Rayonier Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 9 speakers on the call.

Operator

Welcome and thank you for joining Rayonier's Second Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr.

Operator

Colin Mings, Vice President, Capital Markets and Strategic Planning.

Speaker 1

Thank you and good morning. Welcome to Rayonier's investor teleconference covering 2nd 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 Forms 10 ks and 10 Q filed with the SEC list some of the factors that may cause actual results to differ materially from the forward looking statements we may make.

Speaker 1

They are 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 measures in our earnings release and supplemental materials. With that, let's start our teleconference with opening comments from Mark McHugh, our President and CEO. Mark?

Speaker 2

Thanks, Colin. Good morning, everyone. First, I'll make some high level comments before turning it over to April Theiss, Senior Vice President and Chief Financial Officer to review our consolidated financial results. Then we'll ask Doug Long, Executive Vice President and Chief Resource Officer to comment on our U. S.

Speaker 2

And New Zealand Timber results. And following our review of our Timber segments, April will discuss our real estate results and our outlook for the balance of the year. Overall, we generated 2nd quarter adjusted EBITDA of $56,000,000 and pro form a net income of $4,000,000 or $0.02 per share. Market conditions remained challenging during the 2nd quarter with much of the decline in adjusted EBITDA versus the prior year period attributable to lower harvest volumes in our timber segments reflecting generally softer demand and the deferral of some harvest activity. We expect to recoup much of this volume over the balance of the year, which should translate to stronger second half versus first half results for our timber segments collectively.

Speaker 2

Drilling down further on our timber segment operating results. Our Southern Timber segment generated 2nd quarter adjusted EBITDA of $34,000,000 down $10,000,000 from the prior year period as a 17% decline in harvest volumes more than offset a 2% improvement in net stumpage realizations. In our Pacific Northwest Timber segment, 2nd quarter adjusted EBITDA of $6,000,000 was down $1,000,000 dollars from the prior year quarter as a 12% reduction in harvest volumes due to the Oregon sale completed late last year and lower non timber income more than offset improved net stumpage realizations. Turning to our New Zealand Timber segment. 2nd quarter adjusted EBITDA of $8,000,000 decreased $1,000,000 versus the prior year quarter.

Speaker 2

The decrease in adjusted EBITDA was driven by lower net stumpage realizations and lower harvest volumes, partially offset by increased carbon credit sales and favorable foreign exchange impacts. In our Real Estate segment, we generated 2nd quarter adjusted EBITDA of $19,000,000 down $1,000,000 from the prior year period. Adjusted EBITDA in our Real Estate segment improved significantly versus the Q1, but was below our expectations entering quarter due to the timing of closings in our improved development business. However, our full year transaction pipeline remains strong and we expect that second half results in our Real Estate segment will be significantly higher than first half results. Overall, as April discussed in greater detail later in the call, we are on track to achieve full year adjusted EBITDA toward the lower end of our prior guidance range of $290,000,000 to $325,000,000 As we indicated at the beginning of the year, our full year 2024 financial guidance excludes the potential impact of any additional asset sales as part of the $1,000,000,000 disposition target that we announced in November.

Speaker 2

As it relates to our disposition target, we made significant progress during the Q2 and we currently have several large transactions that are in various stages of evaluation or negotiation. Overall, we have been encouraged by the interest received from prospective buyers as we advance our efforts to reduce leverage and capitalize on the continued disconnect between public and private values for Timberland assets. We expect to be in a position to provide additional details regarding pending transactions on or before our next quarterly earnings call. With that, let me turn it over to April for more details on our Q2 financial results.

Speaker 3

Thanks, Mark. Moving to the financial highlights on Page 5 of the supplement. Sales for the 2nd quarter totaled $174,000,000 while operating income was $12,000,000 and net income attributable to Rayonier was $2,000,000 or $0.01 per share. On a pro form a basis, net income was $4,000,000 or $0.02 per share. Pro form a items in the 2nd quarter included $1,100,000 of net costs associated with legal settlements and $700,000 of costs related to our disposition plans.

Speaker 3

Adjusted EBITDA was $56,000,000 in the 2nd quarter, down from $69,000,000 in the prior year period. On the bottom of Page 5, we provide an overview of our capital resources and liquidity. Our cash available for distribution or CAD for the first half of the year was $60,000,000 versus $63,000,000 in the prior year period. The decrease was driven by lower adjusted EBITDA, partially offset by lower net 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.

Speaker 3

We closed the 2nd quarter with $142,000,000 of cash and roughly $1,400,000,000 of debt. Our net debt to trailing 12 months adjusted EBITDA was approximately 4.3 times. At quarter end, our weighted average cost of debt was approximately 2.8% and the weighted maturity average maturity of our debt portfolio was approximately 5 years with no significant debt maturities until 2026. Our net debt to enterprise value based on our closing stock price at the end of the quarter was 22%. I'll now turn the call over to Doug to provide a more detailed review of our timber results.

Speaker 4

Thanks, April. Let's start on page 9 with Southern Timber segment. Adjusted EBITDA in the 2nd quarter of $34,000,000 was $10,000,000 or 22% below the prior year quarter, driven by lower volumes and higher costs, partially offset by slightly higher net stumpage realizations. Total harvest volumes fell 17% versus a strong prior year quarter due to weather related constraints in the Gulf region as well as weaker demand from sawmills. Meanwhile, non timber revenue decreased 5% versus the prior year period as continued growth in our Land Based Solutions business was more than offset by lower pipeline easement revenues.

Speaker 4

Average sawlog stumpage pricing was $29 per tonne, a 1% increase compared to the prior year period due to improved chip and saw pricing in most of our markets. Pulpwood net stumpage pricing was 10% higher than the prior year quarter at roughly $17 per ton. Overall, weighted average tonnage prices in the 2nd quarter increased 2% versus the prior quarter to roughly $20 per ton. Improved end market demand and reduced residual sawmill chip availability translated into improved pulpwood pricing across most of our markets in the U. S.

Speaker 4

South. Market pulp prices have improved over the past year and containerboard operating rates continue to rebound following the inventory destocking cycle that weighed heavily on containerboard demand in 2023. Turning to grade markets. Log demand softened throughout the second quarter due to continued weakness in Sun Yalpine lumber demand as well as drier weather across our Atlantic operating areas. Encouragingly, we have seen indications that the Q2 may mark the low point in pricing.

Speaker 4

Additionally, over the past few months, we've seen a narrowing of the price discount between Southern Yellow Pine Lumber and other species. However, the overall demand picture for lumber remains challenged by continued softness in housing and repair and remodel markets. Lumber producers are responding by reducing production with several mills in the region opting to reduce output in response to current market conditions. In turn, we are seeing less demand for sawtimber as mills adjust their operations over the near term. That said, the relative strength and diversity of our U.

Speaker 4

S. South footprint remains a key competitive advantage as we navigate these headwinds. We anticipate a potential rebound in end market demand following expected interest rate cuts later this year. When this occurs, we believe that our strategic positioning will allow us to capitalize on stronger log pricing as lumber production ramps up again in the U. S.

Speaker 4

South. Moving to our Pacific Northwest Timber segment on page 10. Adjusted EBITDA of $6,000,000 was $1,000,000 below the prior year quarter. The year over year decrease was primarily driven by lower harvest volumes and lower nontimber revenue, partially offset by improved net stumpage realizations. Volumes decreased 12% in the Q2 as compared to the prior year period, reflecting the large disposition we completed in Oregon during late 2023.

Speaker 4

At $91 per ton, average delivered domestic sawlog pricing in the 2nd quarter decreased 7% from the prior year period due to a combination of weaker demand from domestic lumber mills, a lower proportion of Douglas fir volumes and reduced export market tension. Meanwhile, at $30 per tonne, pulpwood pricing remained fairly stable during the quarter, but was down 17% versus a strong prior year quarter that benefited from favorable supply demand dynamics for pulpwood in the region. Overall, despite lower delivered pricing, net stumpage realizations increased 10% due to favorable pricing on stumpage sales and lower per tonne cut and haul costs on delivered volume. The Pacific Northwest log market continued to face headwinds during the Q2 from both challenging domestic lumber markets and reduced demand for log exports. Similar to the U.

Speaker 4

S. South, sawmills in the region are responding to these market conditions by reducing lumber production to better align with current demand. Still, our pricing has been fairly resilient thus far in 2024. We believe that the threat of potential supply constraints as we enter the peak of fire season as well as the recent uptick in lumber prices should translate into fairly stable pricing with some modest upside potential as we move through the balance of the year. Moving to New Zealand.

Speaker 4

Page 11 shows results and key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the 2nd quarter of $8,000,000 was $1,000,000 below the prior year quarter. The decrease in adjusted EBITDA compared to the prior year period was primarily driven by a 12% decrease in harvest volumes and 7% lower weighted average delivered log prices, partially offset by higher carbon credit sales and favorable foreign exchange impacts. Average delivered export sawtimber prices of $102 per tonne declined 2% compared to the prior year quarter as demand continued to be constrained by ongoing challenges in China's property sector. Offtake from Chinese ports remained subdued, reflecting weak construction demand.

Speaker 4

After rebounding seasonally following the Lunar New Year, daily port offtake has fallen back to approximately 50,000 to 60,000 cubic meters over the past few months. Positively though, inventory levels have generally adjusted to the weaker demand environment. At the end of July, softwood log log Shifting to the New Zealand domestic market. 2 Shifting to New Zealand domestic market. 2nd quarter average delivered solven prices fell 6% from the prior year period or 4% when including foreign exchange impacts.

Speaker 4

The decline in pricing reflects soft demand in the local construction market amid a higher interest rate environment as well as reduced competition from the export market. 2nd quarter non timber income in New Zealand of $5,000,000 increased $4,000,000 relative to the prior year period. The year over year increase reflects higher carbon credit sales in the current year period as we temporarily suspended our sales program in the first half of twenty twenty three amid significant market volatility. We anticipate that we will remain active in the New Zealand card market over the course of 2024 as price remains healthy from a historical standpoint. Lastly, in our trading segment, we registered a breakeven results in the Q2.

Speaker 4

As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business. I'll now turn it back over to April to cover our real estate results.

Speaker 3

Thanks, Doug. As detailed on page 12, the contribution from our real estate segment during the Q2 was considerably higher than the Q1, fueled in large part by a non strategic Timberland sale in New Zealand. Real estate revenue totaled $31,000,000 on 14,600 acres sold at an average price of $17.50 per acre. Real Estate segment adjusted EBITDA in the 2nd quarter was $19,000,000 Drilling down, sales in the improved development category totaled $2,600,000 In our Heartwood development project south of Savannah, Georgia, sales consisted of 2 residential pods for $1,600,000 or $34,000 per acre. In our Wildlight development project north of Jacksonville, Florida, we sold an 8 acre commercial parcel for $1,000,000 or $125,000 per acre.

Speaker 3

Despite the elevated interest rate environment, we continue to see healthy interest from homebuilders as both our projects continue to benefit from favorable migration patterns as well as relatively affordable price points. Interest from developers for non residential end uses remains stable, but some deals are taking longer to materialize in the current financing environment. While we expect that the timing of land sales will remain lumpy quarter to quarter, as we detailed in our Investor Day in February, we continue to see growing pipeline of opportunities in our development business. Turning to our rural category. 2nd quarter sales totaled $7,000,000 consisting of approximately 1400 acres at an average price of roughly $5,200 per acre.

Speaker 3

While elevated interest rates continue to impact the willingness of some buyers to transact, the overall demand and pricing for rural properties remains favorable. As discussed last quarter, we have seen growing interest among conservation and impact oriented buyers looking to place capital. We continue to expect a larger contribution from these sales as we move through the balance of the year. Lastly, during the Q2, we also closed on a non strategic Timberland sale in New Zealand. The transaction consisted of approximately 13,000 acres for roughly $16,000,000 or $1200 per acre.

Speaker 3

The transaction included several geographically isolated parcels with above average production cost, a relatively young age class distribution and below average operability with only about 50% of the total acres classified as plantable. The sale price per acre reflects the below average quality of this asset and is not indicative of the overall value of our New Zealand Timberland portfolio. Notably, this transaction was initiated mid last year. It is not related to the review of our strategic alternatives for our New Zealand joint venture interest. Now moving on to the outlook for the balance of 2024.

Speaker 3

Based on our first half results and our expectations for the remainder of the year, we now expect that full year adjusted EBITDA will be toward the lower end of our prior guidance range of $290,000,000 to 325,000,000 dollars Further, we now expect pro form a EPS to be modestly below the low end of prior guidance. As a reminder, our guidance excludes the potential impact from any additional asset sales as part of our previously announced $1,000,000,000 disposition target. With respect to our individual segments, in our Southern Timber segment, we expect full year harvest volumes toward the lower end of prior guidance as we look to opportunistically flex our volume in response to market conditions. Further, we anticipate that pine stumpage realizations will be lower in the second half of the year as compared to the first half due to a less favorable geographic mix, lower sawlog prices and a relatively higher proportion of thinning volume. Lastly, we remain encouraged by the momentum of our Land Based Solutions business and continue to expect higher non timber income for full year 2024 relative to full year 2023.

Speaker 3

Overall, we anticipate full year Southern Timber adjusted EBITDA toward the lower end of our prior guidance range. In our Pacific Northwest Timber segment, we expect to achieve full year volumes slightly below our prior guidance. As Doug discussed, pricing conditions have been relatively stable thus far in 2024, but our ability to increase delivered log prices has been constrained by challenging domestic and export market conditions. While we believe there is some modest upside potential as we move through the balance of the year, we have tempered our pricing expectations as compared to earlier in the year. Overall, we expect full year Pacific Northwest Timber adjusted EBITDA toward the lower end of our prior guidance range.

Speaker 3

In our New Zealand Timber segment, we are on track to achieve our full year volume guidance as we anticipate relatively higher harvest volumes during the second half of the year as compared to the first half. Further, we continue to expect that full year domestic and export sawtimber pricing will improve modestly relative to the full year pricing achieved in 2023. Despite improved pricing conditions, we expect full year New Zealand Timber adjusted EBITDA to fall slightly below our prior guidance range due to lower carbon sales, softer export markets and elevated shipping costs. In our Real Estate segment, we continue to see healthy interest in our development projects and rural properties. We continue to anticipate full year adjusted EBITDA within our prior guidance range with transaction activity heavily concentrated in the 4th quarter.

Speaker 3

I'll now turn the call back over to Mark for closing comments.

Speaker 2

Thanks, April. As I reflect on the first half of the year, I'm proud of how our team has continued to navigate challenging operating conditions with an unwavering focus on making decisions in the best long term interest of Rayonier and its shareholders. To this end, we elected to strategically defer some harvests in more challenged markets to preserve value in the face of ongoing headwinds posed by soft domestic lumber markets and lower export market demand. Despite the headwinds facing sawtimber markets this year, we are encouraged by the sustained improvement in pulp mill operating rates across our U. S.

Speaker 2

South footprint and the corresponding gains in pulpwood pricing that we've been able to capture. The prospect of rate cuts later this year coupled with continued low log inventories in China give us additional reasons for optimism over the balance of the year. On the real estate front, we've been pleased by the continued demand for both rural and development properties despite the higher interest rate environment. As previously discussed, we expect a significantly stronger contribution from our Real Estate segment during the second half of the year versus the first half. We also believe that more favorable financing conditions could further bolster the already healthy demand we're seeing across our Real Estate categories.

Speaker 2

Throughout the first half of the year, we've also continued to advance important strategic initiatives. On the land based solutions front, our team is energized by the pipeline of opportunities we are pursuing with high quality counterparties. We continue to believe that our land base leaves us uniquely well positioned to grow these revenue streams over time. And as I discussed earlier, we are pleased with the progress we've made toward executing our $1,000,000,000 disposition target. There remains a strong bid for Timberland assets in the private market, and we continue to advance a variety of options to achieve this target.

Speaker 2

We look forward to sharing more details regarding our disposition efforts in the coming months. That concludes our prepared remarks, and I'll now turn the call back to the operator for questions.

Operator

Thank Our first question comes from Mark Weintraub with Seaport Research Partners. Your line is open.

Speaker 5

Thank you. 2 quick questions. 1, when you originally announced the disposition plan you had suggested an 18 month timeframe, is that still the right duration to be thinking about? Or, any update there?

Speaker 2

Hey, Mark, this is Mark. Good morning. Yes, that is still the right timeframe to be thinking of. As we said, in the prepared remarks as well as in the release, we've made quite a bit of progress here in the last several months and we look forward to sharing more details on or before our next earnings call.

Speaker 5

Okay. Appreciate that. And then any additional specifics in terms of things that might have moved forward on land based solutions? You made some sort of general comments, but were there any updates that you can give us in terms of things concretely seen done during the quarter?

Speaker 4

Sure. Good morning. This is Doug. Yes, on the Land Based Solutions front, our team continues to advance a range of opportunities with high quality counterparts we mentioned before. But to your point, recently we've added another 5,000 acres of executed carbon capture storage leases.

Speaker 4

And as we discussed on our last call, we're still well on the way to achieving our year end goals of having over 70,000 acres under lease for current capture storage and targeting over 50,000 acres under options for solar. So we continue to believe our portfolio is uniquely well positioned to provide these solutions as many large corporations are setting ambitious sustainability goals and clean those commitments to reduce their carbon footprint and increase the use of renewable energy. So we did have some success in the current quarter and are seeing great progress as we move forward for the rest of the year.

Speaker 5

Great. And curiosity, back in February, you provided some targets. I guess, we're 6 months forward from that. How do you feel about those targets today versus how you felt about them back in February?

Speaker 4

Yes. I'd say we still feel very good about those targets. And if anything else, we're seeing probably more interest than we had in February for these type of opportunities.

Speaker 5

Okay. Thanks so much.

Operator

Thank you. Our next question comes from Anthony Pettinari with Citi. Your line is open.

Speaker 6

Hi, good morning. This is Gregory on for Anthony. First, I guess on Tuncay Timberlands. Can you just comment on what you saw across your various subregions in the second quarter and maybe what's implied in the full year guidance? And then I'm wondering also if there are any disparities locally in the South.

Speaker 6

Are the main drivers there kind of sawmill operating rates? Or is there are there more kind of nuance drivers of prices regionally? We'd love to hear your thoughts there.

Speaker 4

Sure. This is Doug again. I'll be happy to start there. Yes, I think one thing that's important is to keep in mind that we do a combination of stumpage sales and delivered sales. We don't have exact control in the quarter when stumpage tracks are going to be harvested.

Speaker 4

And those buyers typically have a year to harvest and will start selling towards the end of Q4, the prior year and the beginning of the current year. And so the extent there's market softness or weather issues such as we saw in Texas and Louisiana, there can be some short term timing differences. And to your point, I think it's worth noting that for the first half of the year, the southern portion of our Southwest resource unit, so kind of the Texas, Louisiana along the Gulf Coast there, received more rain, than the historical yearly average. So in the 1st 6 months, they received over a year's worth of rain. And if you saw any new storage, you probably saw the flooding in Houston, things like that, so you can appreciate that.

Speaker 4

So we did see some reductions in harvest in those areas where it's just too wet to harvest, but we've seen improvements there. And plus given the market conditions, we've been pretty deliberate about what we brought to market and we didn't look to chase volume. So that said, after a challenging kind of second quarter and the stumpage, our removals are ahead of forecast for July across all of our Southern units. So we've seen some improvements across there as we move forward.

Speaker 6

Thank you for that. And then maybe if I could just have one follow-up on carbon credits. So based on the data I'm seeing, it looks like New Zealand carbon credits kind of leveled off. They dropped off pretty sharply in March, April and they've kind of leveled off since then. So I'm wondering if you can kind of put some context around what's allowed prices to stabilize there, whether demand has come back a little bit or supply has tightened?

Speaker 6

And then can you for your New Zealand credits that you have on the balance sheet, are these able to be sold into the U. S. Market at all? And I'm only asking because it seems like the credits on your balance sheet are pretty high quality, pretty rigorously tested. Bloomberg put out the headline recently about 32% of all credits failing this approval test.

Speaker 6

So in my mind, you may be able to get better pricing in the U. S. Market, if good credits are commanding premiums or is that not the right way to think about it?

Speaker 3

Hi, Greg. This is April. I'll take that. So, I'll address like the first half of your question and then I'll turn it up to turn it over to Doug to follow-up. So, as we detailed in our supplement, we sold about $4,400,000 worth of carbon credits in New Zealand in the Q2 and that was up from $400,000 in Q2 of 2023.

Speaker 3

So as we talked about and Doug said in our prepared remarks, last year we deferred our New Zealand sales early in 2023 because there was such volatility in the market, but we'll resume sales later in the year. So that's what we're doing now. We're being opportunistic about how we're selling them in New Zealand. As far as like the stability in the market, so overall, the regulatory backdrop has been stabilized. It's been that way for it was last quarter.

Speaker 3

This quarter, it's continued. The government has indicated that they're not really contemplating any significant changes to the ETFs in the near term. What drove some price drop earlier in the year was that there was an auction in March and the, it failed to reach the full subscription. So the pricing pretty much backdropped off of that point. And so but overall, the pricing is still strong from a historical perspective.

Speaker 3

It's leaning around 50 to 55 NCD, which is pretty strong. And so we're continuing to be active in that market.

Speaker 4

Yes. And I'll just address your question a little bit more around the quality of markets and things like that. So as we discussed at our Investor Day, continue to be very deliberate in how we're thinking about moving forward in that voluntary carb market, given our discussion with potential buyers who are very focused on those high quality carbon credits. And we see that market really evolving towards the higher quality as you mentioned. That given our high timber EBITDA, it just hasn't made sense for us yet to move forward.

Speaker 4

That said, we're very encouraged by the progress of the Integrity Council for Voluntary Carbon Markets, ICBCM and their Common Core Principles accreditation process. And what that's going to do is create basically approved credit that from our discussions with customers is something that they really believe will be recognized, globally as a benchmark for high quality carbon credits, ensuring they represent real, verifiable and additional emission reductions. So we think this is a major milestone that we've really been waiting on, and paves the way for verified hogfighter credits to come into this market in the near future and clear out the less meaningful ones that are really lower quality and therefore lower price from supply. So really over that longer time horizon, we still believe demand will outpace supply approaching 2,030 as people focus on their net zero commitments and really beyond that. And so we're positioning ourselves to support that growth and demand and meaningfully contribute to this project.

Speaker 4

With pursuing pilot projects that incorporate these latest improvements of the core carbon principles. So we still think this market has some time to develop and that pricing has room to run and we're being patient.

Speaker 2

Yes. And as it relates to just the ability to monetize New Zealand credits in the voluntary market in the U. S, recognize those are 2 different markets and those credits are not fungible. There has been a lot of press about some of the quality issues with credits that have been issued historically in the voluntary carbon market, whereas obviously in a regulated market, a credit is a credit is a credit. So I think as we see better standards evolve in the voluntary market, you'd like to get to a point where they are considered more or less fungible, but we're certainly not there yet.

Speaker 6

Thank you very much.

Operator

Thank you. Our next question comes from Matthew McElher with RBC Capital Markets. Your line is open.

Speaker 7

Hi, good morning. Thanks for taking my questions. Could you share how you're thinking about the pace of lot absorption and development at Wildlight over the next year or so? That just wondering if you see any signs of caution from builders in the area?

Speaker 2

I'd say that the single family homebuilding market has held up reasonably well. I mean that's in there's been a lot of it's been pretty well publicized in terms of how that market has held up in the face of higher interest rates. The benefit of hindsight, we now know that a lot of existing homeowners are essentially locked into low rate mortgages, which has really dried up supply in the resale market for us. So much of that demand for homes has transitioned into the new home construction market. And particularly large national homebuilders have been very successful in essentially buying down rates in order to further stimulate demand in that market.

Speaker 2

Yes, I think given the demographics of our projects in Wildlight and Heartwood as well as the relatively affordable price point when you look at those markets relative to other areas of the state or even more broadly the U. S, we do think that those areas have remained very attractive. And we've certainly transitioned. In terms of the scale of that project, we've certainly transitioned more towards dealing with large national homebuilders. And so I think that look, the market is certainly more cautious today than it was a couple of years ago.

Speaker 2

But overall, we still feel pretty good about the pace of absorption and the level of interest that we're seeing in those markets.

Speaker 7

Okay. Thanks very much for that color. And then for Q3 specifically, do you expect any impact to your business, whether it be disruption to harvest operations or otherwise in the South with some of the heavy rain from the Debbie tropical storm? Or maybe even conversely, would you expect to potentially benefit in some areas given better road infrastructure versus other owners of timberland in the area?

Speaker 4

Yes, sure. This is Doug. I'll be happy to answer that question. Yes, I mean, in localized areas, obviously, we've seen rainfall from 7 inches up to well over a foot. So it's going to have a short term impact on being able to produce logs, but at the same point in time, it's reducing lumber capacity, as you say, and that's all at the pulp mills and things like that.

Speaker 4

So short term, we do believe that there's a slowdown in removals, but we're already moving crews around and to your point our infrastructure investments. So we do think there's an opportunity for landowners like ourselves who've made those investments to recognize increased volume into the mills as well as potentially some pricing comes from that. So it is a short term, but long term, we don't think there's a major impact there. And with our geographic diversity, it impacts kind of our coastal Florida Georgia, but the rest of our operations, it had no impact

Speaker 7

on. Okay, great. So then last one for me. Just touching on the log exports out of the Pacific Northwest, have you seen any change in market conditions there? Any additional tension in the markets compared to what you saw in Q2?

Speaker 4

I would say it's pretty much the same. So we're still the opportunities for additional exports into China have pretty much remained the same quarter over quarter. A little bit of improvement to Japan, from what we've seen, but nothing significant has changed.

Speaker 7

Okay, thanks. That's all for me. I'll turn it back.

Operator

Thank you. Our next question comes from Buck Horne with Raymond James. Your line is open.

Speaker 8

Hey, thanks. Good morning. Just kind of want to follow-up on the kind of the weather update situation with the ground post Debbie. I guess my follow-up would be, if we continue to have a very busy storm season across the Southeast, it feels like your guidance is somewhat dependent on really ramping up harvest activity throughout the 3rd and 4th quarters to kind of recover for the 2Q deferrals. Just wondering what's the flexibility I guess across the region if we continue to have a fairly active storm season across the region.

Speaker 2

Hey, Buck, this is Mark. And I'll maybe start and then kick it over to Doug for any additional detail. But recognize as well, when you mentioned that the guidance was contingent upon higher harvest levels in the back half of the year, That's really more around the Pacific Northwest and New Zealand and less so in the South. We did have a very large harvest volume in Q1 in the U. S.

Speaker 2

South. We had actually guided towards lower harvest volumes for the balance of the year in the U. S. South in particular. So that commentary around recouping some volume over the balance of the year was really more specific to New Zealand and the Pacific Northwest, more so than the South.

Speaker 2

But certainly, we could have some impacts to, removal activity, given the storms that we've seen. But again, recognize that can also be a double edged sword in the sense that when you when volume is constricted, due to wet weather events and due to the inoperability of timber harvest tracks, we tend to see some pricing tension develop. And we, Rayonier, is a large owner of timberlands and a well invested road infrastructure, often stand to benefit from that in the sense that we have better access to our land than perhaps some of the non industrial private landowners. And so again, there's some puts and takes there, but I don't know, Doug, if you'd add anything to that. Mark, I think you

Speaker 4

did a great job with that. I would just reiterate to your point that typically if we've seen our operations constrained, that simply means that everyone else has been constrained to the point where pricing oftentimes offsets the impact of reduced volumes, pretty much what you said. Nothing more to add.

Speaker 8

Got you. Thanks guys. That's really helpful color. And then I guess related to I guess this is kind of combination question, but it's related to the dividend policy and dividend sustainability here. Cash flow trends seem to be trending well below the payout schedule at the moment.

Speaker 8

With the dispositions that are planned for either the back half of this year or into next year, What's the thought process around near term dividend sustainability or addressing the payout ratio sometime in the near future? What's the outlook and what's the flexibility on the balance sheet?

Speaker 2

Yes. I mean, as it relates to this year Buck, keep in mind, we don't manage our dividend funding or really focus on the payout ratio on a quarter by quarter basis. Rather, we're really focused on long term dividend sustainability and growth. Clearly, this year has gotten off to a slower start than we anticipated. But as we discussed during the prepared remarks, some of this is really timing related with respect to harvest activity and real estate closings.

Speaker 2

It's also worth noting that even with the slower start to the year, our year to date CAD is only about $4,000,000 short of where we were last year at this point time. And that's largely due to the pay down of some of our higher cost debt late last year with the proceeds of the Oregon disposition. Of course, right now, we're really focused on further advancing our asset disposition target, which we continue to believe will be accretive to CAD on a per share basis. We also expect that second half cash flow will be significantly higher than first half cash flow. So when you put all these factors together, we're still targeting a dividend that is fully funded this year or at least very close to it.

Speaker 2

And going forward, as we see the run rate impact of our disposition, and deleveraging plan take effect, we expect the dividend funding should further improve from there.

Speaker 4

Got it.

Speaker 8

Thanks guys. Good luck.

Speaker 2

Thanks Buck.

Operator

I am showing no further questions at this time. I will turn the conference back to Colin.

Speaker 1

Thanks, Colin Bings. Like to thank everybody for joining us. Please contact us with any follow-up questions.

Operator

Thank you for your participation. Participants, you may disconnect at this time.

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Earnings Conference Call
Rayonier Q2 2024
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