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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome and thank you for joining Rayonier’s Second Quarter 2019 Teleconference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I will 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 Rayonier’s investor teleconference covering second quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.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 SEC list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They’re 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 Nunes, President and CEO. Dave?
Thanks, Mark, and good morning, everyone.
First, I’ll make some raw 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 in the 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 $0.14, and adjusted EBITDA of $61 million. Market conditions during the quarter continue to be challenging albeit on even 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 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 favorable due to the ongoing U.S. China trade dispute, as well as challenging lumber and 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 saw timber prices.
Exports saw timber prices to China dropped by roughly $20 per cubic meter between late May and mi-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 costs alternatives, particularly European lumber from beetle kill, and wind through salvage timber. Well, we believe export markets have generally stabilized and began to rebound. We are continuing to monitor the situation closely.
Last year, 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 -- a price of over $18,000 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, the pricing dynamics in the Pacific Northwest and New Zealand continue 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 $0.42 to $0.49.
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 total $185 million, while operating income was $31 million and net income attributable to Rayonier was $19 million or $0.14 per share, pro forma EPS was also $0.14 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 dollars 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, you'll find 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 CAD 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.
A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We close the quarter with $131 million of cash and $975 million of debt. Our net debt of $844 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 Forest Resources is 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 pulp wood 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 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 saw timber 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 primary by increased recreational license income and pipeline ease and 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 250,000 tons was 12% and 33% lower than the prior quarter and prior year quarter respectively.
As I mentioned earlier, we continue to pull back harvest volumes in the second quarter in response to soft market conditions resulting from the ongoing U.S. China trade dispute and weak lumber markets. The average delivered saw timber price of $78.35 per ton was flat compared to the prior quarter, and 24% unfavorable compared to the prior year quarter.
Following a significant decline in pricing from the third quarter of last year, when the trade war heated up, pricing has been relatively stable over the last three quarters. The average delivery pulp wood price of $42.26 per ton was 6% and 15% unfavorable compared to the prior quarter and prior year quarter respectively.
The change in pulp wood 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 variants compared to the prior quarter was due to lower export prices into China and lower non-timber revenue partially offset by 13% higher volumes related to the timing of export shipments. The unfavorable variants compared to the prior year quarter was due to lower export prices, 7% lower harvest volumes and foreign exchange impacts.
The average delivered export saw timber price of a $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 saw timber prices of $82.66 per ton in U.S. 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 U.S. dollar exchange rate, excluding the impact of foreign exchange rates, 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 pulp wood 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 pulp wood prices compared to the prior year was a result of increased pulp wood export demand from India.
In our trading segment, we recorded and adjusted EBITDA loss of $0.2 million, which was $0.7 million and $0.4 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, a real estate segment delivered strong results in the second quarter. Sales totaled $23 million and roughly 3300 acres sold and an average price of 60 $900 per acre. Adjusted EBITDA for the quarter was $18 million.
Sales in the improved development category totaled $173,000 which consisted of the final six residential lots and the initial Village Center phase of our wildlife development project. In total, we have sold 84 residential lots at an average price of $46,000 per lot since the inception of the project.
Sales in the unimproved development category totaled $14 million, which consisted of 784 acres in St. Johns County, Florida sold at a price of over $18,000 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 non-strategic and Timberlands category totaled $1 million consisting of 763 acres at an average price of $1500 per acre.
Now moving on to 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, a $54 million to $63 million, EPS of $0.42 to $0.49, 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 6.2 million to 6.3 million tons, with higher adjusted EBITDA off of $120 million to $125 million.
The improved outlook is driven primarily by strong year-to-date result 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, the 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 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 million to $16 million.
In our New Zealand timber segment, we remain on track to achieve our prior full year volume guidance of 2.7 million 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 as export market settle down and log inventories in China ports normalize.
In sum, we now expect full year adjusted EBITDA at 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 will also be concentrated in the fourth quarter.
And I'll 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 U.S., China 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 teaching session at our corporate offices on Thursday, September 26. We look forward to showcasing portions of our Southern timber portfolio and our wildlife 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 will now turn it back to the operator for questions.
Thank you. [Operator Instructions] Our first question comes from Collin Mings of Raymond James. Your line is open.
Thanks. Good morning. To start, Dave, can you 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?
Yeah, I think it's really a relative statement. And I think before sort of jumping into specifically into the question, recognize that we have flexibility to change harvest by roughly, 10% to 15%, due to labor availability, and I think it's important to note that both regions are short of labor.
So, when you -- if you put on the break too heavily, you certainly run the risk of losing experienced contractors, so we're always mindful of that. The other thing I would note getting more specifically to your question, 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 U.S., China trade dispute. And as it relates to New Zealand, 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 historical context, New Zealand is generating, very strong cash flows relative to the historical performance of that business. And so, kind of keep that in mind. We need to be mindful that we're comparing New Zealand against some very strong record cash flows 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 the prepared remarks, have they started to back away from the market? Has there been more takedown 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 the end of 2Q?
Sure, and there's a lot of moving parts to this, but if you start, let's start and talk a little bit about inventory and China, that's something that we watch very carefully. If you go back, we ended 2018, with about 2.4 million cubic meters of inventory at China ports. We consider that to be a very favorable condition. As we went into the Chinese New Year, that grew to 4.4 million cubic meters.
Recently, the inventory has been at 4 million which is roughly 1 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, add or below two months of demand, we consider the markets to be pretty healthy 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 return to construction activity, 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 improved to roughly two months. And so were encouraged by this for number of factors. First of all, we are entering a normally increased construction demand period in China and so as such we weren't terribly surprised to see recent small increases in the neighborhood of $2 to $3 per cubic meter on unlogged prices.
So, that's a high-level sense of where things stand on the inventory cents. I think the bigger impact if you go back to what I was describing earlier, we have seen a big jump in lumbar volumes going into China and that's pretty been the biggest factor on the margin that is influenced markets.
In May in the Yangtze Delta lumber ports we saw lumber inventory climbed to 19 million cubic meters this is roughly two times the level it was in 2018 and a lot of this is being driven by volume coming from Europe. Europe has experienced some pretty severe damage associated with beetle kill [ph] as well as wind throw damage [ph]
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 in terms of the percent of harvest in those countries associated with either beetle kill or wind throw volume they've gone from 28% of their harvest in 2017 to 53% in 2018 and we seem 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 cubic meters in 2018 and wind 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 is really opened up rail linkage into Europe has also facilitated the movement of these increased lumbar volumes into the China market. And so, not unlike what we experience when we saw the beetle kill epidemic hit Western Canada. We’ve seen a big movement of volume into the Chinese market and it’s going to take some for that to be fully absorbed.
We think that it represents at least for the short period of time some element of substitution that’s 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 drop off and that's probably something that that we view as positive, you got marginal log supply from places like Uruguay, Europe and the U.S. South is recently more or less largely stopped and that's a response to both market conditions as well as these competing lumbar supplies.
As we think about our own business, we still believe that 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 be fair to say to say and appreciate all the detail there, again recognizing 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 there a fair way to characterize it.
I would say that the market in general is probably been more supply impacted then demand impacted. We continue to see strong construction statistics coming out of China and 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 it really is more of a supply situation and a tradeoff or substitution issue between both lumbar and logs and as we've seen those trade volumes slowdown, 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 just quick ones for 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 your guidance? Is that still something that you expect to be a headwind?
It's still factored into our guidance, recognize that the shipping costs are also a function of competition for ships. And as we've seen the fall off in Pacific Northwest activity, for example, that's translated into lower freight rates. And so, I think the reference that you're making is really to the broader issues around low sulfur fuel, which we still continue to monitor very closely and have baked into our expectations as a relates to the second half.
Okay. And then last one for me, just on the capital allocation front. Can you just maybe elaborate a little bit more on the acquisitions in the U.S. South?
You bet. We've continued, as we discussed last quarter, we've continued to focus on small bolt-on transactions. We feel that these generate higher levels of return. And less competition than the larger auction type situation. So, we're always on the lookout for those. In Q2, we completed 5 bolt-on transactions all in Florida and Georgia, they totaled $14 million encompassing approximately 8,000 acres, at a price of roughly 1,700 per acre.
Through the first half of the year, we closed on a total of $26 million on 8 transactions spanning all three of our segments at a price of approximately 1,850 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 Ketan Mamtora from BMO Capital Markets. Your line is open, sir.
Thank you. Good morning, Dave, Mark. First question just coming back to New Zealand and not trying to put to find the line. But can you give us some sense on where your current export law prices are on a percentage terms may be the year-over-year, quarter-over-quarter. Any sense that you all can give us?
Yes. Quarter-over-quarter Ketan, I think they're probably down in the sort of 15% range.
So Q3, like they've noted in the comments, I mean we saw a follow-up. Pricing advent sort of in the 1.35 per cubic, for just cubic meter, and kind of the April timeframe. And we saw that kind of drop in specific kind of 1.10 to 1.15 range?
That sort of crept up by a few dollars.
Got it. That's very helpful. And then turning to capital allocation, again. How's your view changed at all in terms of which regions look more attractive, you've done most of the, smaller ones in the U.S. out. But as you step back, any opportunities in other regions given these short-term uncertainties that are providing more opportunity?
And I think a lot of it, 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 like to think about it in terms of 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 activities that we've had both on the buy side and the sell side. And so, we're very much more gun shy, I would say in looking at some of the more marginal market regions out there. And we have specific targets, but they tend to be focused on stronger markets.
Ketan, I'll just add to that. I mean recognize that there tends -- you may see some volatility and earnings associated with some of these market dislocations. You tend to be a lot less than volatility and assets values the private market for 2 million is very sophisticated it’s a very long term market they tend to look through the short term market dislocations Tim - has written on a 25 to 50 year Tcf basis and you’re using 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 tends not to be very highly lever 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 doesn’t generally translate into underlying asset value volatility and so clearly, we see is an opportunity to potentially arbitrage the dislocations for share buybacks and alike. But doesn’t really change our mindset around acquisition opportunities longer term.
Got it and Mark just remind me what you have by the off share repurchase authorization right now?
Yeah, we currently have a $100 million authorization in place of which roughly $99 million is still available and that’s as I said believe that was put in place back in 2016.
Got it. And then turning to Pacific 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 renaissance of exporters to have volume on the water if you will, while there’s still uncertainty 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 something in the 20% range and so that really dried up activity.
And I think we’re still seeing people behaving in a somewhat cautious manner as it relates to the export side and then the important thing to recognize as well as this is coming at time when the domestic markets are struggling indeed.
We’ve got lumber producers dealing with high levels of finished goods inventory and soft pricing and so they’re not anxious to add to log decks and so you really got weakness in both of those products and it’s all about price tensioning in terms of healthy markets and I can - with New Zealand that while you had some declined recently on the export side down the domestic market continues to be pretty strong.
That’s helpful. And then last question from side in terms of the jump that you’re all seeing from Europe duty and that is more of a short-term phenomenon as they clear out the beetle kill wood or do you think structurally anything has changed where this is more like a consistent supply and a new avenue of supply?
I mean we’ve certainly seen activity by at a government level to subsidize the removal of this material before degrades and no longer has value and so that would suggest that you’ll see them plough through this fairly quickly.
I think it’s way too early to get a sense of whether there is anything structural going on. Certainly, one thinks about the linkage with climate change and whether we’re going to see more of this across that region and certainly the rail linkage to China facilitates the harvest and processing of this material into lumber.
Got it. Appreciate all the color. I’ll turn it over.
Thank you. Our next question comes from John Babcock of Bank of America. Your line is open.
Morning just like I want to start out just on kind of the guidance given some of the factors you’ve discussed I was wondering if you can talk about what catch you ultimately to the high end low end of that EBITDA range as you set up?
Hey 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 the 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 there is a general sense of optimism that there would be a near-term resolution as we sit here today that sense of optimism has certainly waned.
And so, that's certainly the genesis of the reset for expectations for the year was to try to kind of reflect that in terms of the balance of the year.
Okay. And then as far as weather I mean, clearly seems like the weather this year has been particularly bad relative to last couple years, and perhaps even relative to historical levels and just want to get a sense, I mean, how much did that impact your harvest and also harvest costs during the quarter, it didn't seem like there was too much discussion on that. So maybe it was relatively minimal, we just want to get some color on that?
Recognize it, in the in the U.S. South, a lot of our sales activity are done through stumpage sales. And so, you're not seeing that direct linkage, you're seeing it certainly in an indirect sense. And also recognize that we're trying to take advantage of attention to markets when we get these weather events.
And we saw a shift in Q1, we saw more heavy weather in the Atlantic regions, in Q2, it was really more on the Gulf in the Gulf regions. And so, we think we're going to continue to see those types of shifts occur as you get weather.
That said, I think we're also encouraged by the impact that we've seen in our wood basins of the new capacity that's come online, from a lumber perspective.
Okay. And then just last question, before I turn it over, you've already talked a fair bit about the logs coming from Europe, just want to get a sense. I mean, are those largely competing in the same market as your New Zealand logs, or there's some discrepancies as far as your kind of end market demand there?
Its lumber coming from Europe, not logs.
Okay, Lumber, got you.
Yeah. 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. Good morning, everyone. So, my first question was with respect to I guess, ultimately, China, but how correlated are European lumber prices to North American values?
Well, you certainly see evidence that the European lumber will flow into this market. In certain market conditions, we saw that last year, we saw a fair bit of I want to say it was in a billion and a half [indiscernible] foot range of lumber come into this market, I have less of a sense of where that fits this year as we've dealt with softer demand.
I don't have -- 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 US, as opposed to consuming it domestically.
Yeah, if we've got $600…
Yeah, high lumber prices aren't always necessarily a positive for Southern producers, because it does generally lead to a higher level than ports, which are competitive with U.S. supply and ultimately U.S. production.
Thanks. I mean, where I was going with that is, we've got $600 lumber, domestically, then you're going to draw an import. But I should think that there, if there is a correlation, then lumber prices are now fairly cheap 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, recognize that the -- a lot of that is because the governments are subsidizing the removal of that wood. So that it doesn't rot.
Yeah, I've got figures 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, 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 done the moves that we made in a portfolio sense back in 2016, where we sold some younger land and acquired some older age class properties. 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, you know, we would be harvesting at below our sustainable level for roughly a decade associated with those moves.
And certainly, when we defer harvest, you know, 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 will get that much closer to, to getting back to our, to our sustainable harvest level.
Thank you.
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 four that I've heard on the call that may be might be having an impact. One being, you mentioned off to the China trade situation.
The week us housing market, what's been going on in Europe with more wood going into China, which I presumably displace logs that could have gone from Pacific Northwest and be processed. And, and then also the U.S. South making more lumber.
And so, 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 stay the same, at least in the short term, to the Pacific Northwest?
Mark, I think another thing to think about in your list, and those are all good items is, is the supply coming out of Canada and recognize that, you know, we've seen, we've seen capacity announcements that are that are pretty substantial in Canada, in terms of capacity, coming out.
And so, you know, 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 you as you think about things like that European lumber into China, you know, that's going to have an effect of displacing some Canadian lumber, which is going to make it want to come into the U.S.
But you've also then have the overlay of reduced production out of out of Canada. And so, recognize that, you know, lumber pricing is always is going to be to some degree, a function of the system wide inventory levels. And right now, you know, 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 point. So, and that's going to presumably be a positive the closures and as they've worked through their inventory, that Canadians us would coming into that would be a positive, regardless of what happens with China.
And so, I guess, just as the follow-up, I'm just trying to -- how was it that the China trade situation is affecting business out of the Pacific Northwest right now?
It's just lower export volume and export volume is ultimately competitive with domestic mills. And so, I mean, it you know, even in more depressed housing environments, you've seen, you know, some price volatility, and certainly some -- you know, significant positive momentum, kind of driven by strengthen the export market, which we just don't have right now.
And I apologize maybe I'm just missing something obvious. But and so there's the 5% tariff, as I understand that. How else is it that it's depressing what other factors is that 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, etcetera?
I mean, some of it, some of it, as we've described in prior calls was 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, 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 know, you're buying it at one price, and then you're 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, you know, 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.
Recognize, you also have a devaluation of the Chinese yuan relative the U.S. dollar, which is certainly impacted the relative pricing and domestic currency in China, that export log.
Okay.
Not just the 5%. It's not just the 5% tariff, it's really all the knock-on effects of the U.S. China trader 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 so much. Good morning, guys.
Good morning.
And just question on, you know, I guess lumber capacity, what you're seeing in the U.S. out there on the additions, I know that lumber production, the U.S. so at least, you know, to the end of May is down?
Are you still seeing additional capacity additions coming into the marketplace? And are you still bullish on the medium- and longer-term outlook for log prices down the US?
Well, I think you know, 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, you know, 6 billion board feet of proposed capacity changes from 2017 to 2021. And if you use, you know, if you use a rough conversion factor that that translates to roughly, you know, 24 million tons of incremental log demand.
And then as you peel that back in different layers, you know, roughly a billion board feet of that came online in 2017, toward the end of the year. It was scattered across many mills, but was primarily associated with existing capacity. And so, you know, that really didn't come into play until 2018.
And then we saw an additional 1.7 billion board feet of capacity come online and 2018. And from, from our perspective, roughly 75% of that was proximate to the wood baskets that we operate in.
Having said that, recognize that you know, sawmill start-ups are always problematic, they always take a fair bit of time, you know, met much of that new capacity is still in start-up mode and is not fully operational yet it typically takes a few years before those mills are running smoothly and get up to their designed capacity.
We have another 1.3 billion board feet, that's coming online and 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 2020 to 2021 timeframe.
Against that you also recognize that we've seen recent curtailment in Western Canada, of roughly 2.7 billion board feet 1.4 of that being permanent and the rest being temporary. You know, as you think about the lag effect, as I described earlier as it relates to lumber, the lag effect as it relates to this, the start-ups, you know, we have not really begun to feel the full effect of the shift into the U.S. South.
And as Mark talked about earlier, you know, the low -- it's the lower lumber price environment that I think is going to help accelerate this and we view 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, you know, we think we're going to benefit from that disproportionately.
Okay, if I could, 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 ground. Is it just the export markets that you're seeing a little bit of recovery or the domestic markets holding up as well?
We recognized that ultimately, that export price is going to be a driver in your domestic price negotiations. And so, if we saw prolonged lower domestic, I'm sorry, export price, that's certainly going to impact domestic pricing as well. But, so far domestic pricing is held up and we seem to have kind of stabilized and the export market and feel some momentum on the positive side.
Okay. And then just lastly, on the real estate side, just, if you could give us an update on what's happening with the wildlife where you are, where you are adding in terms of a to 20 years in the development cycle, what you're expecting for the balance for the year there?
For the balance of the year, we're continuing, these are long dated projects, you recognize it when we kind of announced this first phase of the wildlife development project, it was a 10-year project.
And so, we're still on the relatively early innings of it, but I'd say, 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.
Again, we're looking at this as a very long dated project and really is more of a kind of value catalyst for the region, then kind of a specific investment that we would have made, but for the fact that we own so much surrounding land.
All right. That's all ahead. Best of luck guys. Thanks.
Thank you. Our last question comes from Chip Dillon, of Vertical Research Partners. Sir, your line is open.
Hi, Yes, please. Dan [ph] in for Chip. How are you?
Hello.
Hi. So, my first question is a little bit about your pricing outlook. It's very clear, you were expecting somewhat of a recovery, especially the Pacific Northwest. Just wondering when we look at around $78, $79 per ton on your solos in the Pacific Northwest?
Does it mean you now expect this to remain flat for the remainder of the year no recovery? Or do you expect this to actually decline even further?
Our general expectation is that that it's going to be relatively flat. Again, I think we've seen the market be relatively flat for these last few quarters 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 as we see a pickup and housing, so, you could certainly see some positive momentum and some other factors materialize. But our general expectation is, roughly flat pricing for the balance of the year.
Perfect. And just before you mentioned -- question, I think that the export the sale of New Zealand was down 15% currently. I'm sorry, I didn't actually catch over what period so that would be early August, end of June, July versus Q1 average or versus the peak that you saw a few quarters ago?
The bulk of the dip occurred in June, kind of into the early part of July. And so that's more or less kind of a May to July statement.
So, just trying to understand where is the numbers that we see on the slides, the $112 realize, $116 in Q1, essentially that's pointing to around $100 or $95 for exports something there at the bottom?
I'm sorry, I'm not sure I'm following you.
So, as we look on the slides for New Zealand exports, September, I think, Q1 average was $116 per ton. So, the 16% essentially is of these members?
We recognize that that's per ton. That the prices that we referenced earlier per JAS cubic meter, we're actually selling the product per JAS cubic meter. So, you can look kind of down below that those domestic I'm sorry, those exports solid timber prices. On the bottom part of that chart, we show the price per JAS cubic meters, you have conversion issues that go into that.
Okay, perfect.
The average price in Q2 per JAS cubic meter for export saw timber is 130. That's 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 1.10 level, so you get a little bit of a sense of that. It's partially reflected in Q2, 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 little bit back to capital allocation M&A, you clearly indicated, preferably that you prefer actually to bolt on in the South. I was just wondering if with all the negatives that was in the Pacific Northwest that was, they were discussing detail in this call, would you consider any sales and any acquisitions in the region.
Even the price was right, or do you think you want to focus on areas that have a better growth profile like the U.S and as you mentioned Pacific Northwest may be out of the question.
We're looking really actively across all of our geographies but the bolt on comment was really more a statement of what we feel currently were able to enjoy better returns with bolt on in all regions relative to two auction environments because there is still lot of capital trying to get into the timber asset class.
And as Mark described earlier, timbers value on a very long-term basis and so you look through market dips and in asset values tend not be as volatile as product price values. And so were actively looking really all the time both on auction and negotiated basis in all three of the regions.
And we're also constantly comparing that relative to the relative value implied in our stock price. And so, you know really our philosophy on capital allocation is to stay nimble say opportunistic and really try to find those best relative value trades.
And actually, that was going to be kind of my next question which is close to where it was two years ago, you do have the buyback. How should we think of these $26 $27 level for the appeal of the buyback verse M&A and on the other hand, I think you did some acquisitions with Sheridan [ph] throughout these levels, would you consider actually doing something larger on the M&A front that may require Sheridan [ph] or again at this price it doesn’t make sense.
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 are monitoring the relative value implied in buying back stock versus the acquisition opportunities were seeing in the market and so obviously a lower stock price that that balance can ship in favor of buybacks.
Okay, perfect. Thank you very much.
Thank you. And I'm showing no further questions and I would like to turn the call back over to speakers for closing remarks.
Thank you. 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 disconnect at this time. Have a wonderful day.