Q2 2023 Rayonier Inc Earnings Call
Welcome and thank you for joining rainy or a second quarter 2023 teleconference call. At this time all participants are in a listen only mode. During the question 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 that 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 rate in your 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 secured.
These laws our earnings release and Form 10-K, and 10-Q filed with the SEC with 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 measures in our <unk>.
Earnings release, and supplemental materials with that let's start our teleconference with opening comments from Dave Nunes as our CEO Dave.
Thanks, Colin and good morning, everyone first of all make some high level comments before turning it over to Mark Mchugh, President and Chief Financial Officer to review our consolidated financial results. Then we'll ask Doug long Executive Vice President and Chief Resource Officer to comment on our U S and New Zealand timber results and following the review of our <unk>.
Remember segments, Mark will discuss our real estate results as well as our outlook for the remainder of 2023.
In the second quarter, we generated adjusted EBITDA of $69 million.
And pro forma net income of $8 million or <unk> <unk> per share.
Adjusted EBITDA generated from our timber segments collectively declined 13% to the prior year quarter as favorable results in our southern timber segment were more than offset by lower adjusted EBITDA in our Pacific Northwest timber New Zealand timber segments.
And our real estate segment, we achieved adjusted EBITDA of $20 million down from $25 million in the prior year quarter.
Drilling down further on our operating segment results, our southern timber segment generated second quarter, adjusted EBITDA of $44 million.
Up $5 million from the prior year period.
Improvement versus the prior year period reflected a 32% increase in harvest volumes, primarily due to the acquisitions completed in late 2022.
Which more than offset a 14% reduction in net stumpage realizations due to weaker demand and drier weather conditions.
In our Pacific Northwest timber segment second quarter, adjusted EBITDA of $7 million was down $7 million from the prior year quarter, driven by an 11% decrease in harvest volumes and a 19% decline in domestic sawtimber prices.
During the quarter, both domestic and export market demand.
<unk> relatively soft, which led us to defer some planned harvest volumes.
Until mill inventories normalize and end market demand improves.
Turning to New Zealand timber segment second quarter, adjusted EBITDA of $8 million declined $7 million versus the prior year quarter.
<unk> results were driven primarily driven by lower carbon credit revenues as we chose to defer the sale of carbon units amid significant market volatility.
Lower net stumpage realizations, reflecting weaker export and domestic markets compared to the prior year period and unfavorable foreign exchange impacts.
And our real estate segment, we generated adjusted EBITDA of $20 million in the second quarter down $5 million from the prior year as higher weighted average per acre pricing was more than offset by 20% fewer acres sold.
Despite the increase in interest rates as compared to a year ago demand for rural land continues to be strong and we remain encouraged by the favorable momentum in both our wildlife and heartwood development projects.
Overall, I'm pleased with how our team navigated the operating environment during the quarter in light of ongoing macroeconomic challenges as Mark will detail later in the call. We are updating our full year total adjusted EBITDA guidance to a range of 275 million to $300 million, which represents a four.
<unk> percent reduction at the midpoint versus our original guidance and is largely consistent with the directional guidance update that we provided last quarter.
Our revised guidance maintains a similar midpoint expectation as the original guidance for our southern timber segment, but reflects a lower contribution from our Pacific Northwest and New Zealand timber segments due to softer market conditions in both regions as well as a lower contribution from carbon credit sales in New Zealand.
However, we expect these reductions will be partially offset by a higher contribution from our real estate segment than we contemplated in our original guidance due to a much stronger than anticipated land sales market.
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 sales for the second quarter totaled $209 million, while operating income was $20 million and net income attributable train here was $19 million or <unk> 13 per share on a pro forma basis net income was $8 million or <unk> <unk> per <unk>.
Share after adjusting for an $11 million net recovery associated with the legal settlement adjusted EBITDA was $69 million in the second quarter down from $83 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 C. A D for the first half of the year was $63 million versus $120 million in the prior year period. The decrease was driven by lower adjusted EBITDA higher capital expenditures and higher cash interest paid.
Partially offset by lower cash taxes.
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 $88 million of cash and $1 5 billion of debt at quarter end, our weighted average cost of debt was approximately three 1% and a weighted average maturity on our debt portfolio was approximately five years with no significant debt maturities until 2026, our net debt of approximately $1 four.
<unk> represented 23% for enterprise value based on our closing stock price at the end of the quarter.
I'll now turn the call over to Doug to provide a more detailed review of our timber results.
Thanks, Mark let's start on page nine with our southern timber segment adjusted EBITDA in the second quarter of $44 million was $5 million or 13% above the prior year quarter, driven by higher volumes and non timber income, partially offset by lower net stumpage pricing and higher costs.
Total harvest volume rose three 2% versus the prior year quarter, primarily driven by an increase in pine saw timber volumes from the successful integration of acquisitions, we completed in late 2022.
Average saw log stumpage pricing was $29 per ton or a 15% decrease compared to the prior year period.
The moderation in pricing reflected reduced mark attention across our operating areas due to drier weather conditions softer demand from sawmills and less competition from pulp mills for chip and saw volume.
Meanwhile, pulpwood stumpage pricing fell 26% versus the prior year quarter to roughly $16 per ton as weaker end market demand dry weather conditions and extended maintenance outages at pulp mills, all contributed to softer market conditions.
Overall weighted average stomach prices in the second quarter fell 14% versus the prior year quarter to roughly $22 per ton.
The market tension that drove exceptionally strong pricing levels a year ago has eased as a result of weaker end market demand for pulp products and softer residential construction activity.
However, we believe the pricing does your deterioration we experienced during the first half of the year has largely played out and expect that the relative strength and diversity of our U S. South footprint will be a key competitive advantage for us moving forward as end market demand improves.
Moving to our Pacific Northwest timber segment on page 10.
EBITDA of $7 million with $7 million lower than the prior year quarter.
The year over year decrease was partly driven by lower net stumpage realizations lower harvest volumes and higher costs, partially offset by higher non timber income.
Volume decreased 11% in the second quarter as compared to the prior year period as some planned harvest were deferred in response to soft market conditions.
At $97 per ton average delivered domestic solid pricing in the second quarter fell 19% from the prior year period, primarily due to weaker demand from domestic lumber mills, coupled with reduced tension from export markets.
Well at $36 per ton pulpwood pricing decreased 20% versus the prior year quarter.
As end market demand deteriorated relative to favorable market dynamics seen last year.
During the second quarter Pacific Northwest sawmills had ample bulk supplies, which constrained our pricing power even as lumber prices start to improve however, we are optimistic that a further recovery in end market lumber demand and the normalization of military levels will translate to positive momentum and solid prices in the latter part of this year.
Moving to New Zealand page 11 shows results and key operating metrics for our New Zealand timber segment.
Adjusted EBITDA in the second quarter of $8 million was suddenly in dollars below the prior year quarter. The decrease in adjusted EBITDA compared to prior year period was driven by fewer carbon credit sales lower net stumpage realizations unfavorable foreign exchange impacts and slightly lower harvest volumes.
Average delivered export sawtimber prices of $104 per ton declined 26% compared to the prior year quarter, primarily due to ongoing challenges in the Chinese property sector. However, net stumpage realizations remained relatively flat as port and freight costs fell significantly from the record high levels experienced in the prior year period.
Sure.
The recovery in the Chinese economy. Following the relaxation of COVID-19 containment measures in late 2022 has been slower than we had anticipated pent.
Pent up demand provided a lift to property sales and new construction starts early in the year, but activity slowed through the second quarter that being said pork log inventories declined roughly 15% over the month of July to $3 7 million cubic meters, which is translated to some rebound in log pricing.
Shifting to the New Zealand domestic market second quarter average delivered solid prices fell 10% from the prior year period to $69 per ton largely reflecting the change in the New Zealand dollar to U S dollar exchange rate.
Excluding foreign exchange impacts domestic sawtimber prices declined 3% from the prior year period.
Domestic pulpwood prices and New Zealand increased 10% on a U S dollar basis, reflecting supply disruptions following cyclone Gabriel <unk>.
Excluding foreign exchange impacts pricing improved by 19% in the prior year period.
Non timber income in New Zealand declined during the second quarter relative to prior periods as we opted to defer the sale of carbon credits amid market volatility, resulting from regulatory uncertainty.
However, we are encouraged by the recent uptick in carbon credit pricing falling steps taken by the New Zealand government to stabilize the market.
Given the recovery in both pricing and market liquidity, we expect to be more active in the New Zealand car market in the second half of the year.
Lastly, in our trading segment, we posted a slight operating profit in the second quarter. As a reminder, our treating activities typically joint low margins or probably designed to provide additional commies of scale for our fee timber export business.
I'll now turn it back over to Mark to cover our real estate results.
Thanks, Doug as detailed on page 12, our real estate segment delivered strong second quarter results real estate sales totaled $32 million on roughly 3800 acres sold at an average price of $7500 per acre real estate segment adjusted EBITDA in the second quarter was $20 million.
Drilling down sales in the improved development category totaled $12 million and our heartwood development project South of Savannah, Georgia sales included a $3 million sale of a 101 acre site to a national homebuilder for the first phase of an active adult community to residential pod sales totaling 62 acres for $1.8 million.
And 47 finished residential lots for $2 $1 million, reflecting an average base price of roughly $44000 per lot.
And our Wildlife development project North of Jacksonville, Florida sales consisted of a $5 $3 million sale of a 97 acre site to a national homebuilder for the second phase of an active adult community. We're very excited about the market reception to our two active adult sites and wildlife and Heartland as they are important components of our mixed use development strategy.
Overall, we continue to believe that both our wildlife and heartwood development projects are well positioned and will benefit from favorable migration and demographic trends relatively affordable price points and a diverse mix of residential commercial and industrial end uses that each helped to catalyze demand for one another.
Turning to the rural category second quarter sales totaled nearly $16 million consisting of approximately 3400 acres at an average price of roughly roughly $4600 per acre.
Key transactions included two sales in Walker County, Texas, totaling roughly $1100 1100 acres for $5 million, reflecting an average price of roughly $4500 per acre. Overall, we are encouraged by the continued strong demand for rural land, despite the higher interest rate environment.
Lastly, during the second quarter. We also closed on the sale of 76 acres of non strategic holdings in Bradford County, Florida for $250000 or roughly $3300 per acre.
Now moving on to 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 net income attributable trainee or of $63 million to $78 million full year pro forma EPS of 30 to 40 per share and full year total adjusted EBITDA of two.
$275 million to $300 million.
With respect to our individual segments, we now expect that our southern timber segment will achieve full year harvest volumes of seven two to $7 4 million tonnes, which is at the higher end of our prior guidance and reflective of stronger than expected production in the first half of the year due to dry weather conditions. However, we anticipate lower quarterly harvest volumes for the.
There are 2023 as compared to the first half of the year.
Further we anticipate a modest decline in net stumpage pricing versus second quarter pricing levels, primarily due to a seasonal increase in the proportion of thinning volume as well as geographic mix overall.
Overall, we expect to achieve full year adjusted EBITDA in our southern timber segment of $150 million to $155 million.
In our Pacific Northwest timber segment, we now expect full year harvest volumes of one four to $1 5 million tonnes as we've deferred some planned harvest in response to soft market conditions. However, we expect the weighted average delivered log prices in the second half of the year will increase modestly from first half 2023 pricing levels based on improved and more.
Lumber demand and pricing.
Further we believe net stumpage realizations will also benefit from modestly lower cut and haul costs over the balance of the year.
Overall, we now expect to achieve full year adjusted EBITDA in our Pacific Northwest timber segment of $30 million to $34 million.
And our New Zealand timber segment, we now expect full year harvest volumes of two three to $2 5 million tons as we have deferred some planned harvest volume in response to unfavorable market conditions, we expect that export sawtimber pricing will be modestly lower as compared to the first half of the year.
However, we expect this decline will be partially offset by lower port and freight costs as Doug discussed earlier, we are cautiously optimistic that export log pricing has turned the corner given the recent drop in Chinese port inventories.
The domestic market, we expect that solid pricing will decline modestly from second quarter levels as elevated interest rates continue to constrain the residential construction market.
Turning to the carbon market, we have tempered our full year expectations for carbon credit sales based on significant market volatility and limited transaction activity in the first half of the year. However, we expect to be more active in the carbon market in the second half of the year. Following the recent uptick in carbon pricing in response to governmental action to stabilize the market overall, we now expect.
Zealand timber segment will generate full year, adjusted EBITDA of 39% to $46 million.
And our real estate segment, we now expect full year, adjusted EBITDA of $90 million to $100 million as demand for timberland and rural HBU properties has held up better than expected despite the higher interest rate environment.
Just on the anticipated timing of closings, we expect the second half transaction activity will be heavily weighted to the fourth quarter.
Lastly, we expect corporate segment expense of $34 million to $35 million, which is roughly in line with prior guidance.
More details regarding our updated guidance, including a reconciliation of adjusted EBITDA to net income and EPS 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 as.
As I reflect on the first half of the year I'm pleased with how our team has remained focused on both preserving and enhancing the long term value of our assets. Despite a difficult near term operating environment.
Following a challenging start to 2023, we're beginning to see encouraging signs of stabilization and improvement across many of the end markets served by our timber operations in the U S. Prospective homebuyers have increasingly turned to new construction to meet their housing needs.
A housing shortage that has been further exacerbated by the rapid rise in mortgage rates.
Specifically the significant increase in rates over the past 18 months as discouraged many prospective sellers from listing their current residences and thereby.
Thereby translated to a dearth of supply in the resale market as a result, we're seeing favorable momentum in several residential construction indicators such as homebuilder sentiment new single family building permits and orders for building materials.
Further there are early signs that the destocking of inventory for products derived from our pulpwood such as containerboard is nearing completion.
Meanwhile, as discussed earlier, the New Zealand government has recently taken action to provide more stability in the country's emissions trading scheme, which better positions us to participate in the carbon credit market over the balance of the year. After we opted to remain on the sidelines over the past several months to preserve value and uncertain market.
Conditions.
Turning to real estate.
All things considered I believe the operating environment for our business will generally be more favorable over the second half of the year versus the first half.
In addition to managing ongoing operational priorities and evolving market conditions. Our team has also been advancing initiatives associated with the growing demand for nature based solutions to support the transition to a low carbon economy.
Interest from prospective Counterparties and a corresponding list of potential opportunities continues to grow and we are in the process of converting some of these opportunities into financial results. We now have in place wind solar and carbon capture and storage leases and expect that these nature based solutions as well as others offer.
By our timberlands will become increasingly important to our long term value proposition moving forward.
In summary, I'm proud of how our dedicated team is navigating evolving market conditions and positioning ranier to create shareholder value over time.
We collectively remained very optimistic about the future prospects of our business and all of the opportunities that our land base provides.
That concludes our prepared remarks, and I'll now turn the call back to the operator for questions.
Sir at this time, if you would like to ask a question you May Press Star one to withdraw your question you May Press Star two one moment please.
Mike Walk from the two Securities you May go ahead Sir.
Thanks, David for taking my questions.
Just wanted to kick it off with what's happening in the in the U S South and your expectations for a lower quarterly harvest volumes is that more a function of in the back half of the year that is is that more a function of pulpwood and sawtimber.
Given what's happened with housing last couple of months.
Expected.
Improving sawtimber man.
Given the increase that we've seen in single family housing. So just wanted to get a closer to your forecast in the back half of the year on the southern volumes.
Yeah sure. This is Doug I'll answer that one we have a reasonable mix of both stumpage and deliver business and what we've seen is that there's been pretty active harvesting on our stumpage sales. So a lot of the harvest in that we had in the first half of the year or will it still sales, we'd still to have a 12 month contra.
A lot of wood has been pulled forward in the first half of the year by the harvesting. So what we're seeing out there in the market is that a lot of the folks who do buy stumpage. They have very low inventories and so they've moved on and harvesting on those tracks and so we have a you know a lower mix of stumpage going into our second half of the year. So just a slight slowdown in the volumes being harvested.
Got it but in terms of how that relates to.
Let's say the mix itself in terms of pulpwood sawtimber.
Have you seen it I mean did you have you seen anything provision or charge off I can see.
Timber demand because we give them single family housing construction, which has accelerated the last two or three months.
Yeah, absolutely we've been encouraged by some of the recent price negotiations we've had both on our delivered sales programs as well as some of our recent stumpage sales and you know as we discussed in our prepared remarks, while there'll be some fluctuations in our reported pricing based on geography harvest type of mix, we think on an apples to apples basis pricing appears to have bottomed out and we're actually starting to.
See some improvement in pricing and a recent negotiations.
It really compared to earlier in the year.
But as historically has been the case about 5% of our volume shifts.
Shifts in harvesting from the strong coastal markets to the Gulf markets during Q3 and into Q4 and that is accompanied by a 20, 25% increase in thinning volume that's almost all pulpwood. So while we've seen per product pricing stabilize and even improve the shift in location harvest type will still winter composite pricing going in the second half, which is what's built into our guidance yeah Mike.
Just to reiterate the lower expectation for volumes in the second half of the year is really driven by like Doug said that acceleration of our volume on the stumpage sales and not any statement about market conditions, we actually expect market conditions to be more favorable in the back half of the year.
Got it.
I appreciate all the color there and then just one other question on New Zealand.
Have you guys seen any impact.
From the restart of the from the relationship now between Australia, and China, and B, how China has reopened wood imports from Australia.
Any impact on your New Zealand operations, and you know where do you think.
New Zealand margins could head, China, let's start stated toward an increasing amount of wood from Australia.
Yeah. This is Doug and I'll take that one so we have not seen any impact on you know additional fiber or logs flowing into China from Australia, and we operate a large JV export JV that used to move quite bit of wood from Australia, and what we've seen is that over that course of kind of the trade war between Australia, China really.
Would flow started to really shift back and being used domestically and there has been further restrictions on harvesting and in Australia. During that time too. So we don't expect it to be a significant shift in volume going from Australia to China, there will be some there'll be some marginal when it comes from ports, but don't see this be significant event for us going forward.
Yes, Mike I'd add to that.
You.
If you think about where they were prior to this this trade spat you know they were they were they were roughly 10% of that China market and we don't see them returning to anywhere near that based on some of the shifts they've made to increase domestic processing.
Got it. Thank you very much good luck in the second half.
Thank you. Our next question comes from Mark Weintraub of Seaport Research partners and again that is star one if you would like to ask a question.
Mark you May go ahead.
Thank you so obviously, a pretty big increase on the real estate side relative to original guidance I'm curious how much of that's a function of markets being better.
Versus kind of just a push forward or pull forward.
And just and it's more timing driven and and and.
And maybe relatedly and kind of what is your just sense of your HBU holdings today versus maybe where they had been a couple of years ago. How have you had a positive shift in that view and color you could provide would be helpful.
Yeah.
Good question, Mark and theirs.
There's a there's a fair bit to unpack there. So if you if you break down the pieces of our our real estate you know a lot of the a lot of the baseline and the real estate is a.
Rural Recreation and residential properties and what we have found is theres a fair theres a fair component of of that market that that is somewhat insensitive to two interest rates you know cash buyers and so.
That has been a remarkably stabilizing its it hasnt had there certainly has been some impact but it's not a it's not an arena, where you tend to see highly levered transactions and so that has.
That has provided a nice baseline of support I think another another thing to keep in mind is as we progressed through Covid and come out came out on the other side I think youre seeing a fundamental shift in and more people wanting to live in more rural.
Settings, because they can.
Work from home and so we have seen that translate into our our rural places product, which is where we will put a modest investment into subdividing.
Parcels and putting a modest amount of capital into those and.
And the inventory that we've had of those has has.
Sales pace has vastly exceeded.
Our expectations as we have progressed.
Through and now post Covid and so that's been another big.
Component of it and then I think thirdly, our our improved development projects the ones.
North of Jacksonville.
Wildlife and south of Savannah.
Heartland.
Hardwood those have been.
Those have been really progressing.
Progressing nicely I would say from an absorption standpoint, we're well ahead of.
Of our expectations when we originally underwrote those projects and we're seeing that momentum and as we as we discussed briefly in the prepared remarks, certainly a piece of that is is the strategy around diversifying and use as a good example of that is.
His efforts around.
Around our <unk>.
Shifting from a finished lot sales to pod sales in the pod sales is where we will we will sell a group of entitled Bots and the homebuilder will.
Have their capital to develop those lots.
Into finished lots and then and then ultimately sell homes and.
And it helps us from a capital standpoint.
It gives a builder a little bit more control on their end and we've been very pleased with the progression of that and then secondarily.
The move for more.
More active adult communities, we've got a big active adult community in both hardwood and wildlife and we've had two closings on our wildlife project, one closing on hardwood and <unk>.
These are progressing nicely and complementing the single family.
Lots.
Another piece that is.
That has influenced this and it really kind of boils down to rates of absorption is the big Hyundai plant announcement that touches our heartwood project and we've had.
Homebuilders, who have had a number of sales already that have come out of that Hyundai project and so.
With both heartwood and wildlife, which are very big projects. You know many many years' worth of supply, we're well ahead of our expectations and Youre seeing that.
Youre seeing that in our results and so we're extremely encouraged by.
Those projects are progressing and keep in mind when we when we got into those two projects.
The motivation was not just for the for those lands, but also the lands around them and we feel like as those projects are progressing there, adding a lot of value to our surrounding timberlands.
Okay. Thank you very much for all that unpacking and so when you sort of put it all together.
Is it your do you have a more elevated view as to what kind of the run rate for the next five seven years.
Kent average will be.
Presumably yes, given that the heightened pace, but just wanted to clarify.
Yes, I'd say I'd say that.
I would say that where we sit now we certainly have seen a higher run rate than we expected and sort of faster absorption you know some of the same dynamics that I talked about on the rural residential also apply to these.
Projects and they both benefited from some of the regional migration patterns.
That we've seen and particularly in the U S South.
Are these areas have strong school districts and strong in migration and so yeah. We've been we've been very encouraged by what.
What we've seen in <unk>.
We we expect more of this to come in and you know another thing that we we are.
We're continuing to kind of work on the pipeline, we have a number of other projects that we're working on within the real estate sector that are at earlier stages and so we expect as as.
As these two projects progress some of our other projects that we're working on are going to start to touch.
To translate as well to.
P&L impacts.
And then hey, Mark this is mark.
Just balance out a little bit though in terms of the longer term expectation around just the rise that we've seen an underlying timberland values as well as the optionality around our nature based solutions you know recognize it that rural HBU business is all about premium and the clearing price to hit our premium expectations that it continues to move up.
Getting given some of those alternative land uses and so while our development business. We feel is certainly a hit its stride and we expect that that will continue to perform at a higher level relative to what we've seen over the last call. It five years ago again, I think that rural HBU business will be somewhat balanced in terms of our willingness to sell land given some of the other optionality and the increase in <unk>.
Values that we've seen there.
Interesting. Thank you.
Shifting gears quickly Pacific.
Pacific Northwest and I understand the comments you were making on the timber business, but I guess I'm sort of surprised given.
Lumber pricing has been pretty strong domestically that there wasn't kind of a more robust carried through to saw timber pricing I mean, how much of that the export market or any other kind of additional nuance that you would bring to that.
Process of analyzing what's been going on there.
Yeah sure. This is Doug I'm happy to answer that one so yeah. When we had those higher interest rates at the beginning of the year that really cool demand for building products and particularly in the west It was kind of start the year, which forced the mills you know basically to trim back production and lower their inventories to match that lower demand and I'm. Like you said. This this was also coupled with Wheaton.
Mark attention from from exports to Asia. So the mills had ample log inventory and as we move into Q3 and to your point you know, we're seeing homebuilders gain more confidence as Dave mentioned in the market and people are starting to you know increase that demand and so we're seeing that pause movement in the lumber pricing.
But you would expect that to have translated maybe to your logs you said, what we're seeing right. Now is those mills are starting to increase that capacity. So they had brought down their capacity weren't running at full capacity. There now stepping that back up and so what we've seen with that is that's really resolves and stabilization of log pricing and even some positive momentum here recently in some specific markets.
So I think that's the positive thing we've seen but it really took they weren't running at full capacity. They ramped up so more logs came in specs got a little bit easier. So we're able to move more wood, but them at that point in time. It just wasn't flowing in but we're really starting to see that tension in the market now and we saw a 25% reduction in North American volume at China ports during July so pretty steady drawdown and Chi.
Anna It's we're also encouraged by increasing customer demand from there and we are social moving back in that market in Q3 with exports from a port Angeles export yards. So I think we're just we've seen that point, where the mills have gotten back up they're running at capacity, there's less supply from British Columbia, Canada, they're feeling more confident now and we're so we're starting to see that kind of drained now on the box and so expect to see some price increase.
And Ive already seen some as we go into the second half of the year.
Okay. Thanks, so much I'll get back in queue I do have another question if it doesn't get hit otherwise.
Good luck next quarter.
Thanks Mark.
Thank you our next caller is Anthony Petrone, Larry What Citi Research you May go ahead Sir.
Good morning.
I was wondering if you could talk a little bit more about kind of free cash flow or CAD implied by the updated full year guidance and in case, you know the kind of second half improvement doesn't materialize.
And maybe we're in a weaker economic environment in 2024 can.
Can you just talk about sort of free cash flow profile versus the dividend.
It really stress test macro assumptions, just say theres a recession, obviously, that's not the base case, but just wondering if you kind of talk about that and levers that you can you can pull.
Mark you're on mute.
I'm sorry, yeah, no our expectation is for higher free cash flow in the back half of the year.
And that's largely driven by higher adjusted EBITDA in the back half of the year and so you know despite that we do expect that the dividend will be modestly under funded this year and that's just a function of macroeconomic headwinds that we've seen you know really through the first half and in particular I'm. Obviously, we set the dividend on the basis of long term cash flow.
<unk> also with the desire to grow the dividend over time as cash flows grow and we saw very strong growth in cash flow on 2021, and 2022 and obviously that's backed up some here in 2023, but we still feel as though long term.
We are poised for growth in cash flows we see a market recovery.
But you know that's something that we have to continuously assess and certainly if we saw a more pronounced pullback in market conditions.
We have to assess the dividend against that backdrop, but right now we certainly feel confident that our long term the businesses are pretty well situated and obviously the balance sheet is still in very good shape and we have a lot of levers at our disposal to manage both cash flow as well as our leverage.
Okay, that's very helpful.
Maybe just shifting gears on credits you mentioned the plan to increase New Zealand credit sales. After I think government actions to stabilize the market I was just wondering if you could provide any more context on those actions and then in the U S. You know we've started to see some of these credit projects piloted.
In different geographies, maybe now including the U S. South I was just wondering if you could talk generally about sort of the attractiveness of those projects and you.
You know maybe rein you're participating in the credit markets in the U S as well as New Zealand and the long term.
Sure. This is Doug and I and then as your own government announced in March plans to review its emissions trading scheme to explore where the changes might be need to encourage business to focus more on reducing emissions as opposed to offsets.
This created a fair degree of market uncertainty and limiting liquidity in the market and causing prices friends that used to really declined considerably compared to where they were a year ago.
While we expect the conference in view of that New Zealand ETS will will take some time to complete the government has recently taken measures to adjust both price controls and settings, which has helped support higher pricing liquidity than.
Then we saw earlier in the year and notably you've already seen it uptick in an inside your carbon credit prices and liquidity fall on this news. So there was somewhat certainly put in the market and then it probably market overreacted beyond what they expected and the government come back and try to help assure everyone and stabilize things.
As it relates to nature based solutions more broadly.
Do still see a tremendous opportunity long term around nature based solutions carbon credit markets are really just one piece of that we tend to think of nature based solutions is broadly falling into three categories.
First of which would be carbon markets. Both the voluntary market, which is what we have in the U S as well as regulated markets like the New Zealand emissions trading scheme that second bucket would be alternative land uses and that might include <unk>.
Solar wind leases carbon capture and storage leases, we're seeing tremendous activity there right now and lastly would be wood fiber for bioenergy and Biofuels for example, a sustainable aviation fuel and so that's kind of how we broadly think about the major categories of nature based solutions that said all of these different opera.
<unk> are in various stages of development to date the regulated market in New Zealand has been the largest driver of revenue for us in that nature based solutions Arena, we havent yet participated in the voluntary carbon market in the U S. Given just broader concerns around the quality and consistency of our voluntary market.
Offsets that said, we're certainly evaluating a number of opportunities in the voluntary market currently but suffice it to say, we're proceeding very cautiously on that front, yeah, but like I said the area that we're seeing the most opportunity right now just in terms of capital investment as well as tangible medium term revenue opportunities for Rainier.
It's really around that alternative land use.
Doug is overseeing our nature based solutions business, So maybe I'll turn it back to him.
An overview of some of the.
Kind of activity that we're seeing in that space. Currently yeah. Thanks, Mark Yeah, I would just you know following with Mark's comments on the on the carbon credits with respect the voluntary area.
We're in the process of working on that and we have some of our initial projects. We expect to come online in 2024, and we've been developing relationships with Counterparties that are focused on top tier quality credits as Mark mentioned I'm kind of giving concerns about credibility someone's early carbon credits that were developed and sold we're really hoping to see improve standards of best practices further evolve before issuing our own carbon credits and we've seen some of this with the <unk>.
Integrity Council for voluntary car markets I mean, just passed a framework to assess carbon credit Tegra D and we think that's a positive development.
Given our experience.
Well over a decade, now and New Zealand carbon markets and the projected demand for carbon Chris both in the U S and globally.
We believe it's prudent focus on the long term value by clear differentiate yourselves from a quality perspective.
So overall, we believe that that increased focus on the quality and integrity across the voluntary market, that's going be a positive trend.
And overtime it should increase pricing as cheap low quality credits are purged from the market and replaced by more durable ones that actually chief traditionally.
So we were patient New Zealand you know when credits were selling in the low single digits start and have seen them trade in the range of 35 to $50 U S. Over the past few years. So we can take it and tend to take a similar approach in the voluntary market with a view towards building a durable business.
And then realizing a quick Buck so I think thats kind of on the carbon where we see things right now that just seems like it's a growing market and we want to make sure that we enter it.
At the right time with the right quality.
It goes to alternative land use no. We mentioned our comments that we've we've done some C. C. R. David should we does some ccs carbon capture storage solar and wind on.
On the carbon capture storage front based on the existing kind of pipeline infrastructure location and plans have made their large emitters and civil geology, we've prioritized the Houston carbon capture hub for our initial efforts.
The other areas with our ownership that we believe are suitable for carbon capture storage, but theyre likely further out from timing perspective.
So we've identified about 400000 acres in Texas, and Louisiana with the geological potential for carbon storage in this hub or actively engage with suitable counterparties.
It was execute our first carbon capture storage lease early this year on 26000 acres one of those parties.
At a high level the economics for these types of leases are generally structured as a lease payment for.
For the land then with upside when if and when injection occurs in the future.
And the timeline to potential injection payments for several years out given the lengthy permitting process involved for these types of projects but.
But we really do remain excited about the potential for carbon capture storage leases to add material value for our shareholders.
Now shifting on to solar we're seeing really strong interest from top tier sort of elpers across our southern footprint utility scale projects expected to lead to a tripling of the solar industry over the next five years.
And over 50% of all new electric capacity add to the grid in Q1, 2023 with solar with Florida, Texas, and Alabama, among the top five states, especially suits our footprint well.
Over the past few years, we've sold approximately 3000 acres and average price in excess of $10000 per acre is HBU land sales to solar developers.
But more recently the leasing fundamentals are proven to be more attractive as a long term annuity by itself within the added potential upside to add other MBS nature based solution opportunities such as carbon capture storage.
So right now we currently have approximately 26000 acres either under leased or option to lease with developers expressing interest or simply more acres in Florida, Georgia, Alabama, and Texas in particular.
And that's really based on factors such as capacity on the grid proximity transmission lines sufficient acreage for suitable sites.
And then lastly on the wind in 2020, we participate in our first wind farm in Oklahoma with installation of 16 turbines on a property.
And this is structured as a multi decade lease with a base rental component and then a revenue share based on energy production of each each turbine.
We're still seeing interest in that area and we currently have interest in additional three wind farms in our New Zealand operations.
Oh, the whole where more than 60 wind turbines.
So as Dave said earlier, we've been active in this space and continue to see a lot of interest as we go forward.
And lastly, I'm kind of in that third bucket that mark talked about on the fiber demand.
The level of interest in nontraditional uses of our fiber to achieve low carbon products, such as Biofuels stimulators fuels and really other traditionally petroleum based products has also been very significant.
We are currently in varying degrees of discussion with a dozen incredible projects for fiber supply and are aware several more being considered in our wood baskets.
The average size of these projects is going into the middle of a small pulp mill.
And while that demand is not here in current it it will be coming down the road. We believe in some cases and it will take them a while doing due to permitting and construction, but really encourage by what that means for the midterm to long term for our land base and the nice thing about that I think is that are these new customers. They are outside of our traditional end user products. So we're going to see you know different different opportunities in different flexes within the <unk>.
So that's kind of a high level summary of what we've been working on and where we're going right now and I'd say the the other area that is kind of moving forward as we look at our niche based solutions is also starting to go into a more nascent area, but in the biodiversity.
And Anthony if I could just add a little perspective to that we began this work in earnest back in 2021 and part of that effort was to really.
Divide up the potential opportunities from a what we believed then what would be the timing expectations and start to.
Start to improve our understanding of the opportunities bring in more expertise and you fast forward to where we are today and it was one of the key reasons behind the reorganization that we announced earlier this year, where we we moved that under Doug's leadership, we've brought a lot of new dedicated positions to go. After these are.
Opportunities and it's allowed us to shift as the opportunities.
Have become those opportunities that have become more material and so we're we're very excited about not just the positioning of the portfolio, but also the positioning of our team and the way we're structured to pursue these and so stay tuned it's still it's still the early days, but we like kind of the approach that we've.
And we like the fit.
Our portfolio.
Great Great no. Thank you that the details very helpful I'll turn it over.
Thank you. Our next caller is key Pan mantra with BMO capital markets. You May go ahead Sir.
Thank you good morning, Dave Martin and Doug.
Right.
You talked about you know port inventories in China, having come down quite a bit any sense as to kind of where they are relative to historical averages.
You know, whether they are down to normal levels.
We expect.
Now to get there at some point pretty soon.
Sure. Yeah. This is Doug I'll answer that one so yeah. As we mentioned we saw a 15% decrease in port inventories during the month of July which is resulting in about $3 7 million cubic meters at the month end.
And we're seeing average daily sales in July of approximately 72500 cubic meters and that's up 5% year over year and we typically like to think about kind of what's the demand to the inventory ratio and if you think about that right. Now this equates to inventory demand ratio of about 1.7 months and historically when we've seen this ratio below two months that equates to <unk> in the market.
With price appreciation, which is what we're seeing currently so where we're getting back to your to your point I'm at a point now where we're getting below that two months inventory demand ratio and that's where we typically have seen thing. So it the inventories have come back down.
Quite a bit from where they were and to your point I'm getting into more normalized when we get to below that to that two months ratio. So I think that's a good thing. Additionally, we've seen lumber inventories have also fallen through July which is yield some price improvements and in lumber too so.
The Chinese cellphone markets showing signs of recovery with a reduction in both inventory and increased prices during a seasonally low period of demand.
Cause you weren't the monsoon season is very hot temperatures.
So I think we're you know, we're seeing a point, where certainly price price appreciation attention that market. So it's feeling like a good time right this minute to be in that market.
Alright.
Helpful context, and then.
Doug.
Update on kind of that'd be our but the European spruce bark.
I'll kind of situation and the exports that we're seeing from there into Asia.
The lumber.
Sure Yeah yeah.
I think what we've seen is that the the European spruce beetle salvage has widely is mainly wound itself down they're still harvesting some of that but from what I've read and seen the excess of harvest, where they were harvesting beyond their average annual cuts in certain countries that has come back down now, it's where they're pretty much cutting within there kind of more normalized annual <unk>.
So we've seen the the amount of volume from from Europe , particularly being exported from the salvage reduced significantly over over the years and I don't expect to see that ramp back up what we can see though is that kind of with the weaker demand macro across the country that are still can see European volume moving around trying to find a home.
It's not being processes saw logs, but I don't see that really increased ramp up that we saw before so not expecting to see European logs look anything like they did in 2020.
Got it that's helpful. And then final question from my side can you talk a little bit about how your M&A pipeline is looking and just deal activity in timberland.
Sure I'll take that.
I think generally.
This has been a slower year I think some of that speaks to the the optionality that a lot of these.
Nature based solution types of opportunities have presented and I think it is translating into a number of buyer or excuse me a number of <unk>.
Landowners sort of sitting and waiting to see how these various markets develop and I think that's part of why.
Youre seeing.
A slowdown in activity.
From a.
From a demand side I think we've continued to see pretty robust demand and I say that sort of in the context of.
Our understanding of capital flows capital flows often have a big impact on.
Our pricing and can even impact volumes and so we're seeing and again for those same reasons around the nature based solutions we're seeing.
Capital flows flowing into this asset class.
For that reason and so.
In the in the end, we're going to have to kind of see how that how that sorts itself out we continue to.
We continue to look pretty much across all our geographies for.
For bolt ons, we're always.
We're always sort of active in smaller trash.
<unk> transactions that have a good fit for us and we will have we're taking kind of a wait and see approach on some of the larger.
Transactions until some of these things sort themselves out.
Got it that's very helpful. I'll jump back in the queue. Good luck in the back half.
Thank you our next caller comes from Buck Horne with Raymond James You May go ahead Sir.
Hey, good morning, Thanks for the time guys I'm just wondering if we could go back to the pulpwood market for a second just to characterize.
Maybe a little bit better what you're hearing from your end market customers on.
The pulp mills in terms of.
You know what their log inventories look like going into the back half of the year youre seeing any signs that that demand for containerboard or other pulp.
<unk> is starting to rebound or what's kind of the color you are hearing on the ground from the pulpwood market. These days.
Sure a lot of inventory Destocking that has occurred across supply chain and was a result of that shifting economic consumption from goods or services post Covid and recently, we started to see that inventory situation improve as inventories at mills and box plants fell to $2 6 million tonnes in June which was down from a high of three 1 million tons in July last year.
And for reference in the two years, leading up to the pandemic inventories averaged about $2 6 million tons. So we're right in that ballpark.
And this is why in our prepared remarks, you mentioned that the destocking process for him products drive from a pulpwood as is largely complete as we now see milliman Tories and reach out stories and more normalized levels.
The last part of the supply chain that is still working on clearing inventories that wholesale channel between the mill and the retail and when that happens we expect to see more pronounced recovery the timber containerboard demand, but all that said we felt Denver inventory situation is much improved from where we were you know as mentioned there and we start to see improved demand on the ground matching that so we've had.
Mills, where we were under quota who've now removed the quotas from US and said you know it can take more volumes, it's much like that I mentioned corn the lumber in the northwest where before.
Before we see price improvements, we have to see the capacity improvements in the would move in and so what we're seeing in quite a few areas is that the mills start to open up the quota is allowing us to bring more logs in and we expect that things move on and they start to see demand on their side that that should translate into pricing and we have seen that our individual mills so far.
Awesome, that's very helpful color I appreciate that.
And then switching just to the timberland M&A market.
You guys have highlighted I mean demand has remained pretty strong nally for rural real estate timber in general as an asset class.
It sounds like Theres, not a lot of sellers.
Putting packages together in the market right now would you guys think about.
Stepping into that and looking at maybe putting some parcels that are non core non strategic to you guys and maybe.
Step up disposition activity in the back half of the year.
I mean, I think that's but that's something that we always.
Look at and I think that's one of the one of the areas of advantage that we have as a pure play.
Timber REIT is that we have greater flexibility to kind of.
Actively manage our portfolio and so that's something that we're always considering we have kind of rank ordering of our own properties from a quality standpoint, and it gets back to some of the flexibility that mark touched on as it relates to the balance sheet.
That we have in our toolkit and we take that that active portfolio management.
Our role very seriously.
As a pure play.
Okay, Alright, thanks, guys appreciate the time.
Thank you and our last question comes from Mark Weintraub with Seaport Research partners. Sir you May go ahead.
Thanks for all the color and especially kind of a rundown on the nature based solutions are lots of good information lots of follow ons I'll, just ask one though and on the carbon capture solutions you talked about.
26000 opportunity acre opportunity, having been identified and the possibility of 400000 over time can you give us a sense in terms of how much.
Earnings where revenue could be associated with just a ballpark with the 26000. So we can begin to scale the potential of the opportunity for you here.
Yeah, Mark we can't we're not in a position to provide that level of detail just yesterday I recognize there's a lot of activity that's ongoing in this arena.
The discussions that we're having currently are under confidentiality agreements.
As well as agreements that have been entered into in prospective agreements that we might enter into around Ccs leases and so.
We're working on appropriate disclosures on a go forward basis, and we do hope to be in a position to provide some more color on that here in the next in the next short while but we're not quite at a point, where we can provide economics on the transactions that we're we're evaluating okay fair enough.
And keep in mind keep in mind too that you have kind of two pieces you have the land lease piece, you've got the injection piece and while the land lease pieces is.
Started the injection piece is very determinant based on the permitting and the and the pace of activity and so that's a that's going to be a harder one to sort of get your hands on early in the game.
Got it so there'll be like an underlying rental fee on the the land lease and then.
It would be a bit more variable depending on the injection is that.
How do I understand that is that correct.
Great.
But recognize again that those injection payments wouldn't you know.
Theoretically occur until a later date given that the long permitting process. That's involved in getting these these injection wells permitted.
Understood and not to hold you to it because I realize things are dynamic but.
I think you suggested you might be in a place to give us a bit of a sense more on the economic side soon.
Maybe.
When might represent well illustrative Lee Mark I can point you to Wall Street Journal article from about a month ago that provided some detail round landowner economics, but again they were given a fairly wide ranges and again, we're working through at what point in time and at what level of detail.
We can provide that that information going forward, but recognize that again, we see this as a pretty meaningful opportunity for us long term, but it's still very much in the early stages and some of those revenues are still.
Several years out or prospective revenues or several years out. So again I don't want to put a specific timeline on it but it's something that again, we've seen a lot of activity here just in the last six to 12 months and I think over the next six to 12 months, we'll be looking to provide some more detail around kind of how we expect that impact the business long term okay.
And getting back to my team comments, Mark we're devoting a lot of resources to.
Two two.
And these efforts.
Okay.
I appreciate the help thanks.
Thank you and our last question comes from Paul Quinn with RBC Capital markets. You May go ahead Sir.
Yeah, Thanks, very much good morning, guys.
Following up on Mark's question, if you'd looked at 10 years, how big is this carbon opportunity you know to you between the wind solar carbon capture storage everything all in it in a bucket is that.
Do you think this is 10% of your business you know it gets 20, what you know what what's a ballpark number that that without giving any financials, which you know it sounds like you're still a ways from.
How do we how should we think about it.
Yeah, Paul we're just we're just not quite at the point, where we can put that type of figure them out. There publicly again, we are currently working to to better refine the long term view around that but just recognize that there has been.
Just a lot of activity in the last six to 12 months. We are still trying to size you know both the market opportunity as well as the specific opportunity for Rainier suffice it to say, we think that it's meaningful but again, putting that type of those.
Those type of brackets around it in terms of percentage contribution to cash flow revenue EBITDA. We're just not quite at the point that we're ready to do that.
Okay, maybe I looked at it. They also have a lot of you have a lot of overlay between various potential land uses and products and so that we're managing that complexity as well.
Okay, and then I don't know maybe I take another look at it on a carbon capture.
Sequestration basis.
Do you think that.
As some of these projects get up and and.
The credits gets sold.
Areas get differed from harvest is that going to be a material increase in term in terms of log pricing to you.
The way you think of that down the road.
It certainly could be if you saw meaningful deferral around for example, carbon projects or sale of forestry credits into the voluntary carbon market I think it could also be meaningful as you look at the prospective demand for that fiber going into bioenergy or biofuels, but again.
Recognize that all of these.
Emerging industries are still in their relatively nascent stages and so you know again, we haven't seen we've seen a lot of talk around bioenergy facilities and biofuel facilities like sustainable aviation fuel, but we haven't actually seen that pull of fiber into those types of facilities. Yet. So again I think what's exciting for us as you look at any one of these.
<unk> in isolation again be it carbon capture and storage or solar or fiber into bioenergy are sustainable aviation fuels and in isolation, we think that they could be meaningful for our business. When you start to think about the confluence of all of them together it is.
And there's a compounding effect right just in terms of that demand for wood fiber and demand for land use more generally so.
This is clearly something that's affecting our industry and is driving ease.
Your views around land values currently, it's obviously, making the timberland M&A market that much more competitive and so we're excited about the long term prospects, but we're really still at the point of trying to size these opportunities long term.
Alright fair enough best of luck.
Thank you there are no further questions I'll now turn the call back over to Collin Mings.
Thank you I'd like to thank everybody for joining us please contact us with any follow up questions.
Thank you. This concludes today's conference you May go ahead and disconnect at this time.
Okay.
Yeah.