Rayonier Inc. (NYSE:RYN) Q1 2023 Earnings Call Transcript May 4, 2023

Rayonier Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.11.

Operator: Welcome, and thank you for joining Rayonier’s First Quarter 2023 Teleconference Call. At this time all participants are in a listen-only mode. [Operator Instructions] 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. Collin Mings, Vice President, Capital Markets and Strategic Planning.

Collin Mings: Thank you, and good morning. Welcome to Rayonier’s investor teleconference covering first 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 Forms 10-K 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. 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 Dave Nunes, our CEO. Dave?

Dave Nunes: Thanks, Collin. Good morning, everyone. First, I’ll make some high-level comments before turning it over to Mark McHugh, President and Chief Financial Officer, to review our consolidated financial results; then we’ll ask Doug Long, Executive Vice President and Chief Resource Officer, to comment on our U.S. and New Zealand Timber results; and following the review of our Timber segments, Mark will discuss our real estate results as well as our outlook for the remainder of 2023. For the first quarter, we generated adjusted EBITDA of $55 million and pro forma net income of $1.1 million or $0.01 per share as our team navigated numerous market challenges. The total adjusted EBITDA generated by our Timber segments collectively declined 30% relative to an extraordinarily strong first quarter 2022 amid weaker end market demand, continued macroeconomic headwinds and the harvest disruptions associated with tropical Cyclone Gabrielle, which hit New Zealand’s North Island in February.

As anticipated, real estate closings were relatively light in the first quarter. However, our full year real estate pipeline remains relatively strong, and we continue to expect that closing activity will be heavily weighted toward the second half of the year. Drilling down further on our operating segments. Our Southern Timber segment generated first quarter adjusted EBITDA of $43 million, down $6 million from the prior year period as weaker demand for pulp products and lumber coupled with drier weather conditions drove a 14% reduction in net stumpage prices. Both demand and pricing were impacted by softer market conditions during the quarter as our customers worked through elevated log inventories and recalibrated for slower end market demand.

Compared to less tensioned markets in the U.S. South, the relative price elasticity in a majority of our markets translated to a sharper pullback in pricing from 2022 levels. However, our absolute pricing levels, EBITDA per acre and EBITDA per ton remained very favorable compared to the U.S. South overall. In our Pacific Northwest Timber segment, first quarter adjusted EBITDA of $7 million was down $14 million from the prior year quarter. The decrease versus the prior year period was attributable to a 24% decrease in harvest volumes and a 12% decline in domestic sawtimber prices. Overall, market conditions in the region softened due to weaker lumber demand and pricing, less tension from the export market and general macroeconomic uncertainty.

Given the pricing declines we saw during the quarter, we opted to defer some planned harvest until end market demand and mill inventories normalize. Turning to our New Zealand Timber segment. First quarter adjusted EBITDA of $6 million declined $4 million versus the prior year quarter due to lower carbon credit sales, unfavorable foreign exchange impacts and 7% lower harvest volumes resulting from the impacts of Cyclone Gabrielle. While delivered export sawtimber prices also declined by roughly 11% and stumpage realizations were relatively flat as shipping costs return to more normalized levels. As it relates to Cyclone Gabrielle, our thoughts go out to all of those who were affected by the storm. While we sustained some timber and property damage, fortunately, no Rayonier employees or contractors were injured by the storm.

During the quarter, we completed our damage assessment and determined that a $2.3 million write-off was necessary due to timber damage on roughly 2,600 acres. From an operational standpoint, we also lost several production days during the first quarter. However, access to the forest has been restored, and we currently expect that much of this production will be recaptured by the end of the year. In our Real Estate segment, we generated adjusted EBITDA of $7 million for the first quarter, down $18 million from the prior year period as higher weighted average per acre prices were more than offset by 76% fewer acres sold. Despite the increase in interest rates as compared to a year ago, demand for rural land remains strong, and we remain pleased by the favorable momentum in both our Wildlight and Heartwood development projects.

With that, let me turn it over to Mark for more details on our first quarter financial results.

Mark McHugh: Thanks, Dave. Let’s start on Page 5 with our financial highlights. Sales for the first quarter totaled $179 million, while operating income was $11 million and net income attributable to Rayonier was $8 million or $0.06 per share. On a pro forma basis, net income was $1.1 million or $0.01 [ph] per share. Pro forma items in the first quarter included a $9 million net recovery associated with the legal settlement as well as a $2.3 million timber write-off resulting from Cyclone Gabrielle. Adjusted EBITDA was $55 million in the first quarter, down from $98 million 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 quarter was $30 million versus $65 million in the prior year period.

The decrease was driven by lower adjusted EBITDA and higher capital expenditures, partially offset by lower cash taxes and interest paid. A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on Page 7 of the financial supplement. We closed the first quarter with $99 million of cash and $1.5 billion of debt. At the end of the first quarter, our weighted average cost of debt was approximately 3.1% and the weighted average maturity of our debt portfolio was approximately six years with no significant debt maturities until 2026. Our net debt of approximately $1.4 billion represented 22% of our enterprise value based on our closing stock price at the end of the quarter. I’ll now turn the call over to Doug to provide a more detailed review of our timber results.

Doug Long: Thanks, Mark. Let’s start on Page 8 with our Southern Timber segment. Adjusted EBITDA in the first quarter of $43 million was 12% below the prior year quarter, driven by lower net stumpage pricing and higher costs, partially offset by higher non-timber income. Total harvest volume was relatively flat versus the prior year quarter as an increase in pine sawtimber volume offset reduced pine pulpwood and hardwood volumes. Average sawlog stumpage pricing was $32 per ton, an 11% decrease compared to the prior year period. The moderation in pricing reflected reduced market tension across our operating areas due to drier weather conditions, softer demand from sawmills and less competition from pulp mills for chip-nsaw volume.

Meanwhile, pulpwood net stumpage pricing fell 28% versus the prior year quarter to roughly $17 per ton as weaker end-market demand, drier weather conditions and extended maintenance outages at pulp mills all contributed to softer market conditions. Overall, weighted average stumpage prices in the first quarter fell 14% versus the prior year quarter to roughly $24 per ton. As we had anticipated entering the year, both sawtimber and pulpwood pricing ever treated from the exceptionally strong levels we saw a year ago, given the slowdown in residential construction activity and weaker end market demand for pulp products. While we expect that macroeconomic related headwinds will persist over the near term and constrain log pricing to some degree, we continue to believe that the relative strength and diversity of our U.S. South footprint is a key strategic advantage for us.

Moving to our Pacific Northwest Timber segment on Page 9. Adjusted EBITDA of $7 million was $14 million lower than the prior year quarter. The year-over-year decrease was primarily driven by lower net stumpage realizations, lower harvest volumes and higher costs. Volume decreased 24% in the first quarter as compared to the prior year period as some planned harvest were deferred in response to soft market conditions. At $93 per ton, average delivered domestic sawlog pricing in the first quarter was down 12% from the prior year period, primarily due to weaker demand from domestic lumber mills as well as reduced tension from the export market. Meanwhile, at $48 per ton, pulpwood pricing increased 28% over the prior year first quarter but did moderate from the exceptionally high levels achieved in the second half of 2022.

Overall, sawmills in the Pacific Northwest had an ample supply of logs to start the year, which negatively impacted market conditions. However, as we progressed into the spring, we started to see some indications that log inventories are declining. As we look ahead to the remainder of the year, we expect declining mill inventories, coupled with improving end market demand to translate into positive momentum and solid prices. Turning to pulpwood. We expect pricing realizations will continue to moderate as the supply constraints that helped drive exceptional pricing in the second half of 2022 normalize over the near-term. Moving to New Zealand. Page 10 shows results and key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the first quarter of $6 million was $4 million below the prior year quarter.

The decrease in adjusted EBITDA compared to the prior year period was driven by fewer carbon credit sales, unfavorable foreign exchange impacts, higher costs and lower harvest volumes due to lost production days as a result of Cyclone Gabrielle. Average delivered export sale prices of $113 per ton declined 11% compared to the prior year quarter. However, stumpage realizations on export volume were relatively flat as shipping costs fell to more normalized levels. Encouragingly, the Chinese economy appears to be showing some signs of recovery on the relaxation of COVID-19 containment measures in late 2022 and the implementation of government stimulus measures designed to boost confidence in the real estate market. While port off-take in China remains below normal for the post-winter New Year period, port inventories have trended lower as consumption has outpaced the inflow of logs, giving us optimism that the export market will gradually improve as the year progresses.

Shifting to the New Zealand domestic market. First quarter average delivered sawlog prices fell 6% from the prior year period to $72 per ton, largely reflecting the change in the New Zealand dollar – U.S. dollar exchange rate. Excluding foreign exchange impacts, domestic sawlog prices relatively flat from the prior year period. Domestic pulpwood prices in New Zealand were likewise impacted by foreign exchange rates, declining 5% on a U.S. dollar basis compared to the prior year quarter but up 1% when excluding foreign exchange impacts. Non-deferred income in the New Zealand segment declined during the first quarter relative to the prior year period as we deferred the sale of carbon credits amid pricing volatility and caused by regulatory uncertainty.

Going forward, we plan to remain opportunistic in our sale of carbon credits, depending on carbon credit market conditions and our pricing outlook. Lastly, in our Trading segment, we posted a slight operating profit in the first quarter. 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 Mark to cover our real estate results.

Mark McHugh: Thanks, Doug. As detailed on Page 11, the first quarter contribution from our Real Estate segment was relatively light, consistent with our expectations entering the year. Real estate sales totaled $16 million on roughly 2,100 acres sold at an average price of $6,200 per acre. Real Estate segment adjusted EBITDA in the first quarter was $7 million. Drilling down. Sales in the improved development category consisted of two transactions in our Heartwood development project, South of Savannah, Georgia. During the quarter, we closed on a 27-acre multifamily site to a regional developer for $4.5 million or $169,000 per acre as well as six residential lots to a national homebuilder for $300,000, reflecting an average base price of $50,000 per lot.

In addition to these closings, we’re also very excited about two sites that broke ground in Heartwood during the quarter. The first is the initial phase of the St. Joseph’s Candler Healthcare campus, which will provide the community with convenient access to primary care, urgent care, specialty medical services and [indiscernible]. The second is the Hyundai Mobis manufacturing plant at Belfast Commerce Park, which will supply power systems and control units for electric vehicles. Combined with the Hyundai Metaplant that’s currently under construction within a 30-minute drive from Heartwood, these facilities are expected to create an estimated 9,500 jobs in the area. We believe that the two Hyundai plants as well as the new health care campus will drive further demand within the Heartwood development project going forward.

Overall, we continue to believe that both our Wildlight and Heartwood development projects are well positioned and will benefit from favorable migration and demographic trends, relatively affordable price points and a diverse mix of residential, commercial and industrial end uses that each help catalyze demand for one another. Turning to the rural category. First quarter sales totaled $6 million, consisting of approximately 1,500 acres at an average price of roughly $4,200 per acre. Key transactions included the sale of 439 acres in Alan Parish, Louisiana for $1.6 million or $37.50 per acre and the sale of 360 acres in Marion County, Florida, for $1.5 million or $4,300 per acre. Overall, we’re encouraged by the fact that demand for rural land has held up well, particularly from buyers not reliant on mortgage financing.

Lastly, during the first quarter, we also closed on the sale of just over 500 acres of nonstrategic holdings in Harden County, Texas, for $1.6 million or roughly $3,100 per acre. Moving on to our outlook for the balance of 2023. Based on our first quarter results and our expectations for the balance of the year, we now anticipate full year adjusted EBITDA toward the lower end of our prior guidance range of $280 million to $320 million. Similarly, we anticipate pro forma EPS towards the lower end of our prior guidance range of $0.36 to $0.50. With respect to our individual segments. In our Southern Timber segment, we are on track to achieve our full year volume guidance but anticipate lower quarterly harvest volumes for the remainder of the year following a relatively strong first quarter.

Over the near term, we expect weighted average net stumpage realizations will remain below first quarter levels as demand, particularly for pulpwood, has been negatively impacted by the macroeconomic environment. We continue to anticipate higher nontimber income for full year 2023 as compared to full year 2022. In our Pacific Northwest Timber segment, we expect harvest volumes toward the lower end of our prior guidance as we have deferred some planned harvest in response to unfavorable market conditions. Following the pullback in pricing to start the year, we anticipate the weighted average delivered log prices will improve modestly first quarter levels over the balance of 2023 as end market demand and mill inventories normalize. In our New Zealand Timber segment, we expect harvest volumes toward the lower end of our prior guidance given the lost production days resulting from Cyclone Gabrielle.

Compared to the first quarter, we anticipate the weighted average delivered log prices will remain relatively flat over the balance of the year. We further anticipate a higher contribution from carbon credit sales over the balance of the year following no activity in the first quarter. In our Real Estate segment, we remain encouraged by the interest in our development projects and rural properties. Overall, there continues to be strong demand for HBU properties and timberland assets despite the higher interest rate environment. Consistent with our prior guidance, we expect significantly higher transaction volume and operating results in the second half of the year from this segment. I’ll now turn the call back to Dave for closing comments.

Dave Nunes: Thanks Mark. While the current macroeconomic backdrop and near-term outlook are challenging, we remain optimistic about the long-term prospects for our business and have been pleased with the progress made over the past few years in both growing and improving the quality of our portfolio. We believe that favorable long-term housing fundamentals, coupled with burgeoning business opportunities around nature-based solutions should support long-term growth in timberland cash flows and corresponding valuations over time. As we discussed in our recent annual shareholder letter, timber as an asset class is enjoying somewhat of a renaissance in terms of its investment appeal given the role forest can play to address the impacts of climate change.

In addition to sequestering carbon, a variety of alternative uses for land and wood fiber are evolving to support the transition to a low-carbon economy. We are advancing several initiatives to better understand how these opportunities can add value to our timberland portfolio over time. While we are excited about these new opportunities, our team remains extremely focused on navigating the near-term headwinds associated with a challenging macroeconomic environment. The operational flexibility afforded by our pure-play timber REIT model, coupled with the diversity and relative strength of the markets we operate in, remain a key competitive advantage for us. On this note, the integration of the 137,800 acres of timberland we acquired back in December, has gone very well and has afforded us greater flexibility to navigate the rapidly evolving market conditions that we’ve seen so far this year.

That said it’s important to reiterate that we don’t believe in growth for growth’s sake. And pursuant to our active portfolio management strategy, we also continuously evaluate opportunities to recycle less productive capital towards uses with a better risk return profile. In sum, I believe that our team, our culture, our timberland and real estate assets and our strategies are well aligned to achieve future success. I’m very proud of how our team is working together to adapt quickly to changing market conditions while also advancing important initiatives that will enable us to continue to build long-term value for our shareholders. This concludes our prepared remarks, and I’ll now turn the call back over to the operator for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Anthony Pettinari with Citi. Your line is open.

Operator: Thank you. Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is open.

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

Operator: Thank you. [Operator Instructions] Our next question comes from Paul Quinn with RBC Capital Markets. Your line is open.

Operator: We have no further questions. I will turn the conference back to Collin. Thank you.

Collin Mings: Thank you. This is Collin Mings. I’d 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.