Q2 2019 Earnings Call
Welcome and thank you for joining <unk> second quarter 2019 teleconference call. At this time all participants are in listen only mode. During the question and answer session. Please press star one on your Touchtone phone todays conference is being recorded if you have any objections you may disconnect at that's how I would now like to turn the call over to Mr., Mark Mchugh Senior Vice President and CFO , Sir you may begin.
Thank you and good morning, welcome to Rand years, Investor teleconference, covering second quarter earnings our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier Dot com.
In these presentations. We include forward looking statements made pursuant to the safe Harbor provisions of Federal Securities laws, Our earnings release and Form 10-K filed with the FCC lists some of the factors that may cause actual results to differ materially from the forward looking statements. We may make 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, Mark and good morning, everyone first I'll make some overall comments before turning it back over to Mark to review our financial results then I'll review, our U.S. and New Zealand timber results and following a review of our timber segments, Mark will review, our real estate results as well as our outlook for the remainder of 2019.
For the second quarter, we achieved earnings per share of 14 cents and adjusted EBITDA of $61 million market conditions during the quarter continued to be challenging, albeit uneven across our different segments.
In our southern timber segment, we delivered another strong quarter, despite lower volumes following accelerated harvest activity in the first quarter of this year.
Our markets benefited from increased demand from new mill facilities as well as construct constricted supply due to wet weather.
Southern timber results were also bolstered by very strong non timber income in the quarter.
In our Pacific Northwest timber segment pricing dynamics continued to be on favorable due to the ongoing U.S., China trade dispute as well as challenging lumber end markets.
Based on these unfavorable market conditions, we made the decision to defer some additional volume from our planned harvest during the quarter as well as reset our expectations for the balance of the year, which we'll discuss later on the call.
Our New Zealand timber segment also had to contend with challenging market conditions due to weaker demand from China and competition from alternative supply sources, which resulted in lower harvest volumes and declining export sawtimber prices.
Export sawtimber prices to China dropped by roughly $20 per cubic meter between late may and mid July before stabilizing and improving modestly over the last few weeks.
The decline was driven by a confluence of factors, including slower construction activity high port inventories, a weaker Chinese currency and competition from lower cost alternatives, particularly European lumber from beetle kill and when throat salvage timber.
Well, we believe export markets have generally stabilized and begun to rebound we're continuing to monitor the situation closely.
Lastly, our real estate segment delivered a strong quarter driven by a significant unimproved development sale consisting of 784 acres at a price of over 10 are of a price of over $18000 per acre.
As we've stated in the past this business is all about premium and we're very pleased that our real estate strategy is continuing to yield strong results that meaningfully augment our core timberland returns.
Overall, I'm pleased with how our team navigated these various market challenges to deliver strong operational results during the quarter. Nevertheless pricing dynamics in the Pacific Northwest and New Zealand continued to be unfavorable relative to our expectations going into the year. Thus we have revised our full year guidance to reflect this we now anticipate full year adjusted EBITDA of $245 million to $265 million and earnings per share of 42 cents to 49 cents and with that let me turn it over to Mark to review our financial results.
Thanks, Dave.
Let's start on page five with our financial highlights sales for the quarter totaled $185 million, while operating income was $31 million and net income attributable to rayonier was $19 million or 14 cents per share.
Pro forma EPS was also 14 cents per share as we had no pro forma items in the quarter.
Second quarter, adjusted EBITDA of $61 million was significantly below the prior year quarter, adjusted EBITDA of $111 million due to lower contributions from each of our timber segments as well as significantly lower adjusted EBITDA on a real estate segment as the prior year quarter included a $43 million non strategic timberland transaction in Louisiana.
On the bottom of page five provide an overview of our capital resources and liquidity at quarter end as well as a comparison to year end, our cash available for distribution or see 80 for the first half of the year was $95 million compared to $164 million in the prior year period, primarily due to lower adjusted EBITDA as well as higher capital expenditures reconciliation of see 80 to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We closed the quarter with $131 million of cash and $975 million of debt. Our net debt of 8800 $44 million represented 18% of our enterprise value based on our closing stock price at quarter end.
I'll now turn the call back over to Dave to provide a more detailed review of our timber results.
Thanks, Mark Doug long, our senior Vice President of the Forest resources in China. This week, so I'll be discussing our timber segment results in his absence will start on page nine with our southern timber segment.
Adjusted EBITDA in the second quarter of $28 million was $14 million and $3 million unfavorable compared to the prior quarter and prior year quarter, respectively second quarter harvest volume of approximately 1.3 million tons was 34% and 14% lower than the prior quarter and prior year quarter, respectively.
The reduction in volume was expected after record level stumpage removals in the first quarter further we typically see lower volumes in the spring as many mills take maintenance downtime and wetter weather often limits the operability of lands.
The average pine pulpwood stumpage price of $17.16 per ton was 4% unfavorable compared to the prior quarter, but 7% favorable compared to the prior year quarter, the reduced price compared to the prior quarter was primarily the result of geographic mix, coupled coupled with some softening in markets in our Gulf States region.
Compared to the prior year quarter pulp prices in all markets were favorable which was primarily driven by wet ground conditions at the beginning of the year restricting supply.
The average pine sawtimber price of $25.82 per ton was 2% unfavorable to both the prior quarter and prior year quarter, the slight decline in pricing compared to the prior quarter was primarily due to a reduction in export prices as domestic pricing was relatively stable in comparison to the prior year quarter. The decline was due to geographic mix with an increased proportion of volume harvested in our Gulf States region.
Our non timber income continued their impressive run in the second quarter.
With sales of $9 million. The team is on place for a record year with year to date non timber revenue of $19 million driven primarily by increased recreational license income and pipeline easement sales.
Now moving to the Pacific Northwest segment on page 10, adjusted EBITDA of $2 million was $1 million and $13 million unfavorable compared to the prior quarter and prior year quarter, respectively second quarter harvest volume of 250000 tons was 12% and 33% lower than the prior quarter and prior year quarter, respectively.
As I mentioned earlier, we continued to pull back harvest volumes in the second quarter in response to soft market conditions, resulting from the ongoing us China trade dispute and weak lumber markets.
The average delivered sawtimber price of $78.35 per ton was flat compared to the prior quarter and 24% unfavorable compared to the prior year quarter.
Following the significant decline in pricing from the third quarter of last year when the trade when the trade where heated up pricing has been relatively stable over the last three quarters.
The average delivered pulpwood price of 42.
$42.26 per ton was 6% and 15% unfavorable compared to the prior quarter and prior year quarter, respectively. The change in pulpwood prices compared to both periods was driven primarily by reduced export demand for chips, yielding increased fiber supply for domestic mills.
Page 11 shows the results and key operating metrics for our New Zealand timber segment adjusted EBITDA in the second quarter of $20 million was $2 million and $6 million unfavorable compared to the prior quarter and prior year quarter, respectively.
The unfavorable variance compared to the prior quarter was due to lower export prices into China, and lower non timber revenue part, partially offset by 13% higher volumes related to the timing of export shipments the unfavorable variance compared to the prior year quarter was due to lower export prices, 7% lower harvest volumes and foreign exchange impacts.
The average delivered export sawtimber price of 100 of 111, and 81 dollar $111.81 per ton decreased by 4% and 7% compared to the prior quarter and prior year quarter, respectively.
Pricing for saw logs in China dropped due to a combination of slower construction activity high port inventories, a weaker Chinese currency and cheaper lumber alternatives from Europe .
Average domestic sawtimber prices of $82.66 per ton in US dollar terms were 1% and 4% unfavorable to the prior quarter and prior year quarter, respectively. Due primarily to changes in the New Zealand dollar to US dollar exchange rate, excluding the impact of foreign exchange rates, a domestic pricing in New Zealand dollars was 2% favorable compared to both the prior quarter and prior year quarter as demand remained healthy domestically.
The average domestic.
Pulpwood price of $39.10 per ton was flat compared to the prior quarter and 2% favorable compared to the prior year quarter.
The change in pulpwood prices compared to the prior year was the result of increased pulpwood export demand from India.
In our trading segment, we recorded an adjusted EBITDA loss of.
Zero point $2 million, which was zero point $7 million and zero point $4 million unfavorable compared to the prior quarter and prior year quarter, respectively.
Due to lower volumes and lower export prices to China.
I'll now turn it back over to Mark to review, our real estate results and outlook for the remainder of the year.
Thanks, Dave as highlighted on page 12, our real estate segment delivered strong results in the second quarter sales totaled $23 million on roughly 3300 acres sold at an average price of $6900 per acre adjusted EBITDA for the quarter was $18 million.
Sales in the improved development category totaled $173000, which consisted of the final six residential lots in the initial village center phase of our Wildlight development project. In total we have sold 84 residential lots at an average price of $46000 per lot since the inception of the project.
Sales in the unimproved development category totaled $14 million, which consisted of 784 acres in St. John's County, Florida, So wanted to price of over $18000 per acre.
In the rural category sales totaled $7 million and roughly 1700 acres sold at an average price of $4000 per acre. Our rural program continues to show strong demand in Texas and Florida.
Where we have been able to capture strong HBU premiums to timberland values with minimal incremental investment.
Lastly sales in the nonstrategic in timberlands category totaled $1 million, consisting of 763 acres at an average price of $1500 per acre.
Now moving onto our outlook for the balance of the year on page 14 of our financial supplement.
As noted in our earnings release based on the lingering U.S., China trade dispute and its associated market impacts we are lowering our full year guidance. We now anticipate full year net income attributable to rayonier of $54 million to $63 million EPS of 42 to 49 cents and adjusted EBITDA of $245 million to $265 million.
Additional details regarding our updated guidance, including a reconciliation of adjusted EBITDA to net income and EPS can be found on schedule G of our earnings release.
With respect to our individual segments, we expect that our southern timber segment will achieve full year volumes in line with our prior guidance of 6.2 to 6.3 million tons with higher adjusted EBITDA of $120 million to $125 million.
The improved outlook is driven primarily by strong year to date results in non timber income.
We expect that pricing in the U.S. South will remain relatively stable with quarterly fluctuations driven largely by geographic mix.
In our Pacific Northwest timber segment, we now expect full year harvest volumes of approximately 1.2 million tons, a decline of 11% from the midpoint of our prior volume guidance as Dave noted earlier, our revised volume guidance reflects our decision to defer harvest in the northwest due to unfavorable market conditions.
Despite the near term impact to earnings of this decision. We are confident that it's the right thing to do from a long term value perspective, given the current status of the U.S., China trade dispute, we expect limited upside to current prices through the remainder of 2019, taking these factors together, we are reducing our outlook for full year adjusted EBITDA in our Pacific Northwest timber segment to 13% to $16 million.
And our New Zealand timber segment, we remain on track to achieve our prior full year volume guidance of 2.7 to 2.8 million tons, although we've seen a meaningful drop in export prices relative to average pricing in the first half of the year, we anticipate some improvement in pricing through the second half is export markets settle down and log inventories in China, and China ports normalize.
In sum, we now expect full year, adjusted EBITDA, and our New Zealand timber segment of $72 million to $77 million.
Lastly, in our real estate segment, we expect to achieve full year, adjusted EBITDA of $64 million to $70 million with the balance of our real estate transaction activity concentrated in the fourth quarter.
Note that our real estate segment typically generates very high operating income margins. Thus, we expect that EPS in the second half of the year, we'll also be concentrated in the fourth quarter.
I'll now turn the call back to Dave for closing comments.
Thanks Mark.
We've talked a lot in the past about our operational flexibility, our nimble approach to capital allocation and our focus on building long term value per share.
It's times like these that require the fortitude to make difficult short term decisions for the sake of preserving the long term value of our timberland assets I'm very proud of our team for the way that we've executed operationally amidst a challenging market backdrop during the first half of this year.
The us trying to trade dispute has generated some difficult market headwinds for our business, but I remain confident in the long term value potential of our underlying assets and the commitment of our team towards maximizing that value potential.
In closing I'd like to announce that we will be hosting an investor tour and teach in session at our corporate offices on Thursday September 26, we look forward to showcasing portions of our southern timber portfolio and our Wildlight development project. This event will be open to sell side research analysts and members of the professional investment community.
Additional details will be forthcoming.
This concludes our prepared remarks, and we'll now turn it back to the operator for questions.
Thank you and as a reminder, if you would like to ask a question. It is star one and record your name and company. Our first question comes from Collin Mings of Raymond James Your line is open Sir.
Thanks, Good morning.
To start date can you maybe just expand on the decision to ratchet down harvest activity in the Pacific Northwest, but not New Zealand, although you're seeing weakness in both markets.
Yes, I think it's really a relative statement and I think before sort of jumping into specifically into the question.
I recognize that we have flexibility to to change harvest by roughly 10, 10% to 15%.
Due to labor availability and I think it's important to note that both regions are are short of labor. So when you. If you if you put on the brake too heavily you certainly run the risk of losing.
Experienced contractor so were always mindful of that the other thing I would note getting more specifically to your question is that the Pacific Northwest has experienced a much greater decline in pricing relative to New Zealand order of magnitude.
Year over year, we saw a 7%.
Drop in New Zealand, and a 24% drop in the Pacific Northwest, While New Zealand had a more recent 15% drop.
We think the northwest has more headwinds associated with the us China.
Trade dispute and.
As it relates to New Zealand, we've we've seen some recovery already since the correction that we experienced roughly a month ago and then the last thing I would say is just in a in a historical context, New Zealand is generating.
Yes, very strong cash flows relative to to the his historical.
Performance of that business, and so kind of keep that in mind, we need to be mindful that we're we're comparing new Zealand against some very strong.
Record cash flows from from last year.
That's helpful. Dave and just maybe continuing along with the New Zealand and some of the volatility there you've seen maybe just expand a little bit more on again, you just reiterated the fact that you've seen maybe some stabilization or some improvement there over the last few weeks in New Zealand, just talk a little bit more about that volatility and has it been some of these competing sources that you referenced in the prepared remarks have they started to back away from the market has there been more take down of the port inventories just maybe just give us a little bit more kind of real time update what you're seeing in New Zealand, just given that that sharp correction towards into Twoq.
Sure and there is there's a lot of moving parts to this but if you. If you start if you start let's start and talk a little bit about inventory in China, that's something that we we watch very carefully.
If you go back we ended 2018 with about 2.4 million cubic meters of inventory.
China ports.
We consider that to be a very.
Very favorable.
Condition.
As we went into the Chinese new year that grew to 4.4 million cubic meters.
Recently, the the inventory has been at $4 million, which is roughly a million cubic meters higher than it was last year. The way we think about it here is we look at the ratio of inventory to demand.
Expressed in terms of the number of months and generally speaking if we see that ratio at or below two months of demand. We consider the market should be pretty healthy from a from a pricing standpoint.
Towards the end of Q1, we saw this ratio climb up to three months after the Chinese new year, where we experienced some sluggish returned to construction activity.
Which which impacted that.
We saw in June a big increase in New Zealand log shipments, which grew 26% year over year and that really is what contributed to this 15% price correction that we saw towards the end of June we have subsequently seen the inventory to demand to improve to roughly two months and so.
We're encouraged by this for a number of factors first of all we are entering a normally increased construction demand period in China and so.
As as such we weren't terribly surprised to see recent small increases in the neighborhood of two to $3 per cubic meter on.
On log prices so.
That's a that's a that's a high level sense of where things stand on the on the inventory sense I think the bigger impact. If you go back to what I was describing earlier we have seen.
We have seen a big jump in lumber volumes going into two China, and that's probably been the biggest factor on the margin that has influenced markets in may.
In the in the in the main Yangtze Delta lumber ports, we saw lumber inventory climbed to 1.9 million cubic meters. This is roughly two times the level. It was in 2018 and then a lot of this is being driven by.
By volume coming from Europe .
Europe has experienced some some pretty severe damage associated with with beetle kill as well as when throw damage and just to give you some sense of that.
There are four countries that have contributed to this fairly significantly, Germany, the Czech Republic, Switzerland, and Austria.
They have they have.
In terms of the percent of harvest in those countries associated with either.
Either beat beetle kill or when throw volume.
They've gone from 28% of their harvest in 2017% to 53% in 2018.
And we've seen big jumps in both of these categories the beetle kill volume in 2017 in these four countries was 12 million cubic meters. It grew to 31 million cubic meters in 2018 and the win throw went from 15 million cubic meters in 2017 to 20 million cubic meters in 2018, the one road.
One belt initiative in China, which has really opened up rail linkage into Europe has also facilitated the movement of.
Of these increased lumber volumes into the China market and so.
Not unlike what we experienced when we saw the beetle kill epidemic hit Western Canada, we've seen a big movement of volume into the into the Chinese market and it's going to take some time for that to to be fully.
Absorbed and we think that it represents at least for the short period of time, some element of substitution thats going to impact.
Log markets really from all countries, what we've seen in terms of the impact is that more marginal suppliers into that market have really started to.
To drop off and that's probably that's probably something that we view as positive.
You've got marginal log supply from places like Uruguay.
Europe and the U.S South has recently more or less largely stopped and thats a response to both market conditions as well as.
As these competing.
Lumber supplies as we think about our own business, we still believe that.
That the New Zealand is very well positioned.
In that market as is the Pacific northwest.
Once we get this trade dispute behind us and to a lesser extent the U.S. south.
Dave would it be fair to say and I appreciate all the detail there again, recognizing it's some of both it sounds like some of the weakness in New Zealand here might be more of a supply issue than a material shift in demand is that a fair way to characterize it.
Yes, I mean, I'd say that the market in general is probably been more supply impacted.
Than than demand impacted we continue to see strong.
Construction.
Statistics coming out of China, We saw if you look at.
Construction consumes roughly 70% of softwood log.
Demand in China, and two big pieces of that are residential floor space and commercial floor space, which are up 19, and 17% respectively. So I think that it really is more of a supply situation and and a and a trade off for a substitution issue between both lumber.
And logs and as we've seen those trade volumes.
Slow down both in New Zealand and in some of these more marginal.
Geographies, we've seen that inventory correct pretty quickly and so I expect it to improve.
Really based on that.
Okay. Two more quick ones from me just earlier this year as it relates to New Zealand you cited some potential margin pressure from higher shipping costs is that still kind of factored into here.
Guidance is that still something that you expect to be a headwind.
It's still factored into our guidance recognize that that shipping costs are also a function of competition for ships and as we've seen the falloff in.
In Peru Pacific Northwest activity for example, that's translated into lower.
Freight rates and so I think the.
The reference that Youre, making is really to the broader.
The broader issues around lows low sulfur fuel, which we still continue to monitor very closely and have baked into our expectations as it relates to the second half.
Okay, and then last one from me just on the cap allocation front can you just maybe elaborate a little bit more on the acquisitions in the U.S. out.
You bet.
Weve continued as we discussed last quarter, we have continued to focus on small bolt on transactions, we feel that these generate higher levels of.
A return and and less less competition than the larger.
Auction type situation. So we're always on them on the lookout for those in in Q2, we completed five bolt on transactions.
All in Florida, and Georgia, they totaled $14 million encompassing approximately 8000 acres.
At a price of roughly 1700 per acre.
Through the first half of the year.
We closed on a total of $26 million on eight transactions.
Spanning all three of our segments at a at a price of approximately 18 50, an acre. So these are not big needle movers, but.
We think that this is a period of time.
To be somewhat prudent on the acquisition side and so we continue to like a lot of these small deals.
Thanks, Dave I'll turn it over.
Thank you. Our next question comes from Caitlin and then Tara from BMO capital markets. Your line is open Sir.
Oh, Thank you good morning, Dave.
Question, just coming back to New Zealand and not trying to port.
And in line, but can you give us some sense.
Export log prices are.
On a percentage maybe the year over year.
Any sense that you all can give us.
Yes quarter over quarter occasion, I think that they are probably down in the sort of.
15% range.
So Q.
We've noted in the comments I mean, we saw a fall off you know pricing had been sort of in the 135.
Per cubic project cubic meter.
And kind of the April timeframe, and we saw that kind of drop in to the kind of 110 to 115 range.
And it's been sort of crept up by a few a few dollars.
Got it that's not very helpful and then.
Capital allocation again.
As you have you changed at all in terms of.
Which regions to look more attractive.
You've done most of the smaller ones in the U.S.
But as you step back.
Any any opportunities in other region given.
These these.
Uncertainties that are providing more opportunity.
Yes, I think a lot of it.
We look we look very carefully across.
Different regions, and we have a pretty robust process for taking a risk adjusted approach at them I think that.
Largely are as we think about acquisitions and we think about capital allocation. We're also thinking about it very very much in a defensive mode and we'd like to think about it in terms of.
Of things that things that can go wrong in a market sense and be being factoring those in and so that has generally led to a bias for us in stronger performing markets and you've seen that in the in the activities that we've had both on the buy side and the sell side and so.
We're very we're very.
Much more gun shy I would say in and looking at some of the more marginal.
Market regions out there and we have specific targets, but they tend to they tend to be focused on stronger markets.
Okay, then I'll just add to that I mean recognize that their tencent to you may see some volatility in earnings associated with some of these market dislocations you tend to see a lot less volatility in asset values.
You know the private market for timberland is very sophisticated it's a very long term market. They tend to look through the short term market dislocations timberland is underwritten on at 25 to 50 year DCF basis, using some estimate of trend line prices and so you just don't tend to see bargain purchase opportunities. When you see these type of market dislocations and also recognize that the asset class as a whole you attend tends not to be very highly levered and so you don't see much in the way of distress selling and so.
Look we're going to experience some earnings volatility associated with this we've certainly seen some stock price volatility.
But that doesnt generally translate into underlying asset value volatility and so clearly we see as an opportunity to potentially arbitrage those dislocations.
You know through share buybacks and the like but.
It doesn't really change our mindset around acquisition opportunities longer term.
Got it and just remind me do you have maybe off a share repurchase authorization right now.
We currently have a $100 million authorization in place of which roughly $99 million is still available and that's it.
I believe that was put in place back in.
2016.
Got it and then Tony.
Northwest are you still seeing.
Pressure on prices due to the trade uncertainty or are you seeing things stabilize at this point.
I think we're still seeing a somewhat of a reticence of exporters to have volume on the water. If you will.
While there is still uncertainty in the trade.
In the trade dispute and.
A case in point earlier in the year there was the expectation that tariffs in the northwest would go from the current 5% to two something.
In the 20% range and so that really dried up.
Act activity and I think we're still seeing people behaving in a in a somewhat cautious manner as it relates to.
The export side and then the important thing to recognize as well as this this is coming at a time when the domestic markets are struggling a bit you've got lumber producers dealing with high levels of finished good inventory and and soft pricing and so.
They're not anxious to to add to log decks and so you really got weakness in both of those fronts and it's all about it's all about price tension in terms of of healthy markets and I contrast that with New Zealand that while you've had.
Well you've had some decline recently on the export side the domestic market continues to be pretty strong.
That's helpful. And then last question from my side in terms of the John that you are seeing from Europe .
Moral fish short term phenomena as they clear out the BBC Gil Gil Board or do you think structurally.
Anything has changed.
This is more like a consistent supply and a new avenue of supply.
I mean, we've certainly seen activity by.
At at a government level to subsidize the removal of of this of this material before it degrades and no longer has value and so that would suggest that you will see them plow through this fairly quickly.
I think it's way too early to get a sense of whether theres anything structural going on certainly one thinks about the linkage with with climate change and whether we're going to see more of this.
Across.
That region and certainly the.
The rail linkage to China facilitates.
The harvest and processing of this material into lumber.
Got it appreciate all the color I've done it over.
Thank you. Our next question comes from John Babcock <unk> of Bank of America. Your line is open.
Morning.
Just actually wanted to start out.
Just on kind of the guidance given some of the factors you've discussed I was wondering if you could talk about what gets you ultimately to the high and low end of the EBITDA range that you've set out.
John we provide very detailed guidance by segment in the supplement and so that will kind of give you the range of expectations for each segment.
Okay, but I guess I was wondering though I mean, where do you see I mean like recognizing that I mean like what do you see as a big factors that are driving that sort of flux across the segments.
Well clearly the China trade dispute has been.
A big headwind and so clearly if we saw some resolution of that.
I think that that would be that would certainly be a net positive for our business I think going into the year. We certainly I think that there was a general sense of optimism that there would be a near term resolution as we sit here today.
That sense of optimism has has certainly Wayne and so that's really.
The Genesis of the reset for expectations for the year was to try to kind of reflect that in terms of the the balance of the year.
Okay.
And then as far as whether I mean, clearly it seems like the weather. This year has been particularly bad relative to last couple of years, and perhaps even relative to historical levels and just wanted to get a sense I mean, how much did that impact your harvest and also harvest costs during the quarter. It didnt seem like there was too much discussion on that so maybe it was relatively minimal, but just wanted to get some color on that.
Well recognize it in the in the U.S. South a lot of our.
A lot of our sales activity are done through stumpage sales and so you're not seeing that direct linkage you are seeing it certainly in an indirect sense and also recognize that we're trying to we're trying to take advantage of of Tensioned markets. When we get these weather events and we saw we saw a shift in Q1, we saw more.
Heavy weather in the Atlantic regions in Q2, it was really more on the on the Gulf.
And the Gulf regions, and so were we think we're going to continue to see those types of shifts occur as you get whether that said I think we're also encouraged by the impact that we've seen in in our wood basins of the new capacity.
Thats come online.
From a from a lumber.
Perspective.
Okay.
And then just last question before I turn it over.
You've already talked a fair bit about dialogue is coming from Europe .
Just wanted to get a sense I mean are those largely competing in the same markets as soon as the on logs or are there some discrepancies as far as.
Your.
Kind of end market demand there.
It's lumber coming from Europe , not logs lumber of project.
Yes, and so you're really dealing with sort of substitution level effects.
One layer deeper into the market.
Okay. Thank you.
Thank you. Our next question comes from Steve Chercover of D.A. Davidson and company. Your line is open.
Thanks, and good morning, everyone.
So my first question was with respect to I guess is ultimately, China, but how correlated or European lumber prices to North American values.
Well you certainly see you certainly see evidence.
You know that the European lumber will flow into this market in certain market conditions. We saw that last year. We saw we saw a fair bit of I want to say it was in a billion and a half board foot range of lumber come into this market I have less of a sense of where that sits.
This year as we've dealt with a softer.
Demand.
I don't have.
Yes, you know when feed but I would say they probably my sense is that they probably become more correlated at higher prices, where it actually can make sense to export lumber to the U.S. I'm sure as opposed to it is consuming a domestically.
Yeah, we've got $600.
It is.
Hi, lumber prices aren't always necessarily a positive for southern producers because it does generally lead to a higher level of imports which are competitive with.
You have supply and ultimately U.S. production.
Thanks, I mean, where I was going with that is yeah. We've got 600 dollar lumber domestically, then you're gonna drawing imports but.
I should think that.
There.
If there is a correlation in lumber prices are now.
Fairly cheap and in Europe , too and it's just astonishing to think that these landlocked countries can ship profitably into China. Despite the improvements in rail.
Well, it's subsidized Steve Reckitt recognize that the government has said that a lot of that is because the governments are subsidizing the removal of that wood, so that it doesn't rot.
Yeah, I figured of China's almost providing a waste management service in this respect.
Well so aggravating.
And then.
Secondly.
It seems reasonable to me that you are throttling back on your Pacific Northwest harvest volumes.
How does that impact your long term inventory levels are they getting back into balance because you know I guess 10 years ago, you got a little upside down on inventories by.
Overharvesting during the downturn I don't know if that's been fully addressed yet.
Yeah, I mean, certainly we've we've done the moves that we made in a portfolio sense into back in 2016, where we sold some younger land in acquired some some some some older age class properties.
That that went a long way towards closing that gap, but it didn't fully close the gap and as we as we disclose back then we would be.
Harvesting at below our sustainable level for roughly.
A decade associated with the with those moves and certainly when we defer harvest.
We're chipping away at that by allowing that inventory to grow more so we think from an asset standpoint, you know the assets going to.
Benefit and we will get that much closer to a.
To getting back to our to our sustainable harvest level.
Thanks, Dave.
Thank you. Our next question comes from Mark Weintraub of Seaport Global Your line is open Sir.
Thank you I'm, just trying to sort through the drivers in the Pacific Northwest.
Because it seems like there have been for that I've heard on the call that maybe might be having an impact one.
Being you you know you match up to the China.
Trade situation the week U.S. housing market.
What's been going on in Europe , with more would going into China, which I, presumably displaces logs that could have gone from Pacific northwest and be processed.
And then.
Also the U.S., south, making more lumber and so <unk> I guess.
I recognize it's hard to figure out how much to wait all these different variables, but if the China trade situation were to be resolved relatively quickly.
How how impactful do you think that actually would be if everything else stayed the same at least in the short term.
To the Pacific Northwest.
Mark I think another thing to think about it in your list and those are all good. Good items is is the the supply coming out of Canada and recognize that we've seen we've seen capacity.
Announcements that are that are pretty substantial in in in Canada.
In terms of capacity.
Coming out and so that that is that has largely though not played out in lumber markets. Because you were also dealing with very high.
Lumber inventory, so I think that that's an important overlay.
Against this because as you think about things like the European lumber into China, So thats going to have an effect of displacing some Canadian lumber.
Which is going to make that want to come into the U.S., but you've also then have the overlay of a reduced production.
Out of out of Canada, and so recognize that lumber pricing is always going to be to some degree a function of the system wide inventory levels and right now.
Those are those are affecting.
Pricing, so I think that that any resolution of the trade dispute you have to also look at it in the context of where are we at with the supply chain on the lumber side of things.
That will that will have an impact on the sort of the elasticity of any market recovery.
Fair Fair point, so that's going to presumably be a positive the the closures and as they work through their inventory.
That Canadians, that's what coming in so it will be a positive regardless of what happens with China and <unk>. So I guess just as the follow up I'm just trying to.
Just trying to see how is it that the China trade situation is effecting.
Business out of the Pacific Northwest right now.
Well, just lower lower export volume.
And then export volumes ultimately competitive with you know domestic mills.
So I mean, you know even in more depressed housing environment you've seen.
Some some price volatility and certainly some pop.
Significant positive momentum kind of driven by strength in the export market, which we just don't have right now.
And I apologize, maybe I'm, just missing something obvious, but and so theres the 5% tariff.
As I understand it.
How else is it that it's depressing what other factors. It's the uncertainty is still such that people are choosing not to to export and otherwise would be able to be going to market right now even despite the European would going into China et cetera.
I mean, some of it some of it as we've described in prior calls was the.
The concern or the expectation that that tariff was going to jump to 20% or 25% as it is in the U.S South and no. One wanted to be caught with with exposure from an inventory standpoint, most of the volume coming out of the northwest is controlled by brokers, who are taking control of title and you're buying it at one price and then you are selling it at another price, but you have to you have to bake in time to build that level of inventory up get it on a ship.
Get it across the water and so you have some market exposure during that period of time and so while we've seen the threat of that.
That tariff rise in place.
No one no one wants to be in that position of absorbing that big of a head and recognize the tariff is on the delivered price not the not the base price and so it's a big impact and that's really that's really slowed down and made the market participants in the northwest a lot more cautious I recognize you also have a devaluation of the Chinese Yuan relative to US dollar, which is certainly impacted the.
Relative pricing in domestic currency in China that export log.
Okay, not just the 5% it's not just the 5% tariff its really all the knock on effects of each of us trying to train speed as well.
Okay.
Thanks.
Thank you. Our next question comes from Paul Quinn of RBC capital markets. Your line is open Sir.
Yes, thanks, very much good morning, guys.
Good morning.
Just a question on.
I guess lumber capacity, what you're seeing in the U.S. out there on the additions I note that a lumber production in the U.S. So with at least to the end of May is down are you still seeing additional.
Capacity additions.
Coming to the marketplace and are you still bullish on the the medium and longer term outlook for log prices on the U.S. So.
I mean I think.
I think the short answer is yes, and if you if you if you kind of pull apart.
If you kind of pull apart.
The pieces of this we had roughly.
6 billion board feet of proposed capacity changes from 2017 to 2021, and if you use if you use a rough conversion factor that translates to roughly 24 million tons of incremental log.
Demand and then as you Peel that back in different layers, roughly a billion board feet of that came online in 2017 towards the end of the year.
It was scattered across many mills, but was primarily.
Associated with existing.
Capacity and so that really didnt come into play until 2018, and then we saw.
An additional 1.7 billion board feet of capacity come online in 2018 and from our perspective, roughly 75% of that was proximate to the wood baskets that we.
Operating in.
Having said that recognize that.
Sawmill startups are always.
Problematic, they always take a fair bit of time.
Much of that new capacity is still in startup mode and is not fully.
Operational yet it typically takes a few years before those mills are running.
Smoothly and get up to there.
They are designed capacity.
We have another 1.3 billion board feet.
That's coming online in 2019, 82% of that is proximal to our.
Wood baskets and then as we look out in the outer years, we see another 1.3 to 1.7 billion board feet.
Coming online in the 20.
20, 20% to 2021.
Timeframe.
Against that you also recognize that we've seen.
Recent curtailments in Western Canada of roughly 2.7 billion board feet.
1.4 of that being permanent and the rest being temporary do you think about.
The the the the lag effect as I described earlier as it relates to lumber the lag effect as it relates to this these startups.
We have not really began to feel the full effect.
Of the shift into the U.S, south and as Mark talked about earlier.
The low it's the lower.
Lumber price environment that I think is going to help.
Accelerate this and we view as as positive news when we think about this in a longer term perspective, and so I think we yes, we are still.
Bullish as we think about the impacts of the U.S South and certainly.
The relative placement that we have in better.
Wood baskets.
We think we're going to benefit from that disproportionately.
Okay, if I could.
Flip over to New Zealand, we've been hearing that the log prices are seeing another leg down but it sounds like you're more optimistic and you get guys on the on the ground is it.
Is it just the export markets that you're seeing a little bit of a recovery or the domestic market is holding up as well.
Yes, well recognize it ultimately you know that that export prices is going to be a driver in your domestic price negotiations and so we saw.
Pro longed.
Lower lower domestic arms, our export price thats, certainly going to impact domestic pricing as well, but so far domestic pricing has held up and.
We seem to have stabilized in the export market and feel some momentum on the positive side.
Okay, and then just lastly on the real estate side, just say if you could.
Give us an update on what's happening with the Wildlight, where you are where you are at in terms of are we at 220 years in the development cycle.
What you're expecting for the balance of the year there.
Yes, I mean for the balance of the year. We're continuing you know these are long dated projects you recognize it when we kind of announced this first phase of the Wildlight development project. It was a 10 year project and so we're still in the relatively early innings on it but I'd say on the project is progressing we're sitting in the midst of quite a bit of construction activity going on around US right now with multifamily units going up kind of next door number of single family homes under construction and so.
I'd say it's.
We're continuing to kind of turn along and but it's the quarterly results are going to be volatile as we bring new properties to market and whatnot.
And we're looking at this is.
Very long dated project and really.
More of a kind of value catalyst for the region than that and then kind of a specific investment that we would have made but for the fact that we own so much surrounding land.
Alright, Thats, all I had been like thanks.
Thank you. Our last question comes from Chip Dillon of vertical research partners. Sir Your line is open.
Hi, yes, they settled or Deanna filling in for chip card you.
Hello.
Hi.
So my first question is a little bit about your pricing outlook. It's very clear you know you were expecting somewhat of a recovery, especially in the Pacific Northwest just wondering when we look at the around 70 $879 for.
On on your Sawlogs in the Pacific Northwest does it mean, you now expect lease to remain flat for the remainder of the year no recovery or do you expect these to actually decline even further.
Our general expectation is that it's going to be relatively flat again, I think we've seen on the market to be relatively flat for these last few quarters since the since the trade war heated up and so that that's really our expectation for the balance of the year now again, you could see some price momentum if we see a pickup in housing.
You could certainly see some positive momentum in some other factors materialize.
But our general expectation is Ralph.
Roughly flat pricing for the balance of the year.
Perfect and then just before you mentioned in response to a question I think that.
Export so looking is it a little more dominant in percent of currently I'm, sorry, I didn't actually catch over what period. So that would be early August the end of June and July versus Q1 average of or versus the peak that you show a few quarters ago.
Yeah, the bulk of the dip occurred in June on kind of into the early part of July and so that's that's more or less kind of them may to may to July statement.
So just trying to understand versus the numbers, we see on the slide you know they havent $12 realized.
You know 116 in Q1, essentially that's pointing to around $100 or 95 for export sawtimber at the bottom.
I'm, sorry, I'm not sure I'm not sure I'm following you.
So as we look on the slides for Newsy lump exports. So I think we're I think Q1 average was $116 per Tom so.
The 16% essentially self service member.
Well.
Recognize that that's per tonne.
The prices that we referenced earlier projects cubic meter, we're actually selling the product for jazz cubic meter. So you can look kind of down below those domestic I'm sorry, those export sawtimber prices on the bottom part of that chart we show the.
Price per jazz cubic meters have conversion issues that go into that.
Okay perfect price in Q2 projects cubic meter for export sawtimber is 130, but but as Rick thats reflective of the higher price having fallen off in June that's kind of a weighted average for the quarter. As we described earlier that we ended June at roughly that 110 level. So you get a little bit of a sense of that it's partially reflected in Q2, but but certainly not fully because it occurred all in the month of June and it's come back a little bit since then.
Okay.
Perfect.
Going a little bit back to capital allocation M&A, you clearly indicated preferably.
You would prefer actually bolt ons in the south.
I was just wondering if you know with all the negatives that we see in the Pacific Northwest Red was they were discussing deep dealer.
If the school.
What would you consider any sales any sort of acquisitions in the region. If the price was right or do you think you want to focus on areas that have a better growth profile looks like your south end.
You know as you mentioned and the Pacific Northwest May be out of the question.
No I don't think we still we're looking really actively across all of our geographies.
But the bolt on comment was really more a statement of of.
Of what we feel currently we're able to enjoy better returns with bolt ons in all regions relative to to auction environments, because there's still a lot of capital trying to get into the into the timber asset class and as Mark described earlier.
Timbers valued on a very long term basis and so.
You will look through.
Market dips and asset values tend to not be as.
As volatile as as as product price values and so.
We're we're we're actively looking really all the time both on a on a on an auction and a negotiated basis in all three of the regions.
And we're also constantly comparing that relative to the relative value and implied in our stock price and so you know really our philosophy on capital allocation is to stay nimble stay opportunistic and really try to find those best relative value trades.
Yes, thank you very much and actually that it was going to be kind of my next question, which is you know the stock now is.
Close to where it was two years ago, you do have a buyback how should we think of these 20 $627 level for the appeal of the buyback versus M&A and.
On the other hand, I think you did some acquisitions would share issuance adds roughly this level would you consider actually doing something larger on the M&A front that may require share issuance or again at these prices it doesn't make sense.
Yeah, I mean look we never can speculate on what we may or may do from an acquisition standpoint, or a financing standpoint, but suffice it to say we are always sort of monitoring the relative value implied in buying back stock versus the acquisition opportunities that we're seeing in the market and so obviously at a lower stock price on that that balance can shift in favor of buybacks.
Okay perfect. Thank you very much.
Thank you and Im showing no further questions and I would like to turn the call back over to speakers for closing remarks.
Thank you. This is this is mark Mchugh I'd like to thank everybody for joining the call and please feel free to reach out to me with any additional questions.
Thank you for your participation in today's conference you May now disconnect at this time have a wonderful day.