Rayonier Earnings: Muted Timber Demand and Lower Prices Weigh on Results

No-moat rated Rayonier RYN reported second-quarter results that were in line with our expectations as the company continued to face substantial end market pressure. Revenue declined over 15% from a year ago, largely due to lower volumes across much of the business. Additionally, consolidated operating margins declined almost 500 basis points to 9.6% as stumpage and sawtimber prices pulled back amid unfavorable market conditions. That said, management tightened its EPS guidance range and reiterated its belief that results would rebound in the second half of the year, most notably in its real estate business as previous transactions are closed in the fourth quarter. We’ve increased our fair value estimate to $35 per share from $34 due to the time value of money.

Rayonier’s southern timber segment fared best in the quarter, posting a 3% increase in revenue year over year due to a substantial 32% increase in harvest volumes that were largely attributable to acquisitions made the year before. This more than offset double-digit declines in sawtimber and pulpwood stumpage prices during the quarter. The pacific northwest business struggled in the quarter as revenue fell almost 18% year over year while posting a $2.4 million operating loss. This was largely attributed to a roughly 19% decline in both sawtimber and pulpwood prices in the region from a year ago. Harvest volumes also decreased roughly 11% as both domestic and export demand remained muted.

Timber markets have shown little sign of recovery during the first half of the year as higher interest rates have weighed on housing markets. Rayonier deferred additional planned harvests during the quarter in response to poor market conditions, but management expects activity to pick-up later in the year. Additionally, some recently announced curtailments in Canada should provide relief for some of Rayonier’s domestic operations, but we think timber markets are likely to remained pressured through the end of the year.