Excellence in Core Timber Business - Doug Long

So the guy who wanted to hug trees gets to talk twice. I'm not sure about that. But no, while we're excited about the growth we see in our land-based solutions and our real estate development businesses, our 97 years of managing forests and great timber markets will still be the underlying core of our business. As Mark mentioned, with the focus on decarbonization, population growth, and underbuilt housing, we believe there are strong long-term secular tailwinds upon which to also grow this business. Speaking of growth, our foresters and research team are focused on adapting to changing climates and utilizing advances in technology to organically grow our timber returns on each acre of our ownership. So let's take a deeper look into the high-quality forests that attracted me to Rayonier. Our core timber business is well positioned to meet growing demand for renewable forest products with our high-quality forests concentrated in the top three softwood growing regions in the world: the US South, Pacific Northwest, and New Zealand. As Mark mentioned before, in the US South we have about 1.9 million acres and a sustainable yield of around 7 million tons. In the Pacific Northwest, we have about 420,000 acres primarily of Douglas fir and hemlock with a sustainable yield of around 1.35 million tons. And in New Zealand, also with 420,000 acres, we grow highly versatile radiata pine and Douglas fir, and on that same 420,000 acres we grow almost twice as much as in the Northwest, about 2.5 to 2.6 million tons of annual harvest. That just shows how productive those New Zealand forests are because that's almost in half the time we grow in our Northwest operation. All of our forests provide the full spectrum of traditional products, but there are some nuances to our segments. With a 60% pulpwood harvest, our southern timberlands are more leveraged to strong pulpwood markets and GDP-related consumer consumption. The Pacific Northwest we're more leveraged to housing through lumber, with over 80% of our harvest being in sawtimber. And in New Zealand, the growing populations in the Indopacific region through exports, over 60% of our harvest. The majority of our US and New Zealand forests are proximal to ports that allow us to meet both domestic and global demand. As Mark said, there's value in being a pure-play timber REIT that is upstream in the value chain where there is less volatility. If you look at the bottom right chart and you take out those COVID run-up years, manufacturing has averaged single-digit EBITDA margins with some years even being negative. Compare that to the timber chart on the left, which has enjoyed relatively stable and high-yielding EBITDA margins averaging 34% over the past two decades. While the species and geographic diversity require different management techniques, there are two things that are consistent across our portfolio: first, our commitment to sustainable forestry across all of our timberlands, and second, driving operational excellence through our market-driven precision forestry strategy. As you can see on the left, our forests in North America are SFI certified, FSC in New Zealand, and PEFC was a European-based standard that's now become more international and is recognized by both of those. What does that mean when we talk about sustainable forest management and certification? Essentially, as we talked about before, as Dave mentioned around sustainable forest, it's having that cut that we're harvesting growth and we're doing that meeting all of the water quality requirements, biodiversity, adapting for climate change. There are hundreds of different criteria we have to meet basically to match that, but the goal is to assure everyone that the forest products they're getting from that have been managed well and sustainably. If you look to the right, leveraging our in-house R&D team working with our experienced field foresters, we use millions of data points combined with local knowledge to focus on the silviculture regime that will maximize the net present value of each stand. As Mark discussed, this is going to be based on soils, climates, genetics, and the markets and many other factors. In this chart on the right bottom, site index is a measure of the quality of a stand and it's the average height of trees at a specific age. What we have here is you can see in this chart, typical in US South might be a site index of 65, so trees be 65 feet tall at age 25. We have the opportunity through using those different techniques I mentioned to maximize the ability to grow carbon and fiber on those sites up to say 85 site index. And as you see there, that's significant growth on that left side of about 3 tons per acre to 6 tons per acre of harvesting per year. We also have the ability in that little yellow bar right there to change the quality of the grade, which grade is a percent of sawtimber, so we can change that and improve it. So essentially, through managing the land you have the ability to improve your factory to make more capacity as well as make more profitable products. But this all must be done in the context of the cost and forecasted returns that you're looking at to maximize your net present value, otherwise you can spend the bank chasing that biological optimum on the right-hand side instead of the financial optimum. In my course of my career, I've seen several companies learn this the hard way and they're no longer with us. While each market will have unique localized factors, there are generally three central forces at play: US housing, the pulpwood markets and the strength of those, and export demand driving sawtimber prices in particular. The pace of residential construction, as you can see on the graph on the left-hand side, there's a gap from 2006 to 2016 that was underbuilt, and that gap between that blue line and the little gray line shows right there that's about 5 million houses, actually more than 5 million houses that were underbuilt that we need to have in the United States. So we really are looking for that opportunity and leverage the opportunity. Pulpwood is more closely tied to consumer spending and shopping habits such as e-commerce, as well as the new uses we talked about for bioenergy. We've kind of seen that post-COVID destocking correction as you can see here on this middle chart, and the forecast is basically for improvements. I think that's happening what we've seen in our local markets, and I'm encouraged that we've seen the first linerboard pricing increases in almost two years, so we really are starting to see that destocking and moving forward. Last but not least, access to ports and export demand provides market tension in the US and is core to our New Zealand operations. While not to its peak as you can see on the right-hand side here, the China log imports are forecasted to improve over the next few years with New Zealand poised to meet that demand. As Mark mentioned, timber made up 70% of our adjusted EBITDA last year, with the US South making up the lion's share of that at 67%, followed by New Zealand and Pacific Northwest. Next I'm going to discuss some of those drivers that are unique to each of these segments. Speaking of the US South, as a public investment I don't believe you'll find a better allocation of forest properties, with over 70% of our forest in the US South in top quartile markets that are proximal to both ports and the domestic markets. You look at the map and the chart, and these are made for foresters like me. Actually I made this first map on the left 20 years ago, so they're not only made for foresters like me, they were made by me. And they're made to be like a traffic light, so very simple: green is good, clear red is a full stop. The amber in the middle is where you have taken multiple factors and you think about as you're approaching that light, sometimes it's great, sometimes you stop and think a little bit like is there a cop sitting there watching as you go through. As you can see, the manufacturing capacity in the past decade has really moved in that bottom right quadrant in Florida, Georgia, and Alabama where we have that bright green. They've moved to be closer to the urbanizing growth. Chris mentioned the 1,500 people a day moving into Florida. Georgia's also seeing significant growth, so we see a lot of that capacity moving in there, and they also have access to the ports to export. So with that, we've got highly tensioned markets in the Atlantic coastal region. This portfolio didn't just happen by mistake. Rayonier will share with us in the future some potential moves that we've made. Two important key facts on this graph: first, I'll take you to the middle there on the bar chart, is that the average lumber production costs in North America are cheapest in US South at $312. So this is significantly cheaper. What that's led to, if you look now to the left, is an increase in capacity in US South from 27% to 38% of North American lumber capacity is in the US South, with a lot of that being in our operating area, and you can see that in that map I showed with those green areas being all good, all go. With that advantage they have in the transportation and the other things that we've seen there, we really are seeing significant capacity in this area. One thing also, if you can see between that light shading capacity and then those dark green bars, is that the capital investments have been made but we have yet to see market conditions that have unleashed the full potential of these mills in the associated sawlog demand. So our largest timber segment has the cheapest lumber production in North America and excess capacity in one of the fastest growing regions. For me, this is a winning recipe of success when the markets do turn. We have a well-diversified base harvest with 69% of our pulpwood in markets in containerboard and market pulp, leveraged to growth e-commerce and growing trends of substitution for plastics, and 13% in OSB which is leveraged to housing growth. Growing interest by these new bioenergy entrants are also adding further competition, and we look forward to them in the future. If you look on the right, we really are seeing positive momentum in the current markets. It appears that that post-COVID destocking is largely behind us, and as I showed earlier that graph where we've seen that price increase start, demand capacity has gone from roughly 80% to 90% in the boxboard market in the fourth quarter, so a lot of growth in this area. We've also seen rationalization to accommodate the recent recycle capacity additions that were added, and this is yielding those improved operating rates I mentioned. With strong pulpwood markets and the lowest lumber production costs, our top quartile markets continue to build on their strengths in the US South. Now let's talk a bit about the main market drivers in the Pacific Northwest. With over 80% of our Pacific Northwest harvest comprised of sawlogs, we are heavily leveraged to lumber and the underdeveloped housing market, which obviously hasn't benefited from these high interest rates, but we do believe the demand is coming. That said, if you take a look at this graph and you look in the green, you can see the lumber pricing and over the past few years you can see the potential upside with logs in blue following. These are very tensioned markets and very well balanced, so as we see lumber price increases, we've seen a direct relationship with logs in these markets. In the Pacific Northwest, our top quartile southern markets have very similar price elasticity. An important driver that doesn't show up in this graph to me is the recent two billion board feet of capacity reductions that have happened in British Columbia that have been announced over the last year or so, that should yield even more competitive advantage for our Washington sawmillers as the housing market improves. Having started exports in the 1960s to Asia, Rayonier is one of the leading exporters to this region. As I mentioned before, over 60% of our New Zealand harvest is destined for export markets, and they are primarily in China. I don't believe the China construction troubles are news to anyone in here, but what maybe you haven't heard and read in the headlines is expanding markets in the rest of Indo-Pacific. As you can see here in the light blue, we're seeing tremendous growth in both population and the economies in places like India, Malaysia, Indonesia, the Philippines, and these areas are growing rapidly. And what we've seen before, as the GDP of a country grows, so does demand for lumber and forest products. Well, individually these countries may not be as large as China, their combined potential is growing with India leading the way with an expected five times growth in log imports during the 2020s. As you can see here on the right, that yellow dash line in particular is the percent market share of China that New Zealand has captured over the last few years. It's now approaching 65%. As I shared with you before on that large the three market driver slides, we are seeing a forecast return, while not to its height, back to increased demand from China, but also China's going to have to compete with these new users that I've mentioned in this developing area. So this sets up New Zealand for good opportunities for the future. In addition to log exports, the New Zealand government is in the process of implementing an industry transformation plan that will increase domestic wood products manufacturing by 25%, roughly requiring an additional 3.5 million tons domestically. They're also encouraging the use of wood products in construction like much of the rest of the world, so we expect demand to increase beyond that. In New Zealand, there's something unique that's going on based on the planting in the past. They have a falling industry harvest, so there's an age-class gap where the harvest is expected to fall in the medium term. Given our sustainable forestry management that I mentioned before, Rayonier's well-balanced and sustainable cut will be well poised to help fill that gap both domestically and abroad. With these changes, New Zealand is positioning itself to meet the growing Indopacific region demand for both logs and finished products. Again, hopefully I've successfully helped you understand why we have confidence in our core markets, particularly in our core timber business, which operates in some of the strongest markets as we mentioned before globally. I'm excited about these long-term trends that I've mentioned for traditional forest products, as well as the new ones we were talking about before, and bioenergy and other ways to decarbonize. With the underbuilt housing, the shift to e-commerce, substitution for plastics, and a growing global population, I think the outlook for our forests is very bright. And to wrap up, I believe we have an excellent team of foresters supported by a top-notch R&D team, biometricians, and technical support staff that will allow us to organically grow our business on each and every acre. With that, I'd like to bring up Rhett Rogers. Thank you.