Rayonier Inc Q1 FY2020 Earnings Call

Welcome, and thank you for joining Rayonier's First Quarter 2020 Teleconference Call. 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. Mark McHugh, Senior Vice President and CFO. Sir, you may begin.

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 Form 10-K filed with the SEC list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They 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 measure in our earnings release and supplemental materials. With that, let's start our teleconference with opening comments from Dave Nunes, President and CEO. Dave?

Thanks, Mark, and good morning, everyone. First, I'll make some high-level comments before turning it back over to Mark to review our consolidated financial results. Then we'll ask Doug Long, our Senior Vice President of Forest Resources, to comment on our U.S. and New Zealand timber results. Following the review of our Timber segments, Mark will discuss our Real Estate results as well as our outlook for the remainder of 2020. Before discussing our results for the quarter, I'd like to briefly address our response to COVID-19 as well as provide an update on the Pope Resources merger and recent financing transactions. First, on behalf of our company, I'd like to extend our sympathies and best wishes to all those who have been impacted by this global pandemic. Here at Rayonier, we've responded by prioritizing the health and safety of our employees and contractors, as well as their families, while working to ensure business continuity. In mid-March, we implemented a Work From Home model for all office employees and instituted enhanced safety guidelines for field employees in an effort to do our part as a company to mitigate the spread of COVID-19. On March 19, the U.S. Department of Homeland Security issued a memorandum providing guidance on the essential critical infrastructure workforce, designating the forest products industry as critical infrastructure with a responsibility to continue operating during the response to the COVID-19 emergency. This designation was important to allow our industry to continue to supply critical items such as tissue paper, cardboard boxes, and construction-grade lumber to end-users as we manage through this crisis. In New Zealand, however, the government instituted more stringent lockdown measures across a broader range of businesses, including forestry, beginning in late March. New Zealand ended these lockdown measures effective April 28, and we are currently in the process of restarting our operations there on a phased basis. Overall, while this has certainly been a tumultuous period, we believe we are managing through it well. I'm very proud of how our employees have answered the call to keep our business running amid this pandemic while observing the necessary social distancing and safety protocols to mitigate further spread. On a more positive note, our previously announced merger with Pope Resources is proceeding as planned, and we expect to close the transaction on May 8, pending a successful vote of Pope's unitholders at a special meeting scheduled for May 5. I'm also pleased to report that we recently completed a series of transactions to secure financing for the cash component of the merger consideration, which Mark will discuss later in more detail. Additionally, during the first quarter, we closed a large disposition, consisting of roughly 67,000 acres in Mississippi for net proceeds of $116 million. Taken together, these transactions significantly strengthened our balance sheet, bolstered our liquidity position, and completed the financing required to close the Pope acquisition. I'm extremely proud of our team for their dedication and focus on completing these transactions over the last several weeks, especially given the unprecedented market conditions we faced. I'd also like to thank the team at Pope for their perseverance as we worked through our integration planning process, primarily via phone calls and video conferencing. I can't speak highly enough about their professionalism in the midst of very unusual circumstances, and I'm very excited to welcome them into our Rayonier family. Working through this integration process has really reinforced the strong cultural fit between our respective companies, and we're all very excited about the future prospects of our combined organization. With that, I'd like to now switch gears to briefly discuss our quarterly results. For the first quarter, we reported adjusted EBITDA of $47 million and pro forma net loss of $300,000 or roughly breakeven EPS. Overall, I'm pleased with how our team navigated challenging market conditions amid the COVID-19 pandemic to deliver strong operational results across our Timber segments. Our Southern Timber segment reported adjusted EBITDA of $33 million for the quarter, which was below the prior year's quarter, but well above the last three quarters and generally in line with our expectations and prior guidance. We enjoyed another strong first quarter volume result driven by continued strong pulpwood demand. Overall, our Southern Timber segment continues to enjoy very high margins and relatively low cash flow volatility. In our Pacific Northwest Timber segment, we achieved adjusted EBITDA of $10 million, which is our strongest quarterly result since the second quarter of 2018. While delivered pricing stayed relatively flat versus 2019, we enjoyed some very strong stumpage sales early in the quarter, reflecting a significant pickup in domestic mill demand. Market conditions understandably deteriorated towards the end of the quarter with COVID-19 related mill shutdowns, so we're very happy to have taken advantage of these strong stumpage sale opportunities early in the year. In our New Zealand Timber segment, we reported adjusted EBITDA of $10 million, which represents a significant decline from the prior year's quarter. The New Zealand Timber segment experienced significant headwinds in the export market in Q1 as China instituted strict lockdown measures to contend with the impacts of COVID-19, significantly limiting the flow of export logs. Later in the quarter, as China reopened its markets and demand came back online, New Zealand implemented its own lockdown measures to contain the spread of COVID-19, which further limited our ability to move volume. As discussed earlier, we're currently in the process of restarting operations in New Zealand and are encouraged by the near-term demand response. Lastly, our Real Estate segment reported first quarter adjusted EBITDA of negative $1 million as we sold fewer than 1,000 acres during the quarter, excluding our large disposition in Mississippi. While this result is certainly below our average run-rate expectations for the year, we had anticipated a very light first quarter in real estate due to the timing of closings, and we further expect a significant pickup in transaction volume in the second quarter. With that, let me turn it back over to Mark for a detailed review of our consolidated financial results.

Thanks, Dave. Let's start on Page 5 with our financial highlights. Sales for the quarter totaled $259 million, while operating income was $39 million, and net income attributable to Rayonier was $26 million or $0.20 per share. Pro forma net loss was $300,000, which translates to breakeven EPS for the quarter. Pro forma items this quarter included a $29 million gain from a large disposition and $2.5 million of costs related to the Pope Resources merger. First quarter adjusted EBITDA of $47 million was below the prior year quarter, primarily due to lower results in our Southern Timber, New Zealand Timber, and Real Estate segments, partially offset by favorable results in our Pacific Northwest Timber segment. As a reminder, adjusted EBITDA in our Real Estate segment excludes the impact of the large disposition that we closed during the quarter. 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 the prior period. Our cash available for distribution, or CAD, was $27 million compared to $62 million in the prior year period, primarily due to lower adjusted EBITDA, higher capital expenditures, and higher cash interest paid, which were partially offset by lower cash taxes. 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 quarter with $132 million of cash and roughly $1.1 billion of debt. Our net debt of $925 million represented 23% of our price value based on our closing stock price at quarter end. As Dave noted, during the month of April, we completed a series of financing transactions in preparation for the closing of the Pope Resources acquisition. Specifically, we increased the size of our revolving credit facility from $200 million to $300 million and extended the maturity date to 2025. We also extended the maturity date of our existing $350 million term loan facility from August 2024 to April 2028. Lastly, we entered into a new 5-year $250 million term loan facility to finance the Pope transaction. This term loan facility was syndicated through the farm credit system and is eligible for patronage payments. Taking into account the facility's current spread over LIBOR, estimated patronage payments, and interest rate swaps that we entered into in anticipation of this financing, we expect that the all-in cost of this facility will be approximately 3%. We're very pleased to have completed these transactions on attractive terms amidst a very challenging and uncertain economic backdrop. With these facilities in place, along with the large disposition that we closed during the first quarter, we now have ample liquidity to fund the cash portion of the Pope Resources merger consideration, refinance Pope's existing debt, and pay fees and expenses associated with the transaction. Pro forma for the financings and the closing of the Pope transaction, we expect to have available liquidity of over $300 million. 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 8 with our Southern Timber segment. Adjusted EBITDA in the first quarter of $33 million was $5 million favorable compared to the prior quarter and $8 million unfavorable compared to the prior year quarter. First quarter harvest volume of approximately 1.8 million tons was 17% higher compared to the prior quarter and 5% lower compared to the prior year quarter. In general, we often experience stronger demand in the first quarter as markets pick up on the holidays and as weather often limits supply to those landowners with operable ground conditions. Although this winter was significantly drier than the prior year period, the first quarter of 2020 was still a relatively strong quarter for removals. We also had the decision to pull forward some production where possible due to the uncertainty over the near-term impacts of the COVID-19 pandemic. The average pine pulpwood price of $16.05 per ton was 8% favorable compared to the prior quarter and 11% unfavorable compared to the prior year quarter. The increase in price relative to the prior quarter was a combination of reduced removals from our lowest price markets and improved supply-demand dynamics in other markets. The decrease in price relative to the prior year quarter was driven by increased availability of logs due to the relatively drier ground conditions. The average pine sawtimber price of $26.67 per ton was 15% and 1% favorable compared to the prior quarter and prior year quarter, respectively. The increase in pine sawtimber pricing relative to the prior quarter was due to increased demand for grade logs for large dimensional lumber, plywood, and engineered products, reflecting the growth in the housing market that we had experienced at the beginning of the quarter. First quarter non-timber income of $6 million was $4 million below the prior year quarter due to a reduction in pipeline events. It's important to note that this comparison is being made against a record high year for our non-timber income business in 2019. Now moving to our Pacific Northwest Timber segment on Page 9. Adjusted EBITDA of $10 million was $1 million and $7 million favorable compared to the prior quarter and the prior year quarter, respectively. First quarter harvest volume of 476,000 tons was 14% and 68% higher compared to the prior quarter and the prior year quarter, respectively. The volume increase was driven primarily by a significant increase in lump-sum stumpage sales and delivered log sales to meet improved domestic sawlog demand. The average delivered sawtimber price of $75.4 per ton was 4% unfavorable to both the prior quarter and the prior year quarter. The decline relative to both periods was primarily due to an increased mix of chip-n-saw, with chip-n-saw removals increasing by 13% during the quarter. It's worth noting that pricing, excluding chip-n-saw, on an MBS basis, was up 6% from the prior quarter and flat compared to the prior year quarter. Overall, we saw quite a bit of volatility in market sentiment as the quarter progressed. Early in the first quarter, we experienced strong demand and pricing driven by favorable housing data. But by late February, market sentiment had turned negative due to growing concern about the COVID-19 situation. Then towards the end of the quarter, demand for export timber picked up as China tariffs were waived. Exports from New Zealand halted due to their lockdown, and European spruce exports slowed down. We generally expect that market conditions are going to continue to be choppy as these dynamics evolve, particularly given the different regional responses to the pandemic. The average delivered pulpwood price of $38.11 per ton was 3% and 16% unfavorable compared to the prior quarter and the prior year quarter, respectively. The supply of pulp chips on the open market continues to be priced lower versus the prior year period, particularly in Oregon. However, as lumber mills curtailed production towards mid-March, we began to experience increased demand for pulp logs in Washington. Page 10 shows results and key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the first quarter of $10 million was $6 million and $12 million unfavorable compared to the prior quarter and the prior year quarter, respectively. First quarter harvest volume of 481,000 tons was 30% and 20% lower than the prior quarter and the prior year quarter, respectively, as a result of significantly reduced demand due to the COVID-19 pandemic, which first impacted China export markets beginning in January and eventually led to a lockdown in New Zealand by quarter end. Log processing mills in China were closed for an extended period of time after the Chinese New Year and then were slow to restart as employees struggled to get back from their hometowns due to travel restrictions, which led to growing inventories to over 7 million cubic meters. Our New Zealand team did an incredible job of quickly responding to the situation in China, as we reduced production to 80% of plan and avoided sales into domestic markets and export destinations other than China. In late March, the New Zealand government instituted lockdown measures on all non-essential businesses, including forestry. However, New Zealand recently lifted these measures effective April 28, and we are currently in the process of reopening our operations on a phased basis. The average delivered export sawtimber price of $94.86 per ton was 8% and 18% unfavorable compared to the prior quarter and the prior year quarter, respectively, which reflects the reduction in demand due to the COVID-19 pandemic. The average domestic sawtimber price of $69.97 per ton in U.S. dollar terms was up 1% compared to the prior quarter, but 16% unfavorable compared to the prior year quarter, 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. Excluding the impact of foreign exchange rates, domestic pricing in New Zealand dollars was 1% and 12% unfavorable compared to the prior quarter and the prior year quarter, respectively. The average domestic pulpwood price of $33.84 per ton was 3% and 14%, unfavorable compared to the prior quarter and the prior year quarter, respectively, driven by the same factors as domestic sawtimber. In our Trading segment, we generated breakeven adjusted EBITDA in the first quarter, which was $500,000 unfavorable compared to the prior year quarter due to challenging export market conditions that we've already discussed. I'll now turn it back over to Mark to cover our real estate results.

Thanks, Doug. Now moving on to our Real Estate segment results. As highlighted on Page 11, first quarter real estate sales totaled $119 million on roughly 68,000 acres sold, which included a large disposition in Mississippi, consisting of roughly 67,000 acres. Excluding this large disposition, first quarter sales totaled $2.4 million on 624 acres sold at an average price of $3,800 per acre, all in our rural sales category. Real Estate segment adjusted EBITDA for the quarter was negative $1 million. As discussed on our last earnings call, we had anticipated very light transaction activity in our Real Estate segment during the first quarter due to the timing of closings. Now moving on to our outlook for the remainder of the year. As we noted in our earnings release, we expect that market conditions over the next several quarters will continue to be very challenging and volatile due to the impact of the COVID-19 pandemic. Due to these continuously evolving conditions, we are updating our prior 2020 financial guidance based on our current outlook for the balance of the year. Page 13 of our financial supplement provides our updated financial guidance by segment for 2020 and Schedule G of our earnings release provides a reconciliation of our adjusted EBITDA guidance to net income attributable to Rayonier and EPS. And please note that our updated full year 2020 guidance does not include the impact of our anticipated merger with Pope Resources. We expect to update our guidance for the impact of the Pope transaction on our second quarter earnings call following the expected closing of the transaction. For full year 2020, excluding the impact of the Pope Resources transaction, we now anticipate full year net income attributable to Rayonier of $33 million to $46 million, pro forma net income of $7 million to $20 million, EPS of $0.26 to $0.36, pro forma EPS of $0.05 to $0.15, and adjusted EBITDA of $200 million to $230 million. In our Southern Timber segment, we expect full year harvest volumes of 5.7 million to 6.0 million tons due to the disposition of 67,000 acres in Mississippi, as well as the reduction of harvest volumes in certain markets impacted by weaker demand resulting from the COVID-19 pandemic. We further expect that Southern Timber pricing will be relatively flat versus 2019 average pricing as continued strong pulpwood demand, favorable geographic mix, and increased export demand generally offset weaker domestic sawtimber demand. Overall, we now expect 2020 adjusted EBITDA in our Southern Timber segment of $100 million to $106 million. In our Pacific Northwest Timber segment, we expect full year harvest volumes of 1.3 million to 1.4 million tons based on our strong start to the year, coupled with improved export demand, which has partially offset declines in domestic sawtimber demand due to mill curtailments. We further expect the Pacific Northwest pricing will be somewhat volatile and dependent on the duration of domestic mill curtailments as well as potential changes in China export demand and the availability of competitive supply as different regions cope with the impact of COVID-19. Overall, we now expect 2020 adjusted EBITDA in our Pacific Northwest Timber segment of $17 million to $20 million. In our New Zealand timber segment, full year harvest volumes are expected to decrease to between 2.1 million and 2.3 million tons, primarily as a result of the shutdown of all nonessential activity in New Zealand during parts of March and April. We expect some near-term upside in New Zealand pricing resulting from pent-up demand following the shutdown, while longer-term pricing will be driven by the timing of resumed economic activity and the resultant level of domestic and export demand. Overall, we now expect 2020 adjusted EBITDA in our New Zealand Timber segment of $46 million to $52 million. Lastly, in our Real Estate segment, we anticipate a significant slowdown in improved and unimproved development sales for the balance of the year due to the impacts of COVID-19, although we continue to expect reasonably strong rural and timberland sales activity based on our current pipeline of transactions. Overall, we now expect 2020 adjusted EBITDA in our Real Estate segment of $60 million to $75 million. Details on other elements of our financial guidance, including CapEx, DD&A, noncash basis of land sold, interest expense taxes, and minority interests are provided on Page 13 of the financial supplement and Schedule G of the earnings release. I'd also like to note that due to the market uncertainty surrounding COVID-19, we have added new supplemental cost disclosures with respect to our Timber segments that appear in Section 3 of our financial supplement. This data should allow our investors and analysts to run more accurate EBITDA sensitivities under a range of different volume and pricing scenarios. Lastly, I'll offer a few comments on our balance sheet and liquidity position before turning it back to Dave for closing remarks. Following the closing of the Pope Resources transaction, we expect to have a combination of cash and revolving credit capacity of over $300 million, which we believe provides us with ample liquidity and financial flexibility as we contend with the near-term challenges associated with the COVID-19 pandemic. Our nearest debt maturities are in April 2022, when our $325 million senior notes mature. Our next debt maturity thereafter is the $250 million term loan maturing in 2025. Overall, our weighted average cost of debt is approximately 3.2%, and we've entered into interest rate hedges to swap all our funded term debt to fixed. We have two financial covenants in our credit facilities, a leverage ratio calculated as consolidated debt to consolidated debt plus network and an interest coverage ratio calculated as consolidated EBITDA to consolidated interest expense. Under our credit agreement, we must maintain a leverage ratio of no more than 65% and an interest coverage ratio of no less than 2.5x. As of March 31, our calculated leverage ratio was 43%, and our calculated interest coverage ratio was over 10x. So we have plenty of headroom within both covenants, and we expect to maintain plenty of headroom even with the anticipated decline in adjusted EBITDA in 2020 and the anticipated closing of the Pope Resources transaction next week. In summary, while we're certainly not immune to the market challenges associated with the COVID-19 pandemic, we feel very confident in our ability to contend with these challenges, given our strong balance sheet and overall financial flexibility. I'll now turn the call back to Dave for closing comments.

Thanks, Mark. The COVID-19 pandemic is an unprecedented challenge for the global economy and its near-term and longer-term impacts remain largely uncertain. Nobody yet knows how long this pandemic and its economic impacts will last, but as we sit here today, we certainly expect continued market dislocation and volatility over the next several quarters. Despite these significant challenges ahead, we remain keenly focused on executing against our strategic priorities and achieving our mission of generating industry-leading returns and building long-term value per share. In conclusion, I believe that Rayonier is well positioned to weather this storm. Specifically, I've seen firsthand the dedication and resiliency that our people have demonstrated through this crisis. I'm further extremely confident in the strength of our balance sheet, liquidity position, and financial flexibility. As a pure-play timberland REIT, we enjoy strong margins and substantially less volatility than downstream manufacturing businesses. We have a geographically diverse portfolio that further mitigates our exposure to any single region or product category. We expect that this diversity and optionality of our portfolio will be further enhanced when we close the Pope Resources merger transaction next week following the successful vote of Pope's unitholders. When we held our last earnings call in early February, we anticipated a very busy first quarter given the pending Pope Resources transaction, as well as the financing and other portfolio management moves that were already well underway. However, the quarter became exponentially busier and more challenging as a result of the COVID-19 pandemic and the ensuing economic fallout. I want to reiterate how proud I am of our employees and how they responded and continue to manage through this crisis with poise and determination. I feel very fortunate to be surrounded by such exceptional talent and dedication at all levels of the organization. This concludes our prepared remarks, and we'd like to now turn it back to the operator for questions.

Our first question comes from Collin Mings with Raymond James.

Dave, can you elaborate on where the restarting of your New Zealand operations stand and the phase process of ramping backup activity you referenced? What does that mean for volumes near term? Along those lines, you referenced really a couple of times in the prepared remarks as well as in the press release that there could be some pricing tension in the market due to pent-up demand. Can you just elaborate on that?

Yes, I'm not going to turn that over to Doug, who's a little closer to that to address.

As of Tuesday, New Zealand has reopened, and while we could resume full operations, we opted for a staged approach for safety after a month-long shutdown. Currently, we are operating at 80% to 90% capacity as we ensure the safety of our staff returning to work. This first week focuses on safety and acclimating everyone to the new guidelines. Once our team feels comfortable, we aim to recover some of the production lost since mid-January, especially on the export side, where contractors had their production reduced to 80% starting in late January. We anticipate a gradual increase in volumes over the next couple of weeks and hope to exceed 100% production safely, given the strong demand both domestically and for exports. There is significant pent-up domestic demand due to the month-long pause, and we have already prepared some logs that can be quickly delivered to our domestic customers. Additionally, we have logs available at the ports, with shipments scheduled to leave in the coming week or two. However, it will take about 4 to 6 weeks for the entire New Zealand supply chain to fully resume operations and for the export yards and ports to be fully functional.

Yes. And Collin, if I could just add to that, keep in mind that in the backdrop of the shutdown in New Zealand, you had China kind of getting back into operation. Following the Chinese New Year and the build in inventory associated with their COVID lockdown, inventories grew to 7 million cubic meters. As they started to operate, we've seen those inventories come down to roughly 5.5 million cubic meters. A lot of that, we believe, initially was restocking of log inventories at mills. As a result of that, we have seen some pricing pressure. Keep in mind as well that a large portion of the inventory was coming from the European spruce volume that, as it aged, deteriorated and became less economically viable to process. This put a lot of pressure on the need for green or fresh wood. So we're seeing that translate really in all three of our segments right now.

That's helpful detail, Doug and Dave. This leads into my next question focused on the Pacific Northwest. You mentioned earlier that demand from China has improved somewhat due to tariff relief and reduced supply from Europe and New Zealand. However, you also noted the expectation of uncertain market conditions ahead. Could you elaborate on that? I appreciate the update on the inventory situation in China. What is your latest understanding of how long the tariff relief might last? How do you view the balancing act between export and domestic markets in the Pacific Northwest at this time?

Yes, I'll start, and then Doug can tag on if I've missed anything. Keep in mind that in the course of Q1, we saw quite an evolving market in the Northwest. As we started the year, we had a strong uptick in domestic demand from our domestic mills, really in response to strong housing markets. Then as we saw China come back online towards the end of the quarter, we started to see a pickup in demand on the export side. In Q1, we only shipped 2% of our volume into the export market. So the export market, by and large, was not present in Q1. But I'd say the preparation export shipments were starting to pick up as we were in the last month of the quarter. That was also occurring at the same time that we saw a number of our domestic mills taking downtime. So you've got a lot of moving parts that have had some offset, hence our reference to expected volatility in that market going forward. One thing that we have seen really across North America is some pretty aggressive downtimes by sawmills throughout both U.S. and Canada. We've seen those effective operating rates go up to a level that's much higher than historically has been the case. Recognize as well that a higher proportion of mill downtime was taken out of Western Canada. It will be interesting to see as we go forward how that plays out in our particular market footprints. I don't know, Doug, if you have anything to add to that?

Yes, I would agree. When Dave references the lumber curtailments, we've seen approximately 15 billion board feet of annualized sawmill capacity reductions or closures announced due to the COVID pandemic. That's equivalent to roughly 1 million single-family housing starts on an annual basis. To kind of Dave's point, we think that the amount of curtailments was rightsized, and actually are seeing a demand capacity ratio running about 95%. This suggests that we may have seen the curtailments. One thing I'd add to kind of the export demand is an interesting trend that's probably more long-term, although we're seeing some short-term impacts too. Countries are definitely rethinking their diversification of their supply chains. We've seen some long-term customers in both South Korea and Taiwan gain market share over Chinese imports of both lumber and plywood. While there's the lockdown in our other major export country of India, which is turning some short-term demand, we believe they may experience some similar supply chain diversification benefits in the longer term. We're starting to see that trend before the pandemic with increased pine demand for packaging in particular. There are some interesting factors at play. Some of the volatility we mentioned is that there are a lot of moving parts as countries are rethinking supply chains and where they're getting the wood from.

I appreciate all the color there. Switching gears, Mark, I know you referenced available liquidity of $300 million moving forward. More specifically, just on the timing and magnitude of the Mississippi Timberland sale. How much additional focus will you place on deleveraging following the closing of the Pope deal over the balance of the year?

Yes, sure. When we announced the Pope transaction, we obviously said that we were committed to the investment-grade rating. We were taking leverage up a bit above our comfort zone, and we would look to bring that back down likely through some asset sales in the near to medium term. With the $116 million Mississippi disposition, we largely completed, I would say, that targeted deleveraging in the sense that pro forma for the Mississippi disposition and the cash needed for the Pope transaction plus the expected annualized contribution from Pope, it was largely kind of never leverage-neutral, taking all those together. That said, we're obviously now in an environment where EBITDA is under pressure. To the extent that we had been anticipating that leverage was going up into the high fours on a debt-to-EBITDA basis, and we'd be bringing that down through asset sales, we're probably now back in that range just with the anticipated decline in EBITDA over the near term. I would say that we're still very focused on the balance sheet, very focused on maintaining the investment-grade rating. Obviously, there are a lot of moving pieces right now, and we're having to take all of that into account. But suffice it to say that with lower EBITDA, we certainly don't have the same leverage capacity that we would have had prior to this COVID-19 pandemic.

Okay. And one last housekeeping one for me, and I'll turn it over. Just, Mark, just to make sure we're clear. We should expect updated guidance for the Pope transaction in conjunction with the 2Q earnings release. There won't be a separate update concurrent with the deal closing?

Yes. We want to get under the hood and get a sense as to what the balance of the year looks like. We're somewhat limited while we remain separate companies in directing their business or getting too far into that. We want time to close the deal, get a sense of where they're at relative to their expectations for the year, what's remaining for the balance of the year, and then we'll update guidance. I don't think that on a long-range basis, we would expect that the run-rate expectation would be materially different than what we announced at the time of the transaction. But given the COVID-19 pandemic and the moving pieces right now, we don't have a great sense as to where they are right now relative to their full-year expectation, so we need time to digest that.

Yes. And Collin, the only thing I'd add to that is just keep in mind that one of the objectives with respect to the Pope transaction was gaining additional optionality. This applies in both good markets and in challenging markets. Right now, having more Douglas fir, having a higher proportion of ground-based logging lands, having a more diverse domestic mill footprint, as well as exposure to export. All these things are going to be improved after this transaction, so we remain pretty excited about adding it to our portfolio.

Our next question comes from John Babcock with Bank of America.

I would like to briefly discuss your long-term supply agreements and how they generally function. We are currently facing a challenging period in housing, and some of the forecasted numbers are quite concerning. It appears that the operating rates are recovering at some mills, particularly in the Pacific Northwest and possibly in the South. Could you provide insight on that? Additionally, I would like to understand how these types of supply agreements work in a broader sense.

This is Doug. I'll be happy to take that question. We have very few long-term supply agreements actually as a company. A lot of our wood is sold in the South on stumpage, more delivered in New Zealand and the Northwest, but some here also. Most of our dealings are either quarterly or maybe annual in length. I think we only have one agreement that's beyond a year in length.

Okay. That's helpful. And then I guess, just with regards to kind of the Mississippi land sale, what made that property an attractive one to sell? Any kind of additional color you could provide as far as volumes or what contribution that made to the business would be helpful?

Sure. This is Dave. We initiated a competitive sale process last September and have now completed it. This sale involved our remaining holdings in Mississippi. We determined that we had limited scale in that market and could not realistically grow to a suitable scale. This was a key factor in our long-term outlook for that market. Although it was a productive property with a 69% pine plantation and an average age of 15 years, we prefer to operate in areas where we can achieve better scale, have a stronger market outlook, and make a greater impact.

Okay. And then I was wondering next, if you can kind of talk about how end market demand in North America has kind of trended over the last few weeks, I guess particularly in this out since you already commented about the Northwest?

Yes. I mean, the one thing to keep in mind is the lumber market is fairly diverse. The backdrop of the COVID situation is reinforcing the strength of the repair and remodel portion of the market, which is the largest portion of lumber demand at roughly 30%. Single family housing is 22%, and industrial is about 20%. That is an important thing to keep in mind. It does tend to get a disproportionate amount of the attention. The other thing I’d point out is we've had strong demand from our pulpwood customers throughout this period of time. All the news coverage of things like tissue and strong numbers coming out of the linerboard side for boxes have edged positively as well. When we have markets that have that foundational demand, it positively affects all markets. All else being equal, we’d like to see a nice diversity of product demand across the market classes.

Okay. And then just last question before I turn it over. I was wondering if you could talk about how we should think about working capital over the coming quarter or two just kind of with the pandemic and how that's changing receivables and inventories and accounts payable?

We generally don't carry a lot of working capital, John, so I wouldn't expect significant changes there.

Our next question comes from Anthony Pettinari with Citi.

This is actually Randy Toth sitting in for Anthony. I think for the U.S. South, you're now forecasting flat pricing for the year. Previously, you had expected a slight decline due to geographic mix. Looking at the midpoint of full-year guidance, it suggests EBITDA per ton is expected to be lower than previously expected. Can you maybe just add some color on what has changed besides harvest levels within that full-year guide on the U.S. sale?

Yes, Randy, it's important to note that with fixed costs in the business, lower volume results in these costs being spread over fewer tons, leading to a decrease in EBITDA per ton. Our overall pricing expectations for the year remain largely unchanged. The reduction in our forecast is primarily driven by volume, along with slightly lower expectations for non-timber income. Last year, we saw robust sales from pipeline easements, but given the current state of oil prices, we're adopting a more cautious outlook for non-timber sales. These are essentially the various factors at play. Notably, about half of the projected volume decline in our guidance is attributed to the Mississippi disposition, which is a significant factor.

I would just add then a point where there's a slight mix heavier to pulpwood now than was previously predicted. This is causing the average composite price to look like it's slightly lower when you look at EBITDA per ton, and that's some of the weakness that we're seeing. Some of the additional volume that's coming out is really around sawlog demand, which we can defer and recover in future quarters if things get better.

Okay. Understood. I think in the release and prepared remarks, there was momentum of increasing export demand out of the U.S. South. Is that just on the margins? Or is that business ramping back up? Just to clarify, these Chinese tariff waivers are just on logs coming out of the Pacific Northwest? Or does that cover southern timberland as well?

Sure. As part of the Phase 1 resolution, China agreed to waive tariffs on logs for a year, and that's both for the Northwest and the South. Now these waivers are actually applied for shipments online and are good from month. While they've agreed to do it for a year, the physical mechanism is one month. Our customers have told us it takes about three days to get it, and there's been no one who's been denied. So it's been pretty seamless to get those things. Both operations from the Northwest and South are there, and we have seen them. As Dave mentioned, while we've gone from 7 million cubic meters down to the 5 million range in China, there is a lot of demand for greenwood. That lockdown in New Zealand has really impacted the amount of fresh wood they have, which gives them more optionality for what they can cut. So that has resulted in increased demand for fresh logs from both U.S. sources and our Australia ports in our containers. It's not just at the margins; it's actually something we're seeing to help us meet our volume targets.

Keep in mind though that exports out of the South are done by container, whereas in the Northwest and New Zealand, they're break bulk. So there are different shipping dynamics at play that influence that.

Yes, that's a valid observation. We've observed that ocean freight rates have significantly decreased due to the effects of COVID-19 on global trade, and there has also been a notable drop in fuel costs as we move into this year. We previously discussed the change regarding the IMO regulations for very low sulfur fuels, which have decreased from $730 per ton to $207 per ton since the beginning of the year. This gives us an advantage in break bulk shipping, unlike the rate increases we are not seeing to the South. However, as noted earlier, the reduced supply of spruce from Europe has resulted in spot rates for freight increasing over 70% year-over-year from Europe to China. This situation has led to a decline in the volume coming from Europe to China recently, and we anticipate that this trend will continue for some time. Although we are not facing the same rate increases to the South, we are experiencing more blank sailings, meaning some ships aren't operating due to the freight circumstances. We need to adjust our container allocations, but we are finding opportunities from both U.S. and Australia ports.

Our next question comes from Mark Wilde with BMO Capital Markets.

This is Jesse Bran on for Mark. Just one quick one for me. Do you have any view on kind of the length of the curtailments in the U.S.? Specifically in the U.S. South, did you guys have any exposure to the Klausner mill that shut down in Florida?

The length of curtailment is difficult to predict. We're encouraged by the fact that lumber prices in the Pacific Northwest have increased by 5% year-over-year. While they haven't reached crisis levels, lumber prices in the Northwest have stabilized compared to last year. We have heard rumors that some mills may restart operations in the next few weeks. Similarly, in the South, there are discussions about this, but no commitments have been made regarding when they will resume operations, as far as I know; it remains speculative at this point. With lumber prices stabilizing, we experienced a significant reduction in production out of British Columbia before the pandemic, followed by another 44% decrease due to the pandemic. We are seeing the West Coast prices firm up first. Regarding Klausner, we do have a small amount of supply going to that market, but they were not a major customer for us overall.

I mean the duration on the curtailments at the end of the day is going to be determined by the magnitude of the decline for the year, and estimates of that are still all over the place. We still need to see kind of the COVID-19 pandemic and the U.S. response and the regional response settled down a bit, and then get a sense as to what is going to be the 2020 impact on housing starts before we can get a sense as to what the duration of those mill curtailments will be. Like Doug said, there are some encouraging signs certainly relative to where we were even just a couple of weeks ago.

I'd reiterate, looking at a macro level, mill operating rates in North America tended to be in the 80% to 90% range, and we're currently now in the mid-90s. This suggests a pretty tight environment and would indicate that as we see inventory levels rebalance and demand pick up, you'll start to see some of that capacity come back on. Also to reiterate a point that Doug made, if you look at the breakdown of where those capacity curtailments have come, there's been a 44% reduction in British Columbia. We think relative to our footprint, we're in better shape relative to how we see those mill curtailments over the U.S.

Our next question comes from Paul Quinn with RBC Capital Markets.

I'm not surprised by the reduced guidance. Much of the lower harvest aligns with those thoughts. I’m looking for more details on real estate, which is always difficult for me to predict. Could you provide an outline of the expected EBITDA range of $60 million to $75 million and the anticipated acreage by category that supports that forecast?

We're not going to provide that level of detail, Paul, in the guidance. It's important to recognize that there are many variables in real estate, making it difficult for us to make accurate forecasts. Forecasting remains challenging because so much depends on whether transactions close or not within a specific quarter. The timing of these closures plays a significant role. We anticipated a light quarter in Q1 and continue to maintain a robust pipeline for the year. The decline we projected compared to previous guidance is primarily due to more cautious expectations regarding improved and unimproved development sales. This is the segment of our business where we see the highest risk related to the COVID-19 pandemic. Many homebuilders and developers are either not operating or have paused land acquisitions. When considering the mix we expected at the start of the year, it's worth noting that our initial guidance for 2020 in real estate was very optimistic, likely exceeding a more typical expectation. Currently, we're focused on the risks associated with unimproved and improved development sales for the year, which has been the main factor in our reduced guidance.

Our next question comes from Collin Mings with Raymond James.

Just a couple of quick follow-ups for me. Doug, just in the U.S. you touched on this a little bit in the remarks as far as expecting pulpwood to remain pretty solid. But given that there's going to be less residuals available from sawmills, can you maybe just expand on what you're seeing in terms of pulpwood demand and pricing right now?

Yes, Collin. We're seeing really strong demand for pulpwood. This is typically a season when mills take downtime for their spring maintenance. However, to my knowledge, everyone of our customers has postponed that. We haven't seen increases in prices, and that's due to crew shifting from cutting sawtimber with these curtailed to producing pulpwood. While the demand is strong, we're not seeing any changes in pricing; prices have been flat. The increased demand is being met by increased shifts from people cutting sawlogs to pulpwood, but there is very strong demand for it, which is great to see.

Okay. Sticking with the U.S. South here in particular, Doug, I mean, Mark referenced in response to Randy's questions, just that some of the moving pieces that relate to non-timber income. Can you maybe just elaborate a little bit more on what COVID-19 as well as the plunge in oil prices really means for non-timber income moving forward?

Yes, that's a good question. Last year, a lot of strength in our record year in non-timber income was around easements in oil and gas. With the low oil prices, we have built into our guidance the expectation that capital investments in that business are going to slow down. We do think there's going to be weakness in our oil and gas segments this year. There was a lot that was put in the pipeline, and we're not necessarily being told that they’re canceled, but we're being cautious, thinking that we're going to see some pullback in that area.

Okay. And then, Mark, going back to Paul's question on real estate. Have you actually seen any rural or recreational land sales fall through because of the change in the economic outlook?

I don't believe we've seen any fall through, certainly none of size. Overall, a real estate transaction pipeline for the year is still very strong. We have a number of transactions under contract. I think if anything, we've certainly seen some slippage in some on the improved development side. We see the real estate guidance down as probably more of a timing issue. We believe the value is still there, but with all the Stay At Home orders underway right now, you're just not going to see a lot of housing activity for the near-term, in all likelihood.

Yes. And Collin, we saw that on both the improved development side and to a lesser extent on the rural side, where you're seeing some delays in transactions that were in the pipeline. Again, we don't view that as an impact value, but rather an impact on timing.

It's important to note. A lot of these development transactions, both on the improved and unimproved side, have very long lead times. There's much work and investment on the part of the buyer that goes into making these purchases. With a situation like this, some of those buyers may determine to walk away, but a number of them have some sunk costs in those deals that they're probably not going to be very reluctant to walk away from.

Mark, to that point, recognizing it will probably evolve as you review things post-Pope. But have you maybe dialed back any of your real estate expenditures or the capital outlay on that front? Given that kind of balance of near-term demand being a little softer and longer-term, these are long-term projects with a lot of lead time. Have you brought that in at all?

I mean recognize that much of our capital has been in the Wildlight project, and much of that infrastructure capital is already in the ground, so there isn't as much there to delay. Incremental capital is associated with getting residential lots into the pipeline.

Look, it's a moving target, and it's going to be a continuous reevaluation of whether it makes sense to make certain investments and when it makes sense to make certain investments. So that will absolutely flex to some degree with our expectation around the pipeline for improved development sales.

Got it. And then just one last one for me. Bigger picture, it does look like you closed on a $24 million acquisition during the quarter. And again, recognizing it's a fluid environment, but just maybe just update us as you think about balancing different capital allocation priorities going forward. Obviously, Pope is the near-term focus here. But just you bought back some stock during the quarter. You made an acquisition. Just maybe talk a little bit more about the balance as you go forward.

Yes, I'll touch on the acquisition, Collin, and then Mark can touch on the buyback. We completed the acquisition of 12,500 acres in Louisiana in January. This was a direct negotiation process that we started last summer. We purchased this for $24 million or $19.20 per acre. We're excited about this property; it has a high percentage of 76% plantations and an average plantation age of 15 years. It improves the quality of our Louisiana portfolio, both from logging conditions as well as a percent plantation perspective. We like the markets, and it's in a nice tensioned wood basket with diverse mill ownership and product demand. Getting back to my earlier comments on the Mississippi disposition, this was in a lot more exciting market for us and an area where we felt like we were gaining incremental scale. We're really happy to have completed that in early January.

Collin, I'd say more broadly on capital allocation priorities, we certainly think that share buybacks are still an attractive use of capital in the current market environment. We did a small amount of buybacks last quarter. But leverage is going up with the closing of the Pope transaction, and EBITDA is under some pressure from the COVID-19 pandemic. The top priority today is probably carefully managing the balance sheet with a focus on some modest deleveraging over the medium term. With respect to acquisitions, we're always in the market. We're always evaluating what's out there. But I think it’s fair to say that given our current focus on the integration of Pope and our current leverage profile, it’s probably not a top priority right now.

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All right. Well, thanks for joining the call, and please feel free to follow up with me if you have any further questions. Thank you.

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