Q1 2020 Earnings Call
Good morning, My name is David and I will be a conference operator today.
At this time I would like to welcome everyone to the Potlatch Deltic first quarter 2020 conference call.
All lines have been placed on to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star in the number one on your telephone keypad.
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Yes.
I would now like to turn the call over to Mr., Jerry Richards, Vice President and Chief Financial Officer for opening remarks.
Sir you May proceed.
Good morning, and welcome to Potlatch Deltics first quarter 2020 earnings conference call.
Mike Covey, Chairman and Chief Executive Officer, and Air Crammers, President and Chief operating Officer also on the line.
Three of us are dialing in separately.
This call will contain forward looking statements. Please review the warning statements in our press release on the presentation slides and in our filings with the FCC concerning the risks associated with these forward looking statements.
Also please note that a reconciliation of non-GAAP measures can be found on our website at www Dot potlatch Deltic dotcom.
I'll now turn the call over to Mike for some comments and then I will cover our first quarter results and our outlook.
Thank you Gerry.
We had very strong results in the first quarter, which was especially important given the slowdown in business activity, which began in March due to the cobot pandemic.
It was encouraging that or $48 million in EBITDA in Q1 came from strong results in each of our three businesses.
Particular wood products' operating results improved significantly compared to Q4 29 too.
Although our attention is now forward looking at is focused on adjusting business plans almost weekly to contend with market conditions customer needs and the health and safety of our workforce.
I will spend a few minutes, explaining where the company stands today, both operationally and financially.
I also want to take some time to align our response to the cobot pandemic and how we continue to protect the health and safety of our employees as our top priority.
Finally, I will take make a few comments about how our operations and financial position may change going forward as progress to defeat the virus continues in America returns to work.
First is important to understand that we have been deemed in the central business every state issued stay home orders and we plan to operate each of our businesses at full capacity where market conditions allow.
Today, we are operating all of our saw mills on a two shifts basis in adding overtime, but some locations, where we have good demand and positive margins.
On April Twentyth, we curtailed operations at our plywood plant in St Mary's Idaho.
The specialty in industrial grade plywood manufacturer plywood product. We manufacture is used in the boat recreational vehicle in furniture industries and stay home orders forced many of our customers to shut down in April.
We expect many of these customers to return to work in early May.
Although there have been no definitive announcements.
We will restart our plywood mill when we have enough orders, which we anticipate will be the week of may 11th at the earliest.
Our timberland business continues to operate at nearly full capacity.
With numerous mill closures in the south due to the cobot pandemic.
Downtime related to a powerful string of tornadoes on April 12, we have scaled back some of our Sawlog and pulpwood deliveries for the second quarter and do not anticipate making up the volume in the back half of the year.
Fortunately, we can differ harvest and capture the biological growth of the trees in the future.
Sawlog pricing is relatively flat quarter over quarter across all our southern markets with little change expected from Q1 price levels.
We have been in spring break up mode in Idaho since mid February and will logging will commence as planned on may 4th.
All of our Idaho customers are operating and are expected to accept log deliveries as planned in Q2.
We continue to expect northern harvest volumes to total about 1.8 million tons for the year.
And we expect log prices to be relatively stable and similar to last year.
As you know about 70% of our Sawlogs deliveries are peg to lumber prices through it indexing formula.
A downturn in the economy, most certainly will impact our should all value real estate development business in little rock.
Although we do not expect any commercial real estate sales and 2020, we still expect to sell over 100 residential lots this year compared to 142 lots in 2019.
Our rural recreational land sales in Arkansas in Minnesota should remain on track for the year, which is consistent with our experience during the great financial crisis.
Early feedback this quarter from our real estate brokers indicates that interest rural land remains high.
At the end of the first quarter, we had a cash balances $79 million $460 million of liquidity, including an undrawn revolver.
During Q1, we returned $39 million to shareholders in the form of dividends and share repurchases.
During Q1, we purchase $12 million of company stock at an average price of $30 in 79 cents per share.
We have no concerns regarding our ability to fund the dividend.
Having said that share repurchases, maybe a more attractive way to return cash to shareholders when our stock trades that deep discount to fair value.
Now lets turn for a minute to how we're managing health and safety challenges of operating or businesses at full capacity during the pandemic.
First our crews and teams have been able to work safely to date with no cobot exposure outages.
We have plans and provisions in place in the event, we have cobot exposure in the workplace.
We have increased the frequency of cleaning added physical distancing words, practicable indoor screening visitors and vendors.
We have banned all travel and group meetings and everyone who can work from home is doing so.
We had one of our best quarters on record for safety and the wood products Division, which was encouraging in the first quarter.
Looking forward I believe it's a good reminder, that 80% of our asset value lies in our 1.9 million acres of timberland, we're pricing and volume are quite stable.
We have modestly scaled back harvest plans due to weaker demand, but the trees will continue to grow and be available for harvest in 2021 and beyond.
Wood products pricing remains the single largest wildcard in forecasting our expected results.
Demand has remained surprisingly strong, especially in repair and remodel markets.
With many people working from home or staying home home improvement projects, requiring lumber are driving increased demand.
Having said that it was sobering to see March housing starts tumble to 1.2 million start seasonally a 22% drop in total starts in a 17% decline in single family starts.
We have no doubt that the April figures will be even lower.
However, much of the industry as curtailed capacity with announced curtailments in the range of 25% or approximately 15 billion board feet.
We are scrubbing business plans in each of our divisions to find opportunities to reduce costs and capital expenditures for the remainder of 2020.
We have already identified $7 million that can be saved or deferred.
Reduced diesel fuel costs will contribute significantly to our cost savings effort as logging accelerates in the third quarter.
Capital allocation remains a key focus for the management team and the board as we manage through this unprecedented period.
I'll now turn it back over to journey to discuss the quarter under our outlook.
Thank you Mike.
On page four the slides the stronger than expected start to 2020 that Mike mentioned is reflected by total first quarter adjusted EBITDA of $48 million.
Lumber price realizations and harvest volumes, both exceeded our plan for the quarter.
I'll now review each of our operating segments and provide more color on the first quarter results.
Information for our Timberland segment as displayed on slide five through seven.
The segment's adjusted EBITDA was $35 million in the first quarter compared to $38 million in the fourth quarter.
We harvest at 434000 tons of Sawlogs in the north in the first quarter.
While this is down seasonally from the 473000 tons that we harvested in the fourth quarter. It is 16% higher than the first quarter of 2019.
Northern Sawlog prices were 1% lower on a per ton basis in the first quarter compared to the fourth quarter.
The negative effect of a normal seasonal increase in the density of logs was mostly offset by higher index prices.
In the South our harvest volume was relatively flat quarter over quarter at about 1 million tons.
Our southern Sawlog prices were 2% lower in the first quarter compared to the fourth quarter.
The decline was due to a seasonally lower proportion of hardwood sawlogs in the next.
Pine Sawlog prices were flat quarter over quarter.
Turning to what products on slide eight and nine adjusted EBITDA $13 million into first quarter was $11 million higher than the fourth quarter.
Our average lumber price realization increased 8% from $366 per thousand board feet in the fourth quarter to $396 per thousand board feet in the first quarter.
Our mills operated well in the quarter.
Lumber shipments up 283 million board feet were higher than we expected.
Despite removing overtime production hours in the second half at March.
Our mills ended the quarter with lower than normal lumber inventories.
Moving to real estate on slides 10, and 11, the segment's adjusted EBITDA was $7 million in the first quarter compared to $14 million in the fourth quarter.
An increase in rural acres sold partially offset seasonally lower should all valley lots sales and there were no commercial land sales in the first quarter.
Shifting to financial items, which are summarized on slide 12.
Our total liquidity remained strong at nearly $460 million.
This amount includes cash is $79 million and availability in our revolver, which may remains undrawn.
As Mike mentioned, we spent $12 million to perk repurchased 401000 shares in the first quarter for an average at $30.79 per share.
In March we locked in future debt refinance rates at historically low levels using forward starting interest rate swaps.
The slots cover all farm credit term loans maturing through January 20 night of 2029 totaling $654 million.
Interest rate savings will be staggered because the lower rates become effective when each existing debt tranches refinanced at its maturity.
On a weighted average basis, the swaps will reduce the cost of these term loans by approximately 150 basis points net of patronage and income taxes.
The $46 million scheduled to mature in December 2020 is the first of the plan debt refinances.
Annual interest expense will decline approximately $900000 on this debt beginning in December.
As announced in March we transferred $101 million, a pension obligations to New York life.
The transaction was funded with pension plan assets maintains financially secure benefits for our pension plan participants and reduces potlatch deltics pension funding risk.
We recognized a noncash pension settlement charge of $32 million after taxes.
Capital expenditures were $10 million in the first quarter.
We expect our capital expenditures will be 40 million to $44 million in 2020.
Note that these amounts include real estate development expenditures, which are included in cash from operations and our cash flow statement.
We have revised our 2020 outlook, which is presented on slide 13 to reflect our current best estimate of the shift in business conditions caused by Cobot 19.
We expect to harvest 5.5 to 5.8 million tons and our timberland segment in 2020.
The decline relative to our annual plan of approximately 6 million tons is due to announce milk curtailments in the south.
Harvest volumes in the north or plan to be seasonally lower in the second quarter compared to the first quarter due to spring breakup.
We expect northern Sawlog prices to decrease modestly in the second quarter, due primarily to seasonally heavier logs and lower index prices.
Harvest volumes in the south in the second quarter are expected to decline sequentially due to mill curtailments and should approximate second quarter of 2019.
We expect southern sawlog prices to be comparable to the first quarter.
We have reduced our estimated range of lumber shipment volume downward to 1.0 to 1.1 billion board feet of lumber in 2020.
Our average lumber price in April is approximately $20 lower than our first quarter average lumber price.
We anticipate lumber prices holding steady for the rest of the quarter and estimate that our average second quarter lumber prices will be approximately 5% lower than the first quarter.
As a reminder, at $10 per thousand work foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
We plan to ship 230 to 240 million board feet of lumber in the second quarter.
On a related no we lost a week of production at our Warren Arkansas Mill in April due to a tornado cause power outage.
Shifting to real estate, we expect to sell 20000 to 23000 acres of rural land and a 102 120 Chenal valley lots in 2020.
Additional real estate details are provided on the slide.
Overall, we estimate that second quarter total adjusted EBITDA will be lower than first quarter, primarily due to lower lumber prices and a seasonal decrease in harvest volumes.
We believe we are well positioned to whether the current storm and to take advantage of favorable long term industry fundamentals.
So that concludes our prepared remarks, David and I would like to open the call acuity.
Thank you as a reminder to ask a question.
Star one on your telephone to withdraw your question press the pound hash key please standby, while we compile the keeping roster.
Your first question comes from the line of John Babcock with Bank of America Merrill Lynch. Your line is open.
Hi.
Good good morning, Dutch good afternoon, I guess on East coast.
Overall, I guess I just wanted to start out.
The harvests and how you're thinking about this and also just generally what's going on in the industry. So overall my question I mean, it seems like demand as has pulled back a fair bit on the wood products side.
You talked about the overall curtailments in the industry, how much pullback or you've seen on the harvest side from that.
Obviously, it seems like you guys have pulled back your harvest a little bit, but what are you seeing from some of the other land owners out there.
John This is Mike you know all kind of direct traffic here since run different lines and what Eric answer that.
Yes, Hey, John Good morning, So I can't speak to what other land owners are doing necessarily but I would imagine that their situation is comparable to ours. So in our situation all of our harbor shortfall for the year is going to occur in the south.
And our operating area.
Down South we've now seen curtailments by many of our customers, including 11 lumber Mills six always be your plywood mills.
And three pulp mills, so in total the curtailments in our region amount to about 15000 tons per week of deliveries. So our assumption is that all of these mills are going to stay down for the entire second quarter, which if you do the math on that that amounts to about 200000 tons and that split roughly 50% sawlogs, 50% pulpwood.
We expect there to be a little bit of overhang as we move into Q3, but then as we get into Q4, we expect things to normalize.
So everybody is going to have it a little bit differently, depending upon their particular region in log price dynamics and the competitiveness of the mills.
In their particular region, but I would expect everybody's going to see lower harvest volumes just like us.
Okay.
And then my next question because you also talked about seen pretty decent demand on the repair and remodel side of things how is demand in that channel trended.
Through April so far and what are you thinking about where that will go.
The coming month or two.
Eric.
Yes. So John you are correct. We are we are seeing considerable strength right now in our in our.
And underlying fundamentals quite frankly are still good for the repair and remodel market segment overall, our and our represents the largest segment of lumber demand at about 40% of market demand and for US it's about 40% of our business.
And of course as you can imagine lots of different factors influence our in our activity. So near term are in our is holding up maybe because the stimulus checks from the government.
People are born at home and looking for something to do.
We've also had favorable weather.
So there's lots of reasons why near term are in ours held up a longer term. We think are in ours is going to be okay as well.
Home equity in the United States is still relatively high.
The median house age in the US is now at record levels at around 40 years.
So we think there's lots of reasons why our and our is going to hold up both in the near term and in the long term.
Okay, and then just on overall lumber demand in your markets I mean.
Is there way to quantify how much of a demand decline you've seen in April.
Eric.
Yeah. So so John that's that's a real real tough one.
To answer because that we saw the customers and then they turnaround and sell the customers.
I would I would tell you that for us it varies a lot by mail or by region.
The south has held up for us fairly well, we've got decent takeaway there and of course, all our mills are running there.
In the Midwest, our stud mills Thats largely.
Repair remodel market for those mills that business has held up very well as we just got done talking about western lumber is.
The one week spot that we have in our business right now western lumber prices have come down quite a bit.
Compete with Canadian SPF in Western lumber and those prices have really come down.
So it really varies a lot by market segment I think all told I've heard lumber demand across North America is going to be down roughly five to 6 billion board feet. This year and if you do the math on housing starts perhaps coming down a little bit.
Who knows maybe 200000 going from 1.3 to 1.1 million, which seems to be a reasonable gas.
You get to a shortfall of around five to 6 million board feet and I would I would expect that that's spread pretty evenly around the country and by market segment.
Okay. Thanks for that.
I'll just last kind of two questions before I turn it over and this is really on capital allocation.
I guess first of all how much is left on the share repurchase authorization that you have out there and then also if you could just kind of review your capital allocation priorities right now to be great. Thanks.
Jerry you want to speak to the remainder.
You bet. So so cumulatively under the current share repurchase authorization, we bought $337 million worth of stock. So we have $63 million left.
And John I'll, just to make some overarching comments about capital allocation or we've tried to be nimble and flexible about this is as market conditions change and Im certainly one or timberlands are trading at a deep discount to fair value and its I don't know at.
30 to $34 stock price that somewhere just over $1000 an acre.
Clearly the best value that we can find in the market is to buy our own trees back through purchasing our own stock rather than than an acquisition plan. So at this point, we'd be on the sidelines for acquisitions with a strong preference to purchase our own stock.
As a way to return value to shareholders.
Thank you.
Your next question comes from the line Collin Mings with Raymond James Your line is open.
Thank you and good morning, guys.
First question for me, just kind of picking up where where John laptop there on capital allocation just to clarify as far as the share repurchases and again, recognizing you're probably restricted at purchasing at the moment, maybe just elaborate on how you think about share repurchases versus preserving liquidity in the current environment.
Got it sounds like in the prepared remarks are pretty committed to the dividend, but just thinking through the.
Focused on liquidity as opposed to buying back more spot.
Sure do you want to speak to the.
You bet. So in terms of salt. So I think you posed the question in a very good way call on which is there's a balance there certainly cobot 19, and the pullback and business creates a bit of uncertainty. So very important that we maintain our strong liquidity position and it is strong. So it gives us a lot of confidence going forward.
And it also provides some flexibility so two to illustrate that confidence we were able to by 12 million of shares in the first quarter. So.
I think as we move forward, we'll continue to try to strike that appropriate balance, but feel like we have.
Fair bit of flexibility and a lot of confidence in our position.
Excellent.
Colin I'll, just add to that the $79 million and cash that we had at the end of the first quarter is more than enough to run the business.
We will not borrow money to repurchase our stock but to the extent that we have surplus capital available. That's certainly gives us an opportunity to purchase the stock if the prices attractive.
Got it under understood that point, the incremental cash to your point is now more favorable towards repurchases as opposed to up acquisition.
But again striking a balance on liquidity and repurchases going forward I understood.
Moving onto.
The prepared remarks around the real estate activity.
Recognizing that obviously the situations fluid, but you commented on the stability of kind of the rule and recreational land sale can you elaborate a little bit more on that and have you seen anything fall out of the pipeline yet that kind of following the pandemic.
Eric.
Yes, Hey, good morning Kolon.
So yes, so regarding world demand, we are seeing surprisingly strong interest in world demand and we think there's a couple of different reasons why I'm first it's a it's a hard asset Ali if they do is go look at the volatility in the stock market and you can appreciate how land can can hold its value and appreciate that aspect of it.
The land that we're selling is relatively low cost.
This is this is rural acreage that it's a relatively affordable price points somebody can buy it nice world track for 80 $100000.
The other thing it's worth mentioning is that rural land by definition is away from population density.
And then this age of Corona virus that seems to be a pretty desirable thing.
So for Q2.
We have already got a lot of our contracts in place.
In fact, the vast majority of our acreage our rural acreage that we planned on selling we plan on selling in Q2 is already under contract.
And thus far in almost all of our contracts continue to close and I think right now we've got about 30 deals under contract and to have cancelled honest they've been very small deals that have cancelled so.
Net net it looks like it's the outlook is very very favorable. So we continued to be optimistic that this business is going to continue to produce for us. Despite the economic backdrop and you know it's also very similar to what we realize back in the great financial crisis.
Rural demand.
Demand for rural acres remained relatively high so we're very optimistic about our rural business.
That's helpful and then as we think about the timber operation.
And again.
Scott and detailed a lot of the milk or comments, you've seen but can you maybe touch on it typically pulpwood pricing and or pulpwood demand just in your wood baskets in the U.S. out at some of these saw mill curtail production, presumably there's less residuals in the marketplace. So thinking through kind of the impact that you're seeing on the pulp but type would be.
It get your perspective.
Yes. So as a is that was mentioned earlier you know pulpwood prices are pretty stable for us.
There's no doubt theres, a little bit downward pressure, there I'd say, maybe in a one dollar to per ton.
For the full year.
That's true, almost regardless of which which which which state you look at we're seeing slightly lower pulpwood prices I think was benefiting pulp, but even though you have like paper demand.
As in secular decline.
You know tissue machines are running probably as hard as they possibly can right now so you've got some offsetting factors there, but net net pulpwood prices or heard are relatively stable.
Okay. One last one from me and recognizing that you're going to be probably pretty sensitive on too much detail here, but just as you think about the plywood plant in Idaho is there anyway to quantify the financial impact there of the downtime that you've seen so far or providing any sort of context around how much.
Contributed to profitability last year.
Eric.
Well, yes, so collyn.
As you noted the plywood businesses under some amount of pressure right now.
It is was mentioned you know when we announced that we were curtailing operations. There. We said it was going to be for two weeks. We've now had have to extend that to three weeks.
It's very hard for us to build an order file to to reopen that mill.
And what we're finding challenging is that our customers again. These are RV manufacturers, both manufacturers furniture manufacturers.
They are struggling with their own startup.
They don't know if they're going to run one shift they don't know if they're going to run two shifts. They don't know what demand is going to look like when they finally get back up and running again and people start returning to work.
So our customers are very very tentative to commit to buying much volume from us now that being said we are starting to build an order file as we got as we get out into May.
I won't say that it's really strong order file almost by definition, it's weak, but we are starting to build one.
And we're optimistic that as we always things gradually get better as the country continues to heal up from Corona virus.
We're we're optimistic for example that people were going to want to get an RV.
And go vacation away from population dense areas.
Maybe that will spur RV demand.
But for right now.
It's it's challenging from plywood business and we don't get back to your specific question, we don't break out profitability, specifically for our industrial plywood business for competitive reasons.
Understood appreciate the color. Thank you.
Your next question comes from the line, Steve Chercover with D.A. Davidson Your line is open.
Thanks, Good morning, everyone.
So.
It does sound like you're not really taking downtime in lumber. Besides what was imposed on you by the tornadoes.
And is it because your inventories were lower than you anticipated.
Existing Q1 or are you somehow just better situated than the competition.
Eric.
Yes, the Steve you know I think we've we've mentioned is some prior calls the we regularly benchmark our mills.
And generally speaking, we think we have either first or second quartile mills.
Theres always one that may be an outlier in that mix, but even that one is not a fourth quarter mile mill. So if you. If you look across the landscape of lumber mills, and who has to curtail when demand drops like this and pricing drops like this it's those mills that are positioned the worse.
Those mills that are in the fourth Cortile for example, and as we've seen 25% to 30% of the capacity come out of the industry, it's going to be those mills that have got the worst cost structures that are going to have to close first and frankly were wording weren't a good enough position to where we have not felt the need to curtail we've not run as much overtime and all of our mills are.
St. Mary's Mill for example is not running over time today, and it's because relatively speaking western lumber prices are the weakest.
Of the group.
And we struggled to justify running overtime at that mill, but I think to answer your question, we feel like our mills or or position more competitively than than others and consequently, we don't see need to take downtime.
And most year lumber mills, particularly in the so the Arpus on mills are.
Commodity, but our some of your mills up in Idaho, more pine boards in there for a little less susceptible to.
The vagaries of the market.
No. So the they're really different regional dynamics going on here, although they do overlap depending upon the particular region that particular market.
So our mill in Idaho produces dimensional lumber dimensional lumber in Idaho is not really in our in our DIY kind of a product. So it's not getting the benefit of all the tailwind of all the D. DIY work that we've talked about.
If you think about our mill in Idaho, it's competing.
Against other inland producers and it's competing against Western SPF in particular.
In western SPF prices have just collapsed.
And as they've collapse.
It's getting more challenging for us to compete against Western SPF.
You've also got Washington State is closed for construction is one of the few states has closed for construction.
Residential construction.
Quants Consequently, you've got one market area, where demand is drop but yet there hasn't been a ton of.
Announced curtailments in Western Mills, So, it's all about supply and demand at the end of the day, but our St. Mary's Mill was the one that's that's feeling it the worst right now.
Okay and switching to the plywood.
I realize you're trying to put back together in order file there, but might that the end to end market demand for that particular plywood be more discretionary since is geared towards.
Boats in rvs than.
The product, it's that's destined for residential construction cheating.
Yeah, I think there there they are both big discretionary purchases, whether it's a house or it's a boat or an RV.
Yes, it's there's no doubt if consumer confidence takes a hit which it has.
Stock markets come down.
Unemployment goes up.
Theres no doubt, it's you're going to see declining demand for boats and rvs and big ticket things like furniture.
Gotcha, Okay. Thanks, good luck.
Thanks.
Your next question comes from the line of Paul Quinn with RBC capital markets Your line.
The other instruments family does just following up on it looks like overall and your guidance that you just got a little bit more conservative.
And we're just going to dial in on this timberland guidance because in the.
And the Q4 call. It was about 6 million in now.
I look at your guidance here, it's down sort of three 3% to 8% in.
Where I'm looking at housing starts in some of the forecast and given that it's a very cloudy environment to see any.
Seems like it starts to come down quite a bit more than that so im just trying to reconcile while you're.
You really think it's going to be Dod strong.
And how do you reconcile.
Back to Eric.
Description about 200000 tons looks like the midpoint, we'd be down 350000 tons. So I'm just trying to.
Reconcile all those those things do you think it's going to hold up as well as it.
It appears in your guidance.
Yeah go ahead.
Yes, so Paul so 200000 tons that I referenced was just a second quarter impact.
And I mentioned that there's going to be a little spillover effect into Q3, depending upon how all this plays out.
We are being conservative in our in our guidance that's that's in our nature.
One thing I'd like to remind you that we run.
Three sawmills in Arkansas that consumed the vast majority of our Sawlog production and in the state in the South So we kind of control that that revenue stream and that PNM from our southern resource business. If you will and we have very good visibility into what those three sawmills are doing.
So we have very high confidence.
In those in those sawmills.
We have seen a little bit of pullback in pulpwood demand has been a couple closures.
Curtailments down there but.
Net net things are are still running and still still consuming a lot of a lot of pulpwood.
So we got a pretty good handle on what what the business is going to look like for the rest of the year now if lumber prices plummet go even further south which we don't think thats going to happen, we feel like lumber prices of have bottomed.
All bets are off if a lot of mills start more mill start curtailing.
Including our own.
But for right now we feel like we've hit the bottom and we're we're we're we're coming back up.
Okay.
Okay, Okay, basically equal lumber prices are down 20, bucks or 5% off the Q1 average you didn't get scale gold basically for the balance of the.
Yeah, we actually think we're going to we're going to see a bounce in Q3 of.
Who knows 4%, perhaps is kind of what we havent, our estimates and then kind of flat into Q4.
I listen to the Cam for call and I think they they talked about improved pricing as we get into the back half the year I think we share very similar view.
And although housing starts.
Sorry, I just can add that although housing starts have plummeted here and you know in April and Im sure may is going to be week. Most people think that they're going to get back into the you know kind of the one to one three range when we get to the to the the fourth quarter. This year. So things are going to stay depressed for forever.
Great and then just just some cobot itself.
If you could just give us a summary of Willy.
Well placed tested positive.
You've worked around.
Those instances if that's happened.
Paul This is Mike.
Through our knowledge, we have not had in our operating environment in our mills and timberlands positive tests that have caused any kind of changes in.
And how we operate we certainly had people absent from work for whatever reason, but it's it's not result of a positive cobot test.
Well.
We need Lucky hope I hope it keeps up thanks, yes, well I think it's not surprising that we operate largely in very rural places you know many of these counties, where we have facilities or were timberland operations. You know the data shows you know one or two maybe three people will the county event.
Cool with positive results those pretty rural areas.
Your next question comes from the line of Ketan Mamtora with BMO capital markets. Your line is open.
Hi, Thanks for taking my question.
Maybe starting off on the lumber side.
Can you talk a little more about I missed what off inventories in the China, you've talked about demand, but just maybe outside of China and ventures. It seemed to me that for the last few weeks such an east.
I'm not asking rents you must have come out of the China, because there wasnt much buying activity happening at mid 11, yet you know eastern had sort of construction activity going on so maybe you know any color on.
Sorry channel inventories.
Eric.
Yes, Okay, and that's a it's a challenging one to answer was very little data as you know on on lumber inventories in the distribution channel.
What I, what I will say is that anecdotally in our sales folks are constantly talking to customers and so they are getting kind of real time feedback.
On what they're seeing and what what tends to happen when you get into a falling lumber market, where we like we've had for the last six to eight weeks.
Customers will back away real fast.
Because they don't want to catch a falling knife.
And what you see is that inventories in the distribution channel fall to very low levels.
And dealers will not step in and by lumber.
Unless they have to they'd rather deplete their existing inventories or until they think prices have bottomed. So anecdotally what I'd tell you is that our view is that inventories are at very low levels.
In the distribution channel.
Okay. That's helpful color and then just switching to the timberland side.
On the especially on the southern Sawlog tied up.
Last year first toffee had pretty strong sawlog pricing a large part of it was driven by kind of range.
Now we've got no beyond this environment, you know and there's a lot of uncertainty.
We don't talk of all kind of walk you are seeing out that intones off a solid pricing I mentioned that Q2 pricing is going to be relatively flat quarter over quarter.
But to be extend that.
Ms continuing to take downtime demand remains weak.
How do you see that paying out as we get into the back half of the I'm not asking for specific numbers, but just as you guys know kind of see.
You know, how how it could impact southern sawlog prices.
Eric.
Yes, so keeping your you're right. The sawlog prices ran up in 2019 that was largely due to the inclement weather last year excessive rainfall.
Really limited harvesting activities and including our own.
You saw prices come down for for southern Pine to about 44 Bucks.
In the first quarter you know our expectation is at these prices kind of hold.
And we're in good log and haul conditions Youre right mill inventories mill log inventories that really low levels right now because everybody's afraid to hold inventory.
Typical southern mill might have two weeks of logs in their decks and you know we understand most mills are running with who knows three to five days worth of logs in their decks. So people are running on really tight inventories.
But pricing has come down maybe a dollar ton or so off of where it was but it's it's holding and frankly, it's back to where it was in 2018.
It's back to where it was about 10 years ago prices have been very stable very flat in the south for southern yellow Pine Sawlogs, we don't we don't see that changing as we move into the back half a year.
Got it and then just switching back to the lumber side.
And so a question on you know kind of duties my understanding is that the duties will come down as you move into the back half of the year.
And again I mean, it's still a lot of uncertainty at on how all of this plays out in terms of demand.
But to be extend that demand remains weak and if and you will come down as you move into the back half of the how butane.
Impacts lumber prices.
Eric.
Yes, so keen you're right those those lumber duties are set to fall.
Roughly 10% from from where they are today, which is up around 20% I think the interesting thing is that if you look at the cost competitiveness of mills around North America.
The mills that are taking it the hardest right now in this this low price environment or the Canadian Mills.
They are the ones with the highest cost structures generally speaking so I think they need that 10% duty just to get their PNM back in order.
So we don't think it's going to have a big impact on pricing, it's not like all the sudden mills are going to go from being uncompetitive to competitive when they get an extra 10% in their BNL.
I think they're going to more likely just go from losing money to breaking even.
Is the way I would characterize it so we don't think it's going to have a big impact.
Does that impact though pattern of.
The rationalization aspect off of the whole industry I mean, if duties come down it gives them some sort of.
In all kind of buffer on the on the cost side.
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Theres Theres no doubt that the duty coming down will help make their mills more competitive.
But on a relative basis, they're still going to be relatively high cost mills.
So we don't think the landscape changes a whole lot from that duty going to 10%.
Understood. Okay time for all your thoughts that luck.
Your next question comes from the line of Mark Weintraub with Seaport Global your net your line is open.
Thank you first just one follow up on the lumber where you indicated you thought that prices likely have hit bottom and certainly there they're going up a little bit now as we speak.
Is that largely do you think a function of where the cost curve is already there you what was that more us supply demand.
Driven.
Expectation.
Sure.
Yes, so mark I would I would say you know you've seen 25% of the industry announced curtailments.
Thats announced curtailments, we're guessing at Theres, another 5% that may be on top of that 25%. So you've seen 30% of the industry shut down here in the very near term.
Meanwhile, construction activity, there's no doubt orders are slowing, but they've not come to a complete halt and don't forget you've seen our and our market segment, which is 40%.
If anything it's higher than it was.
Well the pre pre Corona virus.
And our home center customers are screaming for more product. So you know it's easy to look at housing starts and and think that demand is just completely collapse, but but you got to take into consideration strengthen our in our but back to your question about why are things holding up we it's probably more of the the supply side equation than it is the demand side.
Equation.
Okay. That's helpful. Thanks, and then.
On the timberland side and I realize things are fast moving here, but.
Hi, any color you could provide it our have the timberland has timberland M&A essentially.
Temporarily frozen given all the uncertainty.
And is it a viable strategy to consider selling some timberlands to buyback your stock at a very.
Why discount if the state of affairs.
Continues for for any length of time.
Well take the first part first.
I think the theres been for trucks for transactions of any size close this year or two of those were large weyerhaeuser deals.
The rest of than smaller.
Grenier sold attracting Mississippi.
So it's been fairly quiet most of the other properties that were on the market. There were pending who have been pulled or put on hold so I do think the market's frozen at this point.
And there's very little liquidity in that market currently as investors kind of wait to see what happens.
During the great recession, it was possible to the financial crisis to sell timberland in the down market.
I would imagine that would be possible at discounted prices to do it today, we have not entertaining the idea of doing that to support a larger share repurchase maybe as a good liquidity gets back in the market that would be something worth considering but.
I think it'd be a pretty tough sell today to put timberland on the market there just wouldn't be the takers.
Understood. Thank you.
And at this time I am showing there are no more questions I'll now turn the call back over to Jerry Richards.
Thank you David So and also appreciate Everybodys interest in Potlatch Deltic.
Available to answer the detailed modeling questions rest of the day and hope you and years stay safe and this cobot environment.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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