarters.
Lastly, we now expect corporate segment expense of $33 million to $34 million. The increase from prior guidance is largely due to the accelerated realization of equity compensation expense for retirement eligible employees.
More details regarding our updated guidance can be found on page 14 of the financial supplement and schedule G of our earnings release I'll now turn the call back to Dave for closing comments.
Thanks Mark.
Overall as we reflect on the second quarter, we're pleased with how our team work together to navigate the challenges posed by the inflationary environment that is impacting many parts of the global economy as well as the transitory impacts of the Covid.
Related lockdowns in China.
Despite these challenges our U S timber segments are on track to deliver another record year in 2022.
Highlighting the relative strength of the markets in which we operate the operational flexibility afforded by our pure play timber REIT model and our relentless focus on active portfolio management.
Create long term shareholder value.
While the near term operating environment in New Zealand is more challenging we believe that our operations. There are very well positioned over the long term given China's significant fiber supply deficit, coupled with our broad export market capabilities.
Underscoring the sustainability of our core businesses.
Advantageous positioning of our timber timberland portfolio in the company's strong capital structure, Our board of directors approved a five 6% increase in our quarterly cash dividend to <unk> 28, and a half cents per share in may.
We have consistently communicated that a stable and growing dividend is a fundamental component of our capital allocation strategy and long term value proposition. In this recent dividend increase reflects our commitment to growing our dividend overtime in a measured and sustainable manner.
In addition to our focus on achieving important operational and financial goals. We also continue to direct efforts toward improving the disclosure of our environmental social and governance practices.
To this end we are planning to release, our 2021 sustainability report in the coming weeks.
We look forward to reporting on how we are advancing various ESG related initiatives and the pursuit of our mission to provide industry, leading financial returns. While also serving as a responsible steward of the environment and some were very pleased with our strong first.
Half results and relatively stable outlook for the balance of the year, particularly in light of the significant export challenges and inflationary headwinds that we competed with.
As we move forward I remain confident that the strength of our markets, our nimble approach to capital allocation and the dedication of our employees leave us very well positioned to execute on our growth strategy and to build long term value for our shareholders across the economic cycle.
This concludes our prepared remarks, and I'll now turn it back to the operator for questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on mute your phone and record your name clearly if you need to withdraw your question Press Star two.
Again to ask a question. Please press star one our first question will come from Greg Andrea <unk> with Citi. Your line is open.
Hi, Good morning, everyone. This is Greg on for Anthony Congrats on the solid quarter. Despite all the challenges.
So I'm just I'm, just thinking about southern log prices. So I'm, just looking on a year over year basis.
Southern log prices were up for you guys like you know five 6% in the first half of 'twenty, one accelerated to like mid teens in the second half and then now in the first half of this year somewhere around 25% year over year. So is it fair to say that southern log price growth has met or exceeded your expectations. I guess first and then if so can you.
Give us some context around what it's driven not whether it would be.
General inflation sawmills coming online sooner than expected or more favorable weather I'm just trying to think about the drivers as you.
I think about pricing in the second half of the year.
Sure This is Doug.
I would say we've been expecting to see this price shift we've been talking about it for quite a few years now as we see more capacity come online in the wood basket that we operate.
So we continue to see new capacity announcements across the south as companies reposition themselves in the region and with the high cost of them lumber <unk>, Colombia, and now we've seen a lot of lumber production versus plenty, we've seen a lot of mills moving to the south and we really think is a benefit to us. So the past announcements maintenance 2020, we're still roughly 6 billion board feet across yourself.
That's fallen into our operating area.
And of that we've seen about one 8 billion of it start to come operational so we've seen the impact of those operations, particularly in Florida, and Georgia, but also going into Alabama.
And we expect the additional new capacity to add Optionality and further tension or markets facilities complete their various ramp up scheduled on our remaining approximately $1 2 billion board feet over the next 18 to 24 months and our wood baskets. When you think about that 1 billion board feet is roughly equivalent to 4 million green tons of demand. So it's a significant amount of demand in wood baskets.
The recent announcement by camp where of the 250 million board feet Greenfield mill to replace a smaller one Alabama I mean mobile is a good example, what we're seeing so what we've really seen is increase in demand as we go across and in those wood baskets, where there's already a tight gross demand ratio, we're seeing that response in the market.
Does that make sense. Okay. That's very helpful. If I could add if I could add to that keep in mind as well and this gets to doug's opening comment that we expected. This.
Go back to the to the to.
The comment in the prepared remarks that 73% of our southern portfolios and top quartile markets in and the thing that separates those markets is the growth drain relationship is roughly balanced and so those markets are essentially poised for greater price elasticity than the weaker markets that I have.
<unk> had all the inventory build that we've that we've been hearing about for a number of years and so you combine that with the added capacity that Doug touched on the added pressure intentionally log exports. We are not surprised to see this kind of response in those top markets.
That's very helpful. I appreciate that and just just one more question if I may about kind of the market for timberlands. So I guess and in May we saw obviously a merger announcement between two of your large peers.
Another one of your peers thought.
Almost 90000 acres in the Carolinas I guess I'm just wondering what you think those transaction say about the current market for Timberlands I know you mentioned the.
The increase in rates is kind of change buyer psychology, a little bit.
And maybe going forward.
Where you see the most opportunity furthering their portfolio in terms of a timberland acquisition or or selling standpoint, and you know do you guys see yourselves as a net buyer or seller of timberlands in the current market.
I think we always.
Or in the market, where we're looking at all the all the deals or is theres more deal flow in the south than there is in the northwestern New Zealand and we're actively looking at in all of our regions.
At any point in time, I think some of what you're seeing is.
You've got a lot of factors that have contributed to stronger timberland markets you've got.
Yeah.
You've got a little bit of a flight to quality as we have.
A deteriorating macro environment, that's drawn more capital into this asset class.
We've seen that with <unk>.
Foreign capital either in a direct timber investments or through the public companies.
I think you're also seeing a lot of integrated players are putting more of the cash that they've generated off of higher lumber prices and plowing that back into to timberland assets.
We are trying to be remain fairly disciplined, but I'd say, it's a it's a.
Pretty active and pretty.
A pretty strong market right now on the timberland side, we're always looking to grow but we're going to be careful and thoughtful where we do that we have.
Our bias towards looking for properties that have a.
A benefit to our existing age class structure. So we're always looking for that complementary fit.
As we look at various opportunities.
One of the things that we feel really good about how we're positioned from a promote from a balance sheet standpoint, the ATM program that we put in place.
We have as well as the cash flow that we're generating above our dividend.
Level puts us in a really good position to go after properties that we think have a good fit for us.
That's very helpful. Thank you and just one more if I could sneak one more in I. Just you know kind of similar vein in New Zealand and I'm, just wondering what you're seeing in terms of transaction trends. There whether you can talk about deal size or a dollar per acre values, especially given.
Some of the headwinds youre seeing there in terms of Chinese demand freight costs et cetera.
Yeah, I'd say that New Zealand has has had fairly similar characteristics.
Keep in mind, New Zealand has an added element that we don't have in the U S, which is the regulated carbon market Theres a lot awful lot of capital that's flowing into New Zealand timber deals right now.
Really in pursuit of some of those carbon.
And I think the positioning that New Zealand has with China is also drawing a lot of that capital. So it's a it's all it's also a very strong market, but keep in mind the deal flow in New Zealand.
<unk> tends to be a lot a lot smaller than what we're used to particularly in the U S. South and so we tend to see more smaller deals in New Zealand and we do larger ones.
That makes sense. Thank you very much I'll turn it over.
Thank you. Our next question will come from Mark <unk> with Bank of Montreal. Your line is open.
Thanks, Good morning, Dave Mark Doug.
Good morning, good morning.
Uh huh.
Just to kind of follow on a question around southern timber markets.
So you'd probably want to avoid kind of broad generalizations, but do you think we can finally say that southern timber market has turned after 15 pretty rough years.
Well I think we can say that for a for a subset of it but not for the whole.
I mean, I think keep in mind, Mark you have the lower quartile markets have a growth drain in excess of two and so you know those.
Those markets are not seeing price increases for a fairly long time.
Yeah, So we're seeing that youre seeing that in the.
And the relative results.
Yeah, Yeah. It does seem to me, though Dave Youre starting to see.
Capital go into some of these markets, where timber prices have been quite weak. So it's you know in terms of.
Just the capital for kind of converting projects do you think that's fair.
What we have always said is you have to have you have to have a lot of components to draw that capital and and you know right now you have strong lumber markets historically.
Markets markets need a strong residual market to draw that capital and if you don't have if you don't have a strong residual market and we see that in the context of of pulpwood.
Pricing, if you've got very low pulpwood prices youre going to have low residual markets and so that's that's going to be an impediment to drawing some of that capital and then also.
I think labor is.
Is an increasingly an issue.
And so I don't think that you are and this is why youre not seeing kind of a one for one relationship of where that capital is flowing to where you've got the biggest builds and inventory and so we see that as is translating to very differential price elasticity going forward.
As you look in our investor materials.
Youre seeing the spread between the top markets in the.
Bottom markets.
In excess of two times from a from a composite stumpage standpoint, and so.
Again, that's where we get back to sort of harping on the fact that.
We're fortunate we have 73% in the top quartile, we have nothing in the bottom quartile and that's why that's why our overall.
Stumpage prices are performing the way they are.
Yeah, Dave just turning.
I bet here can you help us just think through any impact from the Ukrainian War.
Drop in Russian.
With volumes to the west and what that might mean for the New Zealand business if it means anything.
Yes.
And I think that we certainly see that as a positive when we think about New Zealand and right now a lot of the focus on New Zealand is really about the COVID-19 restrictions that China has in place, which we don't see those as permanent but keep in mind that Russia has.
And barked on a on a long term goal of eliminating log exports. This started back in 2007, when they put tariffs in place and then it culminated at the beginning of this year with an outright ban on logs and so they were a fairly large.
Log supplier into China.
And I think New Zealand has been the primary beneficiary of that.
And so if you if you shift into the western part of Russia, Western Russia has been a significant supplier of lumber into the into the European and.
And North African markets, and and that has really started to decline.
The decline in as that has declined.
Youre going to see more pressure on traditional European lumber exports into the into the U S start to start to go.
Back into into Europe , and so we see that as a positive.
For U S holdings, but in a bigger picture sense.
We don't see we see a net benefit for New Zealand, primarily because of the log flows there there Russia is a large supplier of lumber into China.
But we don't think they have enough capacity to to offset the decline that they've had on the on the long side.
Okay, Alright, that's helpful. And then finally, just one for Mark.
You guys mentioned the shift in.
Investor interest that youre seeing from different parts of the world.
Definitely pick this up when you talk to some of the team owners and they talk about how incrementally much of their capital now is coming from places like kind of Canada into Europe , which I think is much much different than it was 10 or 20 years ago can you just talk from a ran ear perspective.
You know, where you're seeing investor interest in whether it kind of mirrors that.
Those trends that we're hearing about in the private market.
Yes, I'd say it continues to be relatively diverse in I think it certainly interest in you know among European investors. For example has picked up pretty considerably the percentage of our shareholder base that is comprised of European investors has picked up pretty considerably in the last several years and.
And so I think and I think there are a lot of things driving that you know certainly ESG and the recognition of timberland is.
Solution around climate change as well as the potential future to monetize natural carbons.
Climate solutions within our portfolio I think all of those things are driving interest in this sector and certainly outsized interest relative to what we are seeing you know five years ago.
Okay, Alright fair enough I'll turn it over.
Our next question will come from Mark Weintraub with Seaport Research partners. Your line is open.
Thank you for sure that that step change in your markets in the U S. South as has been evident.
I guess the question I have is the context is also been we've had stronger housing which has sort of helped to get that.
That that lumber production demand up although COVID-19 did perhaps keep it lower than it might otherwise have been because of operational issues there.
And containerboard demand has also been quite strong.
If we do go into a period where housing is weaker.
And there are some science, where maybe that containerboard demand growth is going to slack and at least in the near term.
Does that create a pause does that create a potential pullback or because of structural shifts, particularly in lumber do you think that we continue to see strengthening in your markets with a focus on the U S South.
Thanks, Mark I mean, there's a lot of aspects to that question I think.
Certainly as we as we look at housing we don't see this as.
Something akin to the the.
The global financial crisis, where you saw.
A collapse in housing and you go back to that and you had really accelerated inventory of <unk>.
New homes, and we don't have that right now we've had an increase certainly in and the and.
And the inventory of new homes, but I think.
Behind that you have a you have a historically low inventory of existing homes for sale and so we we sort of look at the interplay between those two.
Being a fairly important I think another thing to keep in mind.
Structurally is is that you've got.
Historically the U S has relied a lot on on.
On Western Canadian lumber, particularly from British Columbia, and that's where you're seeing kind of a structural shift of that that capacity is shifting into the U S. South. This has been an ongoing process and so I think that's.
That that is.
That is going on at the same time that you have got any of these.
Changes going on in the housing market and so we see that it.
The governing any type of.
Kind of a decline similar to what we had in that last.
Michael and then I think on the containerboard side, we see that as as a pretty broad and defensible sector. You know keep in mind that that we've also got strong exports out of that that sector and so.
We don't feel that we're in that same level of risk that you may have seen a cycle ago.
And so just.
Contextualize.
Those seem to definitely be kind of medium longer term comments.
In the shorter timeframe that do the timber markets are they sort of.
A different velocity so that if there was a hiccup you wouldn't expect to see it.
To meaningfully impact your markets and only if it was a longer duration would that show up and maybe relatedly is there any kind of update you if and when you are establishing contracts for wood Mac how far in advance are you doing it for kind of for what length of time.
Sure. This is Doug its a variety and I won't really go into the percentages. So that's kind of part of our secret sauce to marketing, but we we have sales that we look at across the board in some cases, we have stumped agreements are 12 to 18 months out. So we've locked in pricing for 12 to 18 months, what kind of hedges for any downside to your point.
And we also have a mix of them delivered wood and other agreements that may go anywhere from monthly to to six monthly and also less leverage up to the upside of thing so to your point about a short term hiccup I think we're our strategy is very well protected to try to minimize anything that could happen from that but also give us the flexibility to capitalize on our opportunities upside. So we use that stumpage.
<unk> delivered mixed to try to manage through those issues youre talking about and more generally speaking timber prices historically have been much stickier.
And then lumber prices I mean, you saw that in the wake with global financial crisis with you know the kind of the creating of the housing market timber prices Didnt didnt bottom out for three or four years thereafter, and it's obviously been a pretty slow.
In a period of years that it's taken to kind of get prices back up to two or more attractive level and so again, it's hard to say with certainty.
Yeah kind of meaningfully downside scenario around the economy, your housing and kind of how exactly that translates to timber prices in the south and northwest, but generally speaking those prices have tended to move a lot slower than kind of a knee jerk reactions that we'll see in lumber prices are and kind of more markets more broadly.
And at the risk of Overstaying My welcome in the Q&A here just on New Zealand.
Now you've talked about step change in the U S.
How about New Zealand would you say there has been any kind of structural step change to the better to the worse or and what would the drivers have been and as you think about that business.
I think I think the primary step change I touched on earlier has been this gradual decline in Russia and lock volume beginning in <unk>, seven and you've seen if.
If you look at our Investor materials, you can see the.
The growth in.
In New Zealand taking.
Taking up the you know the largest share of that.
That increase in log volume coming from from other countries and so.
I think we've largely experienced it theres a lot of noise going on right now with some of the short term aspects associated with the Covid.
Lockdowns in China, and so that's that's kind of getting the news, but I think the underlying fundamental is that New Zealand is extremely well positioned to serve that the China market.
Thank you.
Thank you.
A reminder, if you would like to ask a question at this time you can press star one and record your name when prompted our next question will come from Paul Quinn with RBC capital markets. Your.
Your line is open.
Yeah, Thanks, very much good morning, gentlemen.
Maybe start on.
Just a lot of the markets I mean, we've seen a major correction in cash prizes and futures were down about 480 ranges for him. So just.
Commented that you don't expect a southern log prices.
I haven't seen any slowdown over the summer I wonder if that's true what you're seeing in the Pacific Northwest.
Okay.
Yeah, and civic Northwest, we also haven't seen any slowdown.
Strong and steady demand from our customers I think that kind of balanced supply growth.
Growth drain ratio is helping out in that that area and then we always have the opportunity for exports to kind of help maintain them a bit of a floor there and we have seen our export program continue on actually exports from the northwest.
China and this is no brainer seamless statements have been up 3% over the last last quarter, but down to them, Japan. So we haven't seen any any falloff yet in those markets and customers are still actively looking for logs.
Okay. Thanks, and then Dave you mentioned the regulated carbon markets and in New Zealand, just wondering how that works.
You know what your outlook is as that outlook.
Yeah for the for those credits to be similar to Q2, a 22 going forward or tobacco from that level.
We have the carbon markets in New Zealand the biggest the biggest hurdle that any kind of carbon market has is around the idea of additionality and.
In New Zealand.
<unk> <unk>.
<unk> developed a methodology for this by basically drawing a line in the sand at 1990, and so kind of pre pre pre pre that period, you're not getting credit for September was already in place post that period Youre getting credit so as we plant.
We plant trees from 1990 on.
We generate carbon credits ultimately when we when we sell those trees are we harvest those trees, we'd give credits back we retain a a.
Molly I meant that we have the ability to monetize and so we have we have a fairly large inventory of carbon credits today that we have been opportunistically looking looking to sell when we see strong pricing youll recall, we laid off that market complete.
And the last year.
Because we saw softer pricing and we had an expectation for stronger pricing as we've seen the stronger pricing this year we've been.
Dipping into that market, but we have a pretty steady supply of these carbon credits going forward over the next you know rotation as we see these.
These post.
These post 1990 forest.
<unk> reestablished over and over again, and so we continue to look Opportunistically and.
I think you'll see that you'll see some level of carbon sales.
In our results.
Going forward.
Every year.
And what does that carbon pricing currently at in New Zealand.
The current pricing there is roughly $80 New Zealand dollars.
Per.
New Zealand unit, which is the measure for those for those carbon.
For those carbon credits.
Alright, that's all I have that's like I think.
Thank you. This concludes the question and answer session now I will turn the conference back over for closing remarks.
Hi, This is mark Mchugh, thanks for joining us today and feel free to follow up with me or calling with any additional questions. Thank you.
Thank you that does conclude today's conference. Thank you for participating you may disconnect at this time.