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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 Third Quarter 2019 Teleconference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
And now I will turn the meeting 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 third quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.com.
I would like to remind you that in these presentations, we include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release and Form 10-K filed with the SEC, lists 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 2 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?
First, I'll make some high-level comments before turning it back over to Mark, to review our consolidated financial results, then we'll ask Doug Long, Senior Vice President of Forest Resources, to comment on our U.S. and New Zealand timber results. And following the review of our timber segments, Mark will discuss our real estate results, as well as our outlook for the remainder of 2019.
We generated adjusted EBITDA of $43 million, and breakeven EPS for the third quarter. Our third quarter results were well below last quarter and the prior year quarter, primarily due to the timing of real estate transaction activity as anticipated and discussed in our last earnings call.
In our Southern timber segment, volumes declined modestly versus the prior year quarter, while average prices were also lower due to weaker export demand and an oversupply of saw timber in the domestic market. The pulpwood market also experienced some pricing pressure due to excess supply from dry ground conditions during the quarter.
Despite these near-term headwinds, we remain on-track to achieve record adjusted EBITDA in our Southern timber segment for the full year 2019, bolstered by a very strong year in non-timber income.
In our Pacific Northwest timber segment, we continue to contend with soft market conditions resulting from reduced export demand and challenging lumber markets. As noted on prior calls, with deferred planned harvest volume this year in response to these unfavorable market conditions, which has further impacted results.
In our New Zealand timber segment, we generated a modest increase in harvest levels versus the prior quarter, although pricing declined significantly, as China demand weakened and competitive log and lumber supply from Europe, salvage, European salvage timber increased significantly. While we've seen a modest improvement in export pricing for mid-year lows, pricing still remains well below first half averages.
Lastly, real estate activity was relatively light this quarter, while weighted average pricing remained strong due to a significant improved development transaction. Overall, we're on-track to achieve full year adjusted EBITDA towards the lower end of our prior guidance.
And with that, let me turn it back over to Mark, to review our third quarter financial results.
Thanks Dave.
Let's start on Page 5 with our financial highlights. Sales for the quarter totaled $156 million, while operating income was $11 million, and net loss attributable to Rayonier was $0.4 million, translating to roughly breakeven EPS for the quarter.
Third quarter adjusted EBITDA of $43 million was significantly below the prior year quarter adjusted EBITDA of $83 million, primarily due to a significantly lower contribution from our real estate segment, as well as weaker results in our Pacific Northwest and New Zealand timber segments.
On the bottom of Page 5, we provide an overview of our capital resources and liquidity at quarter end, as well as a comparison to prior periods. Our cash available for distribution or CAD for the first nine months of the year was $116 million compared to $222 million in the prior year period, primarily due to lower adjusted EBITDA, higher capital expenditures and higher cash taxes paid, partially offset by lower cash interest paid.
A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on Page 8 of the financial supplement. We closed the quarter with $57 million of cash and $975 million of debt. Our net debt of $918 million, represented 20% of our enterprise value based on our closing stock price at quarter end,
I'll now turn the call over to Doug, to provide a more detailed review of our timber results.
Thanks Mark. Good morning.
Let's start on Page 9, with our Southern timber segment. Adjusted EBITDA in the third quarter of $23 million, was $5 million and $400,000 unfavorable compared to the prior quarter and the prior year quarter respectively.
Third quarter harvest volume of approximately 1.3 million tons was flat compared to prior quarter and 4% lower compared to the prior year quarter. The decline in volumes was due in part to weaker saw timber demand, particularly in export markets.
Quarterly volumes this year have also been impacted by the outside stumpage removals that we experienced in the first quarter of this year. The average pine pulpwood stumpage price of $15.53 per ton was 9% and 7% unfavorable compared to the prior quarter and the prior year quarter respectively.
The reduction in price compared to the prior quarter was due to an increase in supply as a result of dry ground conditions, combined with geographic mix, as we harvested less volume from our strongest pulpwood market.
The reduction versus the prior year quarter was driven primarily by geographic mix. The average pine sawtimber price of $23.16 cents per ton was 10% and 9% unfavorable compared to the prior quarter and the prior year quarter respectively.
The decline in pricing compared to both prior periods was primarily due to weaker export and domestic demand resulting from continued Chinese tariffs on Southern Yellow Pine logs coupled with an increase in tariffs on Southern Yellow Pine lumber, which impacted domestic production.
Our non-timber revenue team continued to deliver strong results. Year-to-date revenue of $27 million is 29% higher than the same period in the prior year, primarily as a result of increased recreational license income and pipeline ease and sales.
Now moving to Pacific Northwest timber segment on Page 10. Adjusted EBITDA of $3 million
was $0.5 million favorable compared to prior quarter, and $7 million unfavorable compared to prior year quarter.
Third quarter harvest volume of 261,000 tons was 4% higher than prior quarter and 16% lower than the prior year quarter. As trade tensions with China continued, 2019 year-to-date log export volumes have declined to a 10-year low, resulting in continued pressure on pricing. However, we've recently seen a modest uptick in demand, which should provide for increased volumes in Q4.
The average delivered saw timber price of $78.26 per ton, was flat compared to the prior quarter, and 24% unfavorable compared to the prior year quarter. Following the significant decline in pricing late last year, when the U.S.-China trade dispute heated up, pricing has been relatively stable over the last four quarters.
The average delivered pulpwood price of $37.87 per ton was 10% and 23% unfavorable compared to the prior quarter and the prior year quarter respectively. The change in pulpwood prices compared to the power quarter was probably driven by excess supply in the market of small diameter export quality logs, or downgrade to domestic pulp logs due to the weakening export demand. Additional variants relative to the prior year was driven by reduced export demand for chips, which should increase fiber supply for domestic mills.
In summary, we continue to see various negative impacts related to the U.S.-China trade dispute across all product categories in the region.
Page 11 shows results and key operating metrics for our New Zealand timber segment. Adjusted EBITDA in the third quarter of $18 million was $2 million and $6 million unfavorable compared to the prior quarter and the prior year quarter respectively.
Third quarter harvest volume of 754,000 tons was 10% and 14% higher than the prior quarter and prior year quarter respectively. The increase in volume in the third quarter was primarily due to export vessel timing and increased domestic demand, as some competitors harvesting in lower margin force curtailed operations due to the fall in export prices.
The average delivered export saw timber price of $95.51 per ton was 15% and 17% unfavorable compared to the prior quarter and the prior year quarter respectively. Many factors have contributed to decline in pricing, including alternative log and lumber supply from Europe, slower consumption of logs and increased deliveries particularly at the start of third quarter, which yield elevated port inventories.
However, the situation generally improved toward the end of the third quarter as consumption increased and suppliers from higher cost regions significantly reduce shipments. Customers have now had the opportunity to trial the European salvage logs. And our market intelligence suggests that while they're satisfactory for construction lumber, it did not work well for higher end usage, such as plywood, moldings and furniture, for which really a pine is preferred.
As result, by the end of third quarter, radiata pine inventory at Chinese ports had dropped by almost 30%. The average domestic saw timber price of $75.29 cents per ton in U.S. dollar terms was 9% and 7% unfavorable compared to prior quarter and the prior year quarter respectively , partially due to the fall in the New Zealand U.S. exchange rate, but also due to the impact of declining export prices.
Note that domestic pricing tends to lag behind export pricing as log supply reverted back in domestic markets when export prices become uncompetitive. Excluding the impact of foreign exchange rates, domestic pricing in New Zealand dollars were 7% and 4% unfavorable compared to the prior quarter and prior year quarter, respectively.
The average domestic pulpwood price of $38.47 per ton was 2%, unfavorable compared to prior quarter and 2% favorable compared to prior year quarter. New Zealand dollars pulpwood prices were flat compared to prior quarter, but 6% favorable compared to prior year quarter. In our Trading segment we generate breakeven results, which were $200,000 favorable compared to prior quarter and $300,000 unfavorable to the prior year quarter.
I'll now turn it back over to Mark to cover our real estate results and outlook for the remainder of the year.
Thanks Doug.
As highlighted on Page 12. Our real estate segment had a relatively light third quarter. Third quarter sales totaled $9 million on roughly 1300 acres sold at an average price of $6500 per acre. $400,000 of deferred revenue was also recognized in the quarter due to the completion of post closing obligations on prior improved development sales. Adjusted EBITDA for the quarter was $5 million.
Sales in the improved development category totaled $4.5 million, driven primarily by the $4.2 million sale of a 16 acre grocery retail site and our wildlife development project. Since project inception, we have realized total commercial sales and wildlife of roughly $16 million on 76 acres sold at an average price of $215,000 per acre.
Residential momentum and wildlife also continues to be strong. The development of our next phase of 122 residential lots is well underway, with construction scheduled to be substantially completed by the end of Q1 2020.
In the rural category, sales totaled $4 million on roughly 1100 acres sold at an average price of $3400 per acre. Rural sales comprise over 20 transactions across our Southern footprint. Lastly, sales in the non-strategic and Timberlands category totaled $0.4 million, consisting of 200 acres at an average price of $2100 per acre.
Now moving on to our outlook for the balance of the year, as noted in our earnings release we expect to achieve full year adjusted EBITDA toward the lower end of our prior guidance of $245 million to $265 million. Market conditions continue to be challenging across our timber segments driven in large part by the decline in the China export market.
In our Southern Timber segment, we are reducing our full year volume guidance to range of 6 million to 6.1 million tons as we pullback harvest activity in certain markets impacted by the decline in saw timber demand. Based primarily on this lower volume estimate, we expect that full year adjusted EBITDA on our Southern Timber segment will be modestly below our prior guidance.
In our Pacific Northwest Timber segment, we expect to achieve full year harvest volume in line with our prior guidance of 1.2 million tons and adjusted EBITDA towards the higher end of our prior guidance. While market conditions through the first nine months have been very difficult, we're starting to see some momentum and demand which should contribute to stronger results in Q4.
In our New Zealand Timber segment, we remain on track to achieve full year harvest volumes at 2.7 million to 2.8 million tons while we expect to achieve adjusted EBITDA towards the lower end of our prior guidance. Pricing in New Zealand has improved modestly from mid year lows but still remains well below average pricing in the first half of the year. Lastly, in our Real Estate segment, we expect a strong fourth quarter and remain on track to achieve our prior full year adjusted EBITDA guidance for the segment.
I’ll now turn the call back Dave for closing comments.
Thanks Mark.
While market conditions across our timber segments have been challenging we remain focused on our core objectives of generating industry leading returns and building long-term value per share.
To this end, we were pretty active with respect to capital allocation initiatives in the third quarter. During the third quarter, we closed seven acquisitions totaling 23,500 acres for an aggregate value of $55.5 million.
The two largest transactions closed include approximately 4100 acres in New Zealand, acquired for $29.1 million and 10,000 acres located in Coastal Florida acquired for $14.8 million. The New Zealand acquisition has an older age class is heavily stocked with merchantability timber and is located in strong markets with a good mix of domestic and export log demand. The Florida acquisition has a relatively young age class profile, but is situated within one of our strongest markets, and is highly complementary to our existing footprint.
Year-to-date acquisitions through the end of the third quarter total nearly 38,000 acres for an aggregate value of $82 million. Our acquisition so far this year reflect our disciplined growth strategy, which is focused on select acquisitions that upgrade our land portfolio, grow our sustainable harvest, and our accretive to long-term cash flow generation.
We've also enjoyed success through direct negotiations of smaller bolt-on acquisitions, and some of our top target markets. We currently have a good pipeline of opportunities and expect Timberland acquisitions activity to remain robust going into next year.
During the third quarter, we also took advantage of the opportunity to repurchase $8.4 million of our stock at an average price of $26.34 per share, which we believe is below our intrinsic value. We continue to be keenly focused on capital allocation, particularly given the volatility that we've seen in the market and the opportunities that this volatility can create.
We will continue to actively evaluate all capital allocation alternatives including acquisitions and buybacks with a focused view towards building long-term value for our shareholders.
In conclusion, I'm very proud of our team for the way that we've executed operationally amidst a challenging market backdrop during the first nine months of the year.
The U.S. China trade dispute continues to generate some challenging 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.
This concludes our prepared remarks and we’ll now turn the call back over to the operator for questions.
Yes, before we turn it back to the operator just one quick correction, I believe we said that our third quarter harvest volumes in New Zealand were 14% higher than the prior quarter that should have been 4% higher than the prior year quarter. Thank you.
[Operator Instructions] Our first question comes from Anthony Pettinari with Citi. You may go ahead.
This is actually Randy Toth filling in for Anthony. I just wanted to focus on the Southern time for timber prices, which fell 9% in the quarter. I think there is a little spread into us given the indexes we’re basically flat. Could you just talk about what happened more - what happened there and a little bit more detail was that something that was Rayonier specific or localized to a specific region. Any detail would be helpful?
Sure, this is Doug. Yeah, quarter-over-quarter to towards wide saw timber prices typically decreased, decreased till the last 15 years from Q2 to Q3, so it's pretty normal trend we see. However, our saw timber prices were simply impacted them by discounts associated with the channel of our Alabama and Georgia export yards.
We had to sell some volume in the yard essentially pulpwood prices. So during the quarter at the beginning of the quarter, we decided that things have gotten pretty rough in the export markets. And so, since we essentially saw the collapse of the central pine exports from South as of exporters as ourselves with our trade winds, and ceased operations, so that did have an impact that was kind of outside of what would be normal
But as reported also into ourselves, there was a 5% to 7% correction in the Atlantic Coast saw timber markets. And those markets had to realign themselves with the increased amount of saw logs coming in. So we did have something that was a longer Atlantic Coast, it was a change. But in the quarter the market appeared to found its new bounce though, and we don't expect somewhat drop in Q4.
We actually anticipate some modest saw timber price improvements in some of our markets. But, however, it's been the case for the past two years our Q4 sales out of Arkansas will again be simply volume contributor and that would partially offset some of the anticipated gains. So we did have a kind of a unique occurrence that happened in the quarter with a lot of export operations shutting down in Atlanta Coast.
And then just switching gears to New Zealand I think you said radiata pine inventories at Chinese port are 30% lower than average. Have you seen a pickup in demand in October and how are those prices trending first the 3Q average? Thank you.
Yeah, that's a great question. So yeah, we saw that from high almost 5 million tons in Q1 China port inventories have attracted around 3.5 tons in September. And radiata pine inventories as you mentioned managed to drop almost 30% in September.
So we again see a positive correction in pricing, the inventory demand ratio, which something we track closest falling from above two months, which is an oversupply to run 1.6 months, which brings us back into more supplied a balance situation.
And so the reasons we think that improving the ratio or that significant decrease from marginal suppliers such as South America and as I mentioned the tariff constraint in U.S. South, 50% reduction in block trains from Europe on the [indiscernible] initiative from 300 to 150 per month trailing number and then a significant increase in plywood manufacturing, which typically favors radiata demand. So those results have resulted in a meaningful price appreciation in the last month.
The next question comes from Ketan Mamtora with BMO Capital Markets. You may go ahead.
So just on that last point, Doug, is there any way we can, sort of, just quantify maybe just even in percentage term, how much, where it is right now in Q4 versus either Q3 average or where it was at the high's, any sense?
We're still negotiating, obviously, as things go through. But I can tell you that we've seen high single digit increases.
And then turning to this European pine beetle; it seems like it is working with some applications, not so on some other application. But as it stands right now, and with all the work that you've done, any perspective on kind of how many years it may take for this to play out?
And then, kind of, what kind of impact do you-all see both for your log operations in New Zealand and Pacific Northwest? And then, sort of, implications with potential for more lumber coming into the U.S. and with your Southern Timber position.
Yes, it's a great question. As we mentioned in our teaching tour, we're still working on trying to understand the exact impacts of European salvage and what's going on, to be quite honest. We've done a lot of work on it and we're still focused on what the impacts are.
There's a lot of variation. We've been told that, for a lot of the product uses, that efforts spent on the stump for six months, it's no longer valid, and especially once it's been imported over to China.
So there's varying estimates of everything from two to five years of how much volume can be, out there, be harvested. So it's really a moving target at this point in time. We're trying to understand better.
But we've been really pleased to find out that, while customers chase the cheap wood to start with, they're realizing that it's not meeting their needs in lot of the high end radiata demand area. So it's been a positive impact, of course, and raising consumption increase for radiata as we go forward. With respect to lumber, that I don't have as much detail on unfortunately.
Ketan, I can speak to one thing that's important to keep in mind. As you think about lumber, just like mills need to find a home for residuals, they also need to find a home for low grade lumber. And historically, a lot of that low-grade lumber has flowed to China. And so we're seeing kind of a second order effect where you have that low grade lumber having a harder time finding a home as it ripples through the market.
And I think you also probably are going to have some product substation issues within European markets that may have a tendency to push more lumber, than otherwise would be the case, into U.S. markets. And so those are some of the things that we're keeping an eye on. But this is going to take some time to fully understand and kind of follow some of those second, third order effects.
And I think one thing that's important that I forgot to add, I mentioned earlier in my text is, or in the comments that we've seen a reduction in those blocktrains from 300 to 150 a month, so half. And a lot of that, as we mentioned in our teaching, was subsidized getting that number back across to China and other places. So we don't know the exact reasons why that's happened. But it's encouraging to see that there's been a 50% reduction in those trains pulling that lumber across.
Just a couple of other questions. I mean, with this U.S.-China kind of trade dispute, and if they were - if you were to see a deal happen, how do you kind of see things shaking out? Do you expect things to come back to normal levels pretty soon? Or is it also a question of rebuilding confidence and trust and it might take some time to get back to where we were?
Ketan, I think from our perspective we're thinking probably more in the latter context. I mean, this has become fairly protracted, and in some cases, sort of an emotional dispute. And so I don't see it as a case where, if things ended tomorrow, we'd see an immediate pickup. And I think that's - I think that this whole specter of log and lumber substitution from the European substation issue, also plays a role in that.
And so, yes, it would certainly be helpful. But I think both kind of the cultural aspect of this trade dispute, as well as the presence of the European volume is going to make it a slower recovery going forward.
One thing I'd add to that, I actually just got back from D.C. yesterday and was meeting with folks in the White House with National Economic Council. And talks of the phase one deal, we're looking at purchase requirements of up to $50 billion has been mentioned. And forest products have gone from $3 billion to $1 billion in trades. There's about $2 billion of opportunities there.
And so one thing that could change it would be if there are requirements put in to reach those $50 billion. It seemed that logs would be a good contributor to that, and then we look at whether it be purchase targets. And so we may see a quicker than normal recovery than we would, but that's early days. That's literally having just come back from D.C. meeting with the White House.
So we still have a lot of room to work there. But there are some talks about having actual target purchases that would be above current. And so that could be a positive that we, like I said, having factored in and news right off the press.
And then just one last question from my side. We've seen a lot of distress in the hardwood markets. Is this some - is that kind of interesting to Rayonier, the hardwood markets at all or would you – is softwood kind of where your interest is?
We see the opportunity primary to leverage our science and technology in the softwood markets. So we're primarily focused on softwood plantations. That's where we think we have the ability to influence growth. Typically, the softwood plantations, 20-years in the south to 40-years in the Northwest, whereas hardwoods often take 40 plus years, up to 80-years type thing. So a slow rotation. So we're typically focused more on softwood opportunities.
Our next question comes from Kurt Yinger with D.A. Davidson. You may go ahead.
First off, obviously some challenging market conditions this year. If we were to start thinking about 2020, do you think your harvest expectations would be meaningfully different than where you came into the year in 2019, maybe with a little lower on Pacific Northwest because of the China situation? How might we start thinking about 2020 harvest volumes?
I don't think we're quite ready to start talking about 2020 yet. But as a general sense, we generally have a view of operating at or around our long-term sustainable yield. And we'll flex that to some degree based on market conditions. But if you kind of look at that as a starting point or baseline, it's generally going to be in that vicinity, give or take.
And could you maybe help us with the fourth quarter guide for the Pacific Northwest harvest? I mean, that kind of implies a lot of volume versus what you've done through the first three quarters, is that primarily the sort of uptick and export demand that you've referenced?
No, it's Doug again, sorry. What we're seeing is some increased demand. We've had a wetter approach in the fall than normal. And so supply is starting to be constrained from the, from kind of the non-industrial private owners. And so we've seen increased demand from domestic customers.
And so one of the reasons we're looking at increase is some stumpage sales out there that we have. With that increased demand domestically, we're looking to market some with additional to our delivery crews.
And then on kind of the expectation for improved Pacific Northwest log realizations; I mean, do you think, absent any change in the China trade dispute, do you think next year that'll be pretty well correlated to the domestic lumber market or how much impact might a stronger year, next year on the lumber side have on pricing in your view?
Certainly, historically, if you go back, the Northwest has enjoyed the volume from heading to China since about 2009 is when volumes resumed. And so a lot of this, I think, in an optionality sense, is going to depend on how this trade dispute sorts itself out.
And if what Doug is describing, ends up happening, where you have kind of mandated elements of a deal that force more export; the Northwest is certainly going to be one of those places that we'll benefit from it. Absent that, I do think it will be more correlated to underlying lumber demand.
And the other thing to kind of keep in mind as you think about 2019, there's a lot of noise in 2019, associated with the permanent curtailment or the curtailment or permanent closure of capacity in Western Canada.
And what a lot of people need to recognize is that every time one of those mills was being shutdown, you had a good six month lag before you really started seeing that in pricing. I think we're just now starting to see some of the impacts on lumbar pricing associated with those mill curtailments. And so all else being equal, I think you'd expect to see a more balanced lumbar market and that should translate into improve lumbar pricing as well as just elasticity from a pricing standpoint on logs.
Yes, I would agree with that. I think we've seen over $2 billion board feet of permanent closures in British Columbia and another 7,000 million around 7,000 million board feet of temporary curtailment. And so that's about 14% of their production. And I think that's where we're starting to see some potential upside for us in that domestic demand.
Got it, okay, that makes a lot of sense. And then just lastly, going back to the Southern saw log pricing weakness how much of that might be attributable to both the weather and some discombobulated harvest patterns, or the kind of transitory items because I thought Southern log exports were pretty small percentage of sales in recent quarters and I wouldn't have thought that would kind of have a meaningful impact versus let's call it the realizations in the second quarter.
Yes, we did see the dry weather definitely had an impact on saw timber pricing across the South, which is bears out in some of our South report. So we did see an impact on that. But we also - out of our coastal resourcing it - we’re not resourcing it a lot of the volume that we're working on was in the export market. So we did have a certain amount of volume that was coming out that was going in those markets. And so we did - the pricing that we had to take like it says - that the pulpwood price has a significant impact on saw timber pricing.
Okay, so I mean, if the export market stays where it is today. There wouldn't be I guess much upside just because of that impact or I'm just trying to figure out, whether call it the 23 and change is a good way to think about it going forward or it's more a situation of domestically this quarter things from the supply demand perspective, where there is a lot of lack?
Well recognized that what Doug described earlier, some of that Q3 price was a function of having to basically sell saw logs at a discount as we curtailed export operations. So there was a fair bit of noise that influenced that. So bear that in mind that was not a normal run rate quarter.
Our next question comes from Collin Mings with Raymond James. You may go ahead.
Just going - first off going back to some earlier questions just given we’re into tariffs now. I mean, just what do you think led to the acceleration in the shutdown of some of the export operations. And again, David sounds like in particular, you've curtailed some of your operations too. But it does sound to be a little bit more broad base, what you think kind of was the trigger point for that.
And then just how has this volatility on the export markets may be factored into your acquisition underwriting in the coastal markets. Because I know, for a number of number of years that's been highlighted a favorable attribute of the U.S. South or the particular areas that you're focused in the U.S. South as far as that optionality?
Sure Collin, I'll start with the first section of that. Yes so - I think what's happened is almost all of the exporters particularly folks like Rayonier who have been exporting for a long time to China. One to work through this process with our customers, we had supply chain setup. And so, basically, we were in investment mode, and as we thought about it, so obviously, the returns weren't great with 25% margin, but we felt like we want to keep those supply channels open and keep things going.
So we were in investment mode trying to keep that going. And so, our peers and competitors, but I think finally everyone kind of got that feeling like, okay, this is not ending soon, and how long we keep moving with that. And what really added on to that was we were seeing significant slowdowns on kind of the other side in China of getting cargo unloaded, inspected.
And so there was costs that were beyond our control beyond our tariffs that we just couldn't anticipate. And that's what really caused us to say this is getting too painful when you - if you know what tariff and you understand that you can work around it. But when you start to see on a non-tariff trade related things that are impacting your recoveries, realizations that was at the point where we made this decisions that were tough.
And I having talked to some of my peers and other groups - they felt similarly that it was just getting point where it was hard to figure out what was going to happen next.
And Collin to your second question, regarding underwriting, recognized that, we're typically doing very long-term DCF models and when we think about pricing, we look at some of the market characteristics where we look at underlying demand from known manufacturing customers against the wood basin supply. And that really helps inform our pricing and I think export volatility just does not play that meaningful role when we think about it from an underwriting standpoint as it relates to price forecasting.
Okay, very helpful color there on both fronts. And then another thing just in the prepared remarks, it was highlighted I think it was highlighted in the press release to just another strong quarter of non-timber income in the U.S. South. Can maybe just speak to the sustainability of that?
Sure, yes I mean, obviously, this has been an outside year for us with respect to particularly pipeline easements, but we see this as a very strong business going forward. And particularly we have more pipelines in the pipeline for a pun, but we do see opportunities to have another strong year next year. This will be a peak year though I can't say we'd be able to replicate these years, but still a very strong year, when we compare ourselves on our run rate from prior years.
Okay, and then switching to New Zealand and I apologize if I missed this, but obviously a lot of focus there on the export side of the equation. But maybe can you just elaborate on what you're seeing on the domestic market in New Zealand?
Sure, yes as we mentioned, we look forward domestic prices typically lag the export market by a month or a quarter depending on pricing arrangements. So, we do anticipate there will be some price corrections in domestic market, as we actually export price fall over Q3, and then significant increase that we've seen in Q4. So it's early on like I said, we have quarterly and monthly negotiations.
So it's a bit of a mixed bag and what's going on - we typically do see some lag after domestic pricing or after the export pricing.
I appreciate that. I guess I was getting more just the general demand side of things?
Oh sorry, demand. Yeah on the demand side of things, we're actually still having fairly strong demand domestically. So that that hasn't been too much of an issue, as Q3, we had significantly stronger demand for domestic. As we saw operators that are working in, very high cost forced when export prices fell, they just couldn't work anymore. So we saw increased domestic demand that point in time.
So we're not seeing that typically falling off, but we are - as Dave mentioned in the last call typically with our harvesting in New Zealand. We contract out - almost a 100% of that, and some of those were on one to three agreements type thing. And so it's hard for us to change the lever immediately, but we have those things rolling so we can move that lever back and forth as we respond to markets.
And so, we're kind of as we move into Q4 really the opportunities we might have to pullback a little bit in New Zealand as we think about those as some of those kind of crews roll off. And we have the ability also that our contracts to scale back those crews, but it's not something we can just turn them off immediately.
So New Zealand's a little more of a constrained labor market and so our contracts have us working in conjunction with our contractors over there. But we do have the ability as we kind of stage out those contracts to roll off to bring crews off of different things. We're looking at how we handle our volumes, based on markets as we go into Q4.
Okay, that's helpful detail there. And then one last one for me, Dave, just I appreciate the prepared comments just on the acquisition activity during the quarter and the pipeline, as you look out. Some of your comments though, do contrast some of the peers that have just either not been active on the acquisition front or have again characterized it’s a pretty quiet market out there. Can you maybe just provide us maybe a little bit more color on what you're seeing and maybe some of the reasons behind you think better driving your success on the acquisition front?
I think Collin it's a number of things. I mean first of all, there is a lot of activity out there. There is a lot of properties out there. I think as we and others have noted, there is a lot of properties that are average or even in some cases below average properties. And we tend to be fairly disciplined about looking - for properties that have a good fit. We're always looking to improve our portfolio when we are considering acquisitions.
We are not interested in just growth for growth's sake. And so, we're very picky about what markets we go into. I think we tend to think of ourselves as very market centric, when we look at our acquisition targeting. And so having said that, I think another aspect to this is that, you know, we've had a concerted effort this year to focus on both, negotiated transactions as well as smaller transactions that we refer to as bolt-on transactions.
And we have had some measure of success, does it move the needle individually on those acquisitions, not as much. And I think that's why a lot of larger timber owners tend to shy away from those smaller deals, we tend to look at a more on the margin, and we looked at them in aggregate, we feel like, we've had a good year adding really high quality properties, but in small increments.
And so, we're happy with what we've done. We think we've developed a nice niche and, we're going to take these opportunities as they come and as we're able to develop them.
The next question comes from Paul Quinn with RBC Capital Markets. You may go ahead.
Yes thanks so much good morning guys. Most of the questions I had have been asked so really I've only got one, just in the U.S. South you guys talked about saw timber pricing down, but what is the reason for the weakness in the pulpwood pricing?
Sure, great question. So with respect to pulpwood we had to drive the normal summer, which yield excess supply across the operating area. In addition to the dry weather, we were able to work on a backlog of thinning because it was dry. And that increased our thinning volumes by 7%. And typically those thinnings net a lower stumpage due to the increased harvesting costs. And then finally found third reason, geographic mix also plays significantly into the quarter as pulpwood volumes from our highest price region were down 15%.
And our lowest price region were up 8% and to give you a sense of difference in price, the pulpwood price is twice as high in the highest region versus lowest regions. There is a significant difference in volume and value there. And that's kind of the main reasons so we saw the pulpwood prices changes.
Well, that makes sense. Yeah that’s all. Best of luck guys. Thanks.
The next question comes from John Babcock with Bank of America. You may go ahead.
Just want to kind of tag on – kind of the U.S. South a little bit here. One of your peers mentioned that they were seeing an increase in supply from non-industrial private landowners. Is this something consistent with what you were seeing and is that kind of part of the reason why saw and timber prices weakened. Obviously, this kind of adds a little bit of some other kind of items you mentioned earlier, but just wanted to get some more color there?
Sure, as I mentioned, when we have a really dry period of time, like this summer, it allows folks who haven't invested in the road networks and even folks you don't even have roads farmers who might have 100 acres out there still able to go and harvest. And so we have significantly see an increase not an availability supply. As the mills they're smart when there is opportunities they go after them so it has generated more supply for the mills at this point in time.
As we started to see as I mentioned Northwest the wet weather has started constraint that supply and in some parts of South we're starting to get more rain and starting to see that same thing, but it was a very dry summer, which allowed us to do lot of thinnings and allowed those farmers and private owners to be out there and harvest timber that may not be able to use the last two years.
And just quickly on that also, where our prices currently based on relative to where they were, on average in the last quarter?
I mean, it varies pretty considerably by market again, we have a lot of regional differences in the U.S. South that are kind of driving that kind of quarter-to-quarter noise. And so, again I think you three for variety of reasons, the dry weather, the kind of shutdown the export operations. You definitely saw a decline there that’s again, unless we were to go market-by-market, product-by-product, it's hard to kind of make general commentary on that front.
And then just the last question, with lumber prices kind of starting to trend upwards over the last week or so. Are you seeing any pickup in demand from saw mills either in the South or Pacific Northwest?
As we mentioned before Pacific Northwest in particular, we've seen some increase demand, which has been nice. Expect the South we haven't really seen that reflect through, but it's been very short-term as you mentioned. So it hasn't that chance to work through yet.
Our next question comes from Mark Weintraub with Seaport Global Securities. You may go ahead.
This is actually Ryan on for Mark. I just have one. Hi, can you hear me?
Yes.
Yes great, I just have one quick one on the Southern harvest guidance for the remainder of the year. I saw you guys picked that down a bit siding weaker demand, one of your competitors are in a week mentioned that there was an influx of supply from the non-industrial landowners. Just want to know if that was impacting you as well? Thanks.
Yes, as I mentioned earlier, due to that dry weather we are seeing that increased supply from the folks who it's been wet over the last couple years and what we bring wood to market. So now they have this opportunity they have bought lot more wood than normal to the market I would say. And so, we have had an impact of increased supply from non-industrial private forest owners that's impacted us.
But you have to also keep in mind that, the U.S. South as Mark mentioned, is quite varied and we talked a lot about the Golden inventory of standing timber being very differential across the U.S. South and so, it really does depend on where you're talking about because there is parts of the U.S. South that have really had a tremendous growth in their inventory and you're just going to see both weaker pricing and lower price elasticity than in other areas.
So you have to be pretty careful and mindful of where that that footprint is when you're thinking about pricing.
[Operator Instructions] Our next question comes from Chip Dillon with Vertical Research. You may go ahead.
Good morning, Dave, Mark and Doug. This is Salvator filling in for Chip. So a couple of questions for me firstly, building a little bit on the question from the South. Do you think these demand – these extra supply from smaller owners that you saw now was one and done or either significant pent up capacity. There is standing timber inventory that if we see similar weather conditions in the next few years. You could see temporary spike in supply?
I mean I think it really gets back to what I just said from the last question that depending on the region. I think that where you've had large builds in inventory and you have favorable weather with smaller non-industrial privates. You're going to tend to see some of that pent up supply kind of flowing to the market. And so you just have to be mindful of what region you're referring to and we pay a lot of attention to that kind of operationally as we look across the U.S. South.
But really across regions when you see dry weather, you're going to see greater accessibility in the non-industrial private landowner forests. And so you will tend to see some incremental supply coming to the market with dry weather. Likewise, when you have wet weather, you'll tend to see that supply pullback and a price response in that regard.
Okay, yes, that makes sense. Now just a little bit with all the lumber capacity that's shifting to the U.S. South. Can you just give us a little bit an update – a little bit where do we stand with the lumber mills that have started what do you expect to start in the next couple of years. And primarily, given the lumber outlook prices now are going higher, slightly at least but we’ve seen some curtailments, do you see any capacity that is at risk near your Timberlands in the South?
Yes, I'll take that start with the sawmill side talked about going forward. In our local area, we're tracking quite a few we talked about before GP Albany is on track to be complete in 2020. We understand and that will add a significant amount of volume up to 7000 or 8000 tons of additional demand in our wood basket in that area. Another mill in DuPont yard here more locally, also maybe increasing capacity and so we are seeing potential of additional 150,000 tons demand in that region.
And then there is couple mills that have opened up, but they're just getting started and that's where we see with a lot of these. So a lot of these fiber in Alabama, that's expected to generate significant amount of volume increases we go forward [indiscernible] products in Lufkin, Texas, another one that sits right there in our wood basket another 0.5 million tons of impacts. And then, therefore in much space we have announced significant amount of upgrades we are also doing.
So there is millions of board feet of opportunity, but what we're seeing is that basically, these are coming slow to start up. And then so, and I think Dave mentioned this earlier, when we see these things growth comes curtailments it typically takes six months to work to sustaining inventory. And on start-ups, we're often saying we’re going to take one to two years to get going. And so that's a little bit different. They have name plate capacities, but the route is they're often functioning at 20% to 30% so they get started.
So we haven't seen the real impact of all this announced capacity coming online yet, and really, a lot of them operating it I would say 40% to 50% as they work out the kinks and work out getting labor and demand supply and things like that. So there is a lot of high level, upsides and we think long-term it’s great, but short-term we haven't seen the exact impact although in some of our key markets where these mills have come up even at 40%. We are seeing price tension.
That's why I mentioned before, we do expect to see some positive price appreciation and saw timber going into Q4 in some of our markets. But the additional volume harvesting at Arkansas will kind of offset some of the upside.
Again just the last one a little bit on capital allocation. It seems like you're sounding a little bit more optimistic on M&A, it builds by a lot more this quarter and you're thinking about next year. How should we think a little bit about your capacity to use – to acquire Timberlands without issuing any shares, using cash on hand or potentially issuing new debt. What would be kind of the ultimate leverage you would be willing to take?
Yes, we generally guided the market to a comfort level around leverage debt-to-EBITDA, or net debt-to-EBITDA - the leverage capacity. As we sit here today, kind of based on our updated guidance for 2019 that would kind of imply somewhere in the sort of $250 million to $300 million of debt capacity?
Perfect.
And kind of investment grade within the investment grade targets that we specified.
Thanks.
Thank you, and at this time, there are no further questions. I will turn the call back over to speakers for any closing remarks.
This is Mark McHugh. I'd like to thank everybody for joining us today. Please feel free to contact me with any follow up questions. Thank you.
Thank you. And that does conclude today's conference. Thank you all for participating. You may now disconnect.