Q2 2021 Potlatchdeltic Corp Earnings Call
Good morning, My name is for me and I will be your conference operator today at this time I would like to welcome everyone to the potlatch dealt the second quarter 2021 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will.
The question and answer session. If you would like to ask a question. During this time simply press Star then the number 1 on your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief.
B of financial Officer for opening remarks, Sir you May proceed.
Alright, Thank you may and good morning, and welcome to Potlatch <unk> second quarter 2021 earnings conference call joined.
Joining me on the call is Eric Cremers, Potlatch, <unk>, President and Chief Executive Officer.
This call will contain forward looking.
Please review the warning statements on our press release on the presentation slides and in our filings with the SEC 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 Delta Dot com.
I'll now turn the call over to.
<unk> for some comments and then I will cover our second quarter results and our outlook.
Thank you Jerry.
The lumber prices continued their historic run in the second quarter driving another quarter of record financial performance for the company.
<unk> consolidated EBITDA was $275 million in Q2, which.
Which is our fourth consecutive quarter record financial performance.
Our wood products segment generated $205 million of EBITDA in the second quarter to provide context. This amount exceeded wood products EBITDA for full year, 2020, which was an annual record itself.
Eric as previously announced we had a fire at our Ola Arkansas sawmill on June 13th.
Fortunately nobody was injured and the damage was limited to just the large log primary breakdown machine center.
Insurance will cover the cost of restoring operations at the mill along with lost profits above a.
2 million dollar deductible.
Our team is actively working on demolition and equipment replacement options.
Although we have not yet finalized our plans we are working on restarting the large log line as soon as possible potentially in late Q1 of next year.
It is premature to commit to that schedule.
As we have not yet finalized the purchase of of replacement line.
As a reminder, overhead on annual capacity of 150 million board feet prior to the fire.
Our plywood business continues to perform exceptionally well and we expect record profitability from this business this year.
As.
<unk> discussed on prior calls our industrial grade plywood is used in big ticket boats Rvs truck trailers and furniture demand for these items remains very strong.
Our timberlands segment earned record EBITDA of $77 million in the second quarter, Despite Idaho harvest volumes being at.
We have the seasonal low point due to spring breakup.
Our average saw log price of $245 per ton in Idaho highlights the value being created by our index saw log sales contracts, which are unique in the industry.
Our Idaho team did a great job exceeding the harvest plan in the first half.
<unk>, realizing attractive saw log prices and reducing the risk of not meeting our annual harvest plan because of high fire danger.
Our southern team did a good job managing through extraordinarily wet weather during the second quarter after dealing with extreme winter weather in the first quarter.
Spec that our southern.
Another on harvest will be approximately 200000 tons below our annual harvest plan, primarily due to the Ola sawmill fire.
Our real estate segments EBITDA declined in the second quarter as expected as homebuilders digested over 120, <unk> Valley lots purchased in the prior to.
Of the year's demand and should all remained strong as evidenced by lot draws thus far in the third quarter and we continue to see good interest in commercial and rural acreage.
Turning to lumber prices, we believe that the steep decline in lumber prices that occurred over the last 9 weeks has reached the bottom.
The collagen most certainly has played a role over the past couple of months and it is not uncommon for lumber prices to overshoot on the upside as well as the downside.
The peak Western SPF price of $1630 per thousand board feet reported by random lengths for 2 of them better to buy for us in may.
<unk> was not sustainable.
Parts of lower home center lumber demand appears to be a key factor that triggered the price decline lumber.
Lumber futures led cash prices down in the July contract settled at $650 per thousand board feet.
While the market tone shifted last week.
Random lengths reported that the price.
The 2 of them better to buy for us increased $55 per thousand board feet in the second half of the week, which is the first increase of nearly 9 weeks random lengths also reported that downward pressure and other western species of lumber and southern yellow pine eased late last week.
Nobody wanted to catch a falling knife.
During the lumber price correction, we believe that reports of some mill curtailments provided comfort to lumber buyers that theyre downside risk was limited at current lumber price levels.
As a result lumber futures moved up sharply at the end of last week. The various contracts are in the $600 per thousand board foot range, which suggests.
Just that lumber prices could bounce nicely as liquidity returns to the market and lumber buyers replenish lean inventories.
Housing related fundamentals that drive our business remained robust and FAA stated that new residential construction is on the cusp of a multi year boom and the recent set of slides frankly, we agree.
On the demand side, new residential construction remains strong with June starts of 1.64 million units on a seasonally adjusted basis permits of 1.6 million units or 23% higher than the prior year as well as the 50 year average of 1.5 million units.
We expect new residential construction.
Remained very strong due to massive under building since the great financial crisis record low inventories of homes for sale of historically low mortgage rates and millennials entering their prime home buying years on that first point Freddie Mac estimates of the shortage of U S single family homes is $3.8 million units and the National Association of Realtors.
<unk> estimates that the U S is under built by 5 to 6 million units.
The D. R. Horton stated on their earnings call last week that demand remains extremely robust and quote unlike anything we've ever seen.
Lumber demand and the repair and remodel market declined after memorial day.
Willable reacted the high lumber prices that had turned into front page news returned to work and discretionary spending shifting the leisure activities likely also played a role.
Long term fundamentals in this segment remain positive, including the age of the U S housing stock, which is now 42 years on average high levels of home equity.
As people and the fact that remote work continues to be of common practice industry economists expect lumber demand and the repair of model segment to continue to grow and demand is likely just been deferred not destroyed.
On the supply side higher cost of the tight labor market and equipment supplier bottlenecks govern the pace of new lumber capacity.
<unk>.
<unk> fires across the west and a shortage of truck drivers may also create constraints in the near term.
Overall, the fundamentals that drive our business remain favorable and we continue to expect that lumber prices will settle at relatively attractive levels.
Our leverage to lumber strat.
<unk> perfectly situated to continue to drive strong financial performance for the remainder of 2021 and beyond.
Turning to capital allocation, returning cash to shareholders remains a top priority. We continue to expect that we will pay a meaningful of special dividend in the fourth quarter. In addition, our board typically evaluates our.
<unk> is popular annual dividend, which is currently of $1.64 per share in December.
Our strong balance sheet and $891 million of liquidity provide a solid platform as we consider additional investments in our existing mills or accretive acquisitions, we're interested in acquiring timberlands mills or a combination of the 2 near our current.
Current operating areas.
We published our second environmental social and governance report in May and the report is available on our website highlights include disclosures of scope to greenhouse gases expanded information about our carbon sequestration and storage and climate related analysis Potlatch Delta is a leader.
And sustainable Forest management, and we are committed to environmental and social responsibility and the responsible governance.
To wrap up my comments Potlatch Delta is very well positioned to take advantage of favorable industry fundamentals and our strong liquidity and prudent capital allocation strategy positions us to continue increasing shareholder.
<unk>.
I will now turn it over to Gerry to discuss second quarter results and our outlook.
Thank you Eric.
Starting with page 4 of the slides, our adjusted EBITDA increased from $195 million in the first quarter to $275 million in the second quarter.
This is our fourth quarterly EBITDA record and.
On a row and we have generated $769 million of EBITDA over the last 12 months.
The effect of higher lumber prices more than offset seasonally lower harvest volumes in the second quarter.
Information for our Timberland segment is displayed on slides 5 through 7 the.
The segment's adjusted EBITDA increased from 60.
$8 million in the first quarter to $77 million in the second quarter.
Our team leveraged good logging conditions and strong markets to harvest 354000 tons of saw logs in the north in the second quarter.
This volume of seasonally lower than the 427000 tons that we harvested in the first quarter due to typical.
Typical spring breakup.
Northern saw log prices increased from $178 per ton in the first quarter to a record $245 per ton in the second quarter or 38%.
Lumber index and Cedar saw logs, both experienced healthy price increases.
In the south we harvested.
876000 tons in the second quarter compared to 893000 tons in the first quarter.
Logging activity was constrained by wet weather.
Our southern saw log prices were flat sequentially.
Turning to wood products on slides 8 and 9 adjusted EBITDA increased from 120.
The $6 million in the first quarter to $205 million in the second quarter.
This is another quarterly EBITDA record for the segment.
Our average lumber price realizations increased 33% from $890 per thousand board feet on the first quarter to $1185 per thousand.
Board feet in the second quarter.
To provide context. It is helpful to look at our lumber prices by month, our average lumber price realizations per 1000 board feet increased from $1045 in April to $1218 in May and finally to $1280 in June.
We shipped 260 million board feet of lumber in the second quarter.
While this was approximately 7% below our expectations our team did a good job managing of drop in home Center demand After memorial day, and truck and rail transportation challenges to limit the shortfall.
Also as Eric discussed earlier, our Ola Arkansas.
<unk> has not been operating since the fire occurred on June 13th reducing our production.
Moving to real estate on slides 10, and 11, the segment's adjusted EBITDA was $12 million in the second quarter compared to $17 million in the first quarter the.
The sequential decline reflects a $3 million of commercial real estate.
<unk> completed in the first quarter and fewer Chanel Valley lot sales in the second quarter.
For the ladder was expected as builders were digesting robust lot purchases that were completed in the prior 2 quarters.
Shifting to financial items, which are summarized on slide 12, our total liquidity increased to 890.
Sales of <unk>.
This amount includes $512 million of cash as well as the availability on our Undrawn revolver.
We did not repurchase any shares during the second quarter. As a reminder, we have a <unk> 1 plan in place, which reflects our ability and commitment to repurchase our shares at attractive prices.
1 the capital expenditures were $14 million in the second quarter.
Note that the amount I just mentioned includes real estate development expenditures, which are included in cash from operations on our cash flow statement and it excludes timberland acquisitions.
We expect that our total capital expenditures will be approximately $60 million in 2021, excluding acquisitions.
Planned 2021 capital expenditure expenditures are also exclude cost to replace equipment damaged in the Ola sawmill fire that we expect will largely be covered by insurance.
I will now provide some high level outlook comments. The details are presented on slide 13.
We expect the harvest 1.5.
5 to $1.7 million tonnes in our timberlands segment in the third quarter and approximately $5.7 million tons for the full year.
As Eric mentioned, our southern harvest will be lower than plan. This year, because it is uneconomic to redirect logs that would've been consumed by our Ola Arkansas sawmill.
Harvest volumes in the north.
<unk> seem to be seasonally higher in the third quarter.
The fire danger is very high in Idaho, which may constrained logging in the quarter.
We expect northern saw log prices to be lower in the third quarter and that they will approximate first quarter 2021 saw log prices.
Harvest volumes in saw log prices in the south are expected to be seen.
The player in the third quarter.
Our lumber order file is currently prompt to 2 weeks depending on the mill.
Our average lumber price, thus far in the third quarter, including orders book, but not yet shipped is approximately 50% lower than our average second quarter lumber price.
As a reminder.
<unk> of $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
We plan to ship 260 to 270 million board feet of lumber in the third quarter.
We will treat the insurance proceeds associated with the Ola, Arkansas sawmill as a special item and.
<unk> I'll exclude the amounts from consolidated and segment adjusted EBITDA.
Shifting to real estate, we expect to sell approximately 2400 acres of rural land and approximately 50 Chanel Valley lots in the third quarter.
Demand remains strong and we expect to sell approximately 150 lots for the year.
Additional.
Additional real estate details are provided on the slide.
We.
Our consolidated tax rate will be approximately 15% in the third quarter and 20% for the full year.
Overall, we anticipate total adjusted EBITDA will decline sequentially in the third quarter as the effect of lower lumber prices will exceed.
We willingly higher harvest volumes.
We are very bullish on industry fundamentals and we expect lumber prices to remain above long term averages.
We're well positioned with our integrated operating model to continue growing shareholder value over the long term.
And that concludes our prepared remarks may I would now like to open up the call the Q&A.
<unk> 6.
As a reminder to ask a question you will need to press star 1 on your telephone to add value.
The question press the pound key please standby, while the compile the Q&A roster.
Your first question comes from the line of Keith and Montara the.
CMO capital.
Gross markets your line is open.
Thank you and congrats on a very strong second quarter.
Eric on Jay.
First question.
<unk> on.
On capital allocation.
Maybe just talk the then recognizing that you don't want the.
Mark on top of the board on on special dividends.
Can you give us some sense of what is the right day to think about the framework around sort of the level of special dividends do you think about it in terms of cash profile. The should we be thinking of voted in terms of leverage.
Any color there will be there'll be.
Helpful.
Yes, that's probably a really good place to start caving. This is Jerry.
I'm sure that's topical for a lot of folks, including a lot of shareholders for.
First off we have this high class problem, where our leverage to lumber prices has really generated a lot of value of this year and Fortunately a lot of that value is going to be shared with the shareholder.
Jumping to the form of the special dividend and we do expect that the amount that will be paid out will be significant and we've also have described it and presentations as last quarter as multiples of the regular dividend, which is currently $1.64 of share and.
And the set the stage what really drives again it goes back to the value we're creating through.
Shareholders logged arrangement in Idaho, as well as the strong lumber prices that are coming through our lumber business.
And as a REIT, we can only retain so much cash I mean, we of the benefit usually going to retain a fair amount, but the earnings of Ben So high this year that we have to distribute that to maintain our REIT status, which.
The debt, we will never jeopardize that and certainly our destinies within our control here. So nobody should be worried that we're in danger of of <unk>.
Breaching those requirements in terms of the amount there is a lot of moving parts with key 1 being what is what are the lumber prices for the rest of the year and Theres a lot of complexities given its REIT.
<unk> driven theres a lot of complexities of lot of variables. We are in the process of looking through and discussing with our board. So Unfortunately at this point I can't give much more guidance or color of sideboards other than it will be significant it will be in the fourth quarter.
And Keith now I'll, just add 1 comment to what Gary just said.
Right now Theres a lot of volatility right now on our earnings stream, particularly in wood products as you might imagine given the change in lumber prices.
And just.
A month or 2 ago, we had of wood products of forecast for the for the year earnings that was roughly $200 million for the year higher than where we think we're going to end up now so think about that 2.
Said spread across.
The 70 million shares more or less the amount of volatility in that earning stream and therefore that dividend is enormous so we're going to wait until we get to the end of the year to decide what the appropriate special dividend is.
None of that.
That's absolutely fair and I appreciate the color.
<unk> hundred million on tax day.
Switching to the other side of capital allocation around M&A can.
Can you talk about.
All of what is the pipeline looking like on menu, you'll see the most opportunities at the moment I know, it's you know you look at sort of bolt on the timberland side plus timberland consult.
I'm, just curious kind of how the the pipeline looks right now.
Yes, there is a number of deals that we're currently looking at and we're currently working on.
Hi.
I don't like to get down into the specifics of these deals for competitive reasons, but what I would what I would tell you on what I do think is interesting.
Is that we we've been.
Competing for these deals and on 3 recent ones, we were actually the high bid.
And yet the seller changed their minds and decided to not transact, even though we were the high bid in 1 case, we hit the number that they were looking for.
They just change their minds and walked away from the deal so.
So I think timberland M&A is picking up it's getting interesting people are seeing timber Mart, south data, they're seeing $500.600 lumber and theyre getting excited and so the bid ask spread may may still be wide between buyers and sellers, but we continue to kick the tires on deals and in fact, we did 1 of Mississippi.
This last quarter was the 1100 acres it was 11% IRR. So it created a lot of of shareholder value for us.
But we're not going to chase deals and overpay, we're only going to do deals that create shareholder value just like that 1 that we closed in Q2.
Got it Thats, how you have for lives down into what I would jump.
Good luck on the back half of the year.
Thanks.
Yeah.
Your next question comes from the line of John Babcock of Bank of America. Your line is open.
Hey, Hi.
Good day, Thank you for taking my questions.
Just starting out could you talk about you know I know you mentioned.
Back on the little bit about what youre seeing on the market right now in terms of lumber.
Want to get a sense for how demand is right now relative to last day relative to 2 weeks ago.
Particularly at the home centers it sounds like that was where.
Some of the weakness in demand has been just kind of curious if that's picked up.
And then also what you are broadly the.
Builders, if theres been any change on the trend there.
Any any kind of data you can provide around that or at least you know commentary would be useful.
Yes, so on the on the home Center demand question, Yeah, you know when prices got up to 1600 bucks or so.
You know month or 2 ago.
Essentially there was there was the buyer strike.
It looks like.
Seeing from DIY demand, just just dried up in.
And probably some of that might have just been due to the people spending time on leisure activities in the summertime.
It could've been the Covid was now in the rearview mirror mirror of people, who go out and travel and go to movies and restaurants and whatnot.
But there was there was a real buyer strike that has.
For us.
A month or 2 ago.
And so demand just ground to a halt the virtually no takeaway.
And we have started to see.
Demand pick up from the home centers it's.
It's not where it was a year ago.
But it is increasing so our view is that.
And nobody wanted to get caught with a lot of 1600 dollar number on the balance sheet.
And so they stopped buying they let prices of now drifted lower.
And now we're seeing demand come back because of the risk is off for for the home centers. So.
So we feel like demand is coming back on now that we're getting into the fall we're going to start.
Net and our activity pick up again as you know as people return from summer vacation and whatnot.
What I would tell you on the on the housing start side is I don't know that I've ever been this optimistic.
Regarding the outlook for for for housing. It is just incredible if you look at what.
Of the homebuilders the public company homebuilder.
<unk> had been saying with recent earnings releases on whether D. R. Horton.
<unk> <unk> this morning.
I could just go on and on about the very favorable things, they're talking about in terms of exceptional demand out there now theyre struggling.
To produce those housing.
Homebuilders.
Because of shortages and supply chain issues.
But there is just an unbelievable amount of demand and if you look at what.
Lot of the pundits are saying like FAA for example thinks that we're going to new housing starts are going to keep marching higher up to 1.8 million units per year over the next 4 of 5 years. So.
<unk> unit really favorable demand outlook on the on.
The housing start side.
Okay, and then just following up on that particularly as it pertains to the home centers I mean, it sounds like they were essentially trying to work through on the higher price inventory can you talk about.
To the extent that you have any color on this really.
How much.
Just the of apps.
For them to work for on that front.
Also you know how should we think about when.
Prices might come lower on that side of it at the home centers I know that youre not net directly in that business on so it might be difficult to predict but just trying to get a sense for that because that ultimately may come into play you know in terms of overall lumber demand.
Yeah, it's really hard for us to know exactly where home center inventory and demand is but what I'd tell you is that because they went on buyer strike.
There still is takeaway at the home centers their inventories of got to be really lean right now.
And like I said with these prices coming down to 600 bucks or so.
Mike.
To step back into the market and replenish inventories.
So.
I don't know.
We don't have we don't have direct insight into what the home centers doing just kind of anecdotal.
Okay, No that's fine.
And then just last question before I turn it over I just wanted to get.
Get a quick sense on the northern.
The pricing.
And how we should think about how that rolls through our results over the next.
Or 2 particularly just given the volatility in 1 of our pricing. So if you could just talk about the lag in and kind of some of the color I guess of you provide in the past that would be useful.
Yeah, I'll take that on Jon This is Jerry so in terms of the lag as a reminder.
It's all of our group, it's about a 4 week lag in terms of lumber price resets. So when I talked in the script about.
Lumber prices for us were down 50%, so far in the third quarter compared to the second quarter average you do have to lag that when you think about index of all on pricing again, thats about a 4 week for week lag the.
For the group that's in the mix of Cedar, which typically sells for 3 and sometimes for times.
The value of mix all logs. So we certainly have cedar continues to be relatively strong and certainly it's not going to come off of the same level and then the last thing I'll give you is actually in the prepared comments.
It had kind of guided that we think third quarter northern solid.
Other thing pricing is probably approximately the same as Q1 of 2021, so that really should help you all the dial in at least what we're our expectations are.
Okay. Thank you.
Your next question comes from the line of Paul Quinn of RBC Capital. Your line is open.
Yes, thanks very much morning.
All of our great results.
Yeah.
Good morning.
Sorry.
Maybe I'll start with the fire of OLED.
I know you've got the $2 million deductible.
Bad was the fire is that day.
Is that at <unk>.
$20 million insurance claim.
Got it.
Maybe you could give us some context for it.
Yes, so so as we as we said in our opening remarks, I mean, the fire thankfully nobody was hurt thanks.
Thankfully the whole mill Didnt burned to the ground. It was really just 1 machine center.
They got damage now unfortunately, because of very important machine.
Center.
The primary large log breakdown line that's of integral components of running a saw mill.
And obviously those those machine centers are in very high demand right now from the equipment vendors.
So we're trying to find we're trying to find the new line.
We've identified a really.
Used 1.
We've been in discussions with all the vendors about buying a new 1.
We will see how the discussions play out, but I'm, but I'm optimistic that we will.
Windup getting the the.
The used 1 which is it's been gently used so to speak.
And we will we will wind up paying a premium it's probably if I had the guess.
Really good on the $15 million kind of kind of range now insurance is going on is going to cover that purchase on their <unk>.
We'll be demolition and install cost, which again will be covered by by insurance. It's hard to know what the full extent of our claim is going to be because from a business interruption standpoint, it's really dependent upon what happens to lumber prices.
Yes, it's but.
But we will be protected our P&L will be protected as if that all of a saw mill was up and running.
From a business interruption standpoint.
So right now I'd say, it's $15 million for that machinery, it's probably another $5 million to relocate it and install it.
And then it's plus business interruption.
Okay, and then just on the equipment providers themselves. Yes, my understanding is that they've got long lead or pilots for 2 years plus and.
So I suspect that wasn't of that wasn't an option. How are you able the sourcing use 1 instead of working.
Is it working right now and a saw mill or has the dialogue.
Price as well so so so 2 different 2 different things there 1 is on the on the new equipment side, we can get 1 as early as middle of next year.
So it's not it's not 2 year lead times for that particular piece of equipment.
So we could get a new and by the who knows late second third quarter of next year the use 1.
It's about 8 to 9 years old.
It's out of Idaho sawmill today, so it's not not being run it's roughly been sitting idle for I don't know 2 to 3 years, it's very well maintained that piece of machinery is still sold today by the vendor, which is a leading vendor in.
In the industry in fact, if we had to go out and buy a new 1 today that's the exact.
The piece of equipment, we would buy now there've been modifications to the.
That thing since it was originally sold software and whatnot, but we will make all of those changes prior to.
Prior to implementing.
Installing that that piece of equipment. So from from our view, it's as good as new.
Okay, so on and still.
Like it doesn't sound like there's a huge difference between you bring it up this use of 1 and maybe the end of Q1, 'twenty, 2 and a new 1 and probably Q3 of 'twenty 2 so in insurance is covering the.
The issue why would why would you go use versus net.
Well, because we think that the used is basically as good as the new we're going to do diligence.
On that piece of equipment, we're going to have the original vendor go in and inspect.
Inspect it and we've been assured by them that this is as good as new.
So in our mind the really there really is no difference than we would just as soon get that mill back up and running.
As we can you know when you have when you have of mill down.
People tend to scatter.
And we've talked about this on prior calls how challenging it is for the industry right now to get skilled labor.
We don't want our people to scatter we want them to stay at that mill, we want them to work the longer we delay that startup the harder it's going to be.
<unk> is just of retaining those people.
Okay.
At the very good point, Okay. So maybe just turning on of lumber just on.
I like the monthly breakdown in pricing what is your July average price of the date.
July average forecast of 720 Bucks.
For a member of our order file so it's the Paul remember of order files, you know, we're always selling stuff out into the future. So some of that 720 captures.
Those high prices that we were still seeing back in back in June.
Yes, no I understand the leg, Okay and then just.
You highlighted Australia on plywood market is that instead.
Is that of meaningful pickup is that like a 5%.
Annual run rate this year or is it more meaningful than that.
I would I would say, we don't like for competitive reasons, we don't like to break out the results of our plywood business, but just like with lumber the earnings in that business, it's multiples of what it would be in of.
Now from here.
Okay.
That's helpful. Thanks, very much guys best of luck.
Thanks, Paul.
Your next question comes from the line of Kurt Yinger of D. A Davidson your line is open.
Great, Thanks, and good morning, Eric and Jerry.
The thing.
Just starting.
Turning off on the harvest outlook.
I guess first what should we be expecting in terms of normalized Idaho harvest levels going forward and secondly, as we think about 2022, whether on demand permitting is that roughly 6 million ton harvest level that was originally.
The outline for this year of reasonable starting point.
Yeah, So Kurt I'll take that on this is Jerry in terms of all I'll start with the back part of your question because I think it's at Ts of the answer well, which is $6 million still is our normal run rate.
When you think about our Idaho and our southern harvest.
6 million tons give or take is about the sustainable level of eagle harvesting roughly the same amount that's growing each year.
There are some moving parts of this year in the harvest.
Unfortunately, the first off Eric touched on in his comments that on all the Timberlands district or all of sawmill was a key.
Outlet for on the purchaser of a lot of the saw logs that are produced in that region. So.
We think part of the reason why the harvest guidance for the year has come down from the 6 million tons is we think we're going to be 200000 tons short.
In the district for it because of the whole of fire of this year, so that the harvest volume would be deferred.
The continuing to grow Fortunately and it'll be delivered in future years.
The other thing that's happening here.
In Idaho, certainly, we prioritize delivering saw logs so when we have logging contractor availability.
We're going to push it to the salt logs just to make sure that we can deliver into the.
The strong markets and pulpwood becomes less of a priority. So when you look at kind of of the volume. So far this year of pretty anemic on the pulpwood side in Idaho, but as of record as you recall, that's pretty low margin business to start with and like I said, we've really shifted the logging capacity so the other.
The other explanation as to why we're short.
5.
7 million tonnes versus the 6 is there's probably 100000 tons on the pulpwood.
I hope.
At the end of the day, it's just the low margin stuff to it the other.
A day so.
Especially when you think about all the saw mill residuals that are being produced or have been produced here over the last few quarters, it's really put downward pressure on pulpwood prices to where like Jerry said, there is low or no margin.
And in producing that stuff.
Got it okay that makes a lot of sense.
And I guess just sticking on the log side. It looked like that was a modest headwind versus last quarter. The could you remind us how to think about the lag of those fiber costs in Idaho is that something you would expect I guess more pressure.
From in Q3 as you absorb.
2 pricing.
Yes, just to clarify your question are you thinking in terms of wood products purchase of logs Kurt correct. Okay. So that lag that I talked about earlier, it's about a 4 week lag in terms of of price resets. So.
We're again, we saw or expect northern saw log pricing to come down call. It 25%. If you just take the the marker which is Q3, probably looks very similar to Q1 in terms of realization.
Now I'll tell you get some price relief going forward in the St. Maries Mill complex in terms of the index saw logs, but.
Probably not as fast as you are seeing the route is as youre seeing the the lumber price realizations come down.
Okay got it alright, so its the same I guess is the pricing going to the timberlands segment that makes sense. Okay. And then I was just curious if you could talk about with all of this volatility whether youre seeing.
Any change in the approach to inventory or buying from your distributor customers in and ultimately how you think that may impact the market going forward. You know you spoke to the psychology impact there is that something that you think will just be another factor kind of lending itself the more big swings going forward.
Yeah. There is the there is a huge psychology impact from from lumber purchasers.
When prices get to really high high levels of.
People start to get really nervous.
Don't want to get stuck with a lot of inventory as you can imagine on their balance sheet.
And so the full.
We will stop buying but they want to meet.
They want to meet customer demand so they tend to buy.
By lumber.
Chip directly from mills via via truck and not not like rail, where it takes a month or something.
So the psychology is huge we got to those high prices buyers went to really lean inventories and then prices collapsed, especially as.
As DIY wasn't it wasn't showing up at the home centers to buy inventory. So now the situation as prices of really come down and.
In the home centers of got really lean inventories.
We think as we get into the fall and people return from vacations and whatnot, we do think theres going to be a pick up in the.
The DIY and the R&R segments and the demand is going to come back on the home centers are going to have to replenish inventories and we think that's going to provide.
Some support for pricing here in the.
In the third and fourth quarters.
The psychology is a large large part of what happens here.
Right right Okay great.
Great well I appreciate all of the color and good luck here in the back half guidance.
Thanks for you.
Your next question comes from the line of Mark Lean track of the parts Research partners. Your line is open.
Thank you.
So it's kind of interesting as you were referencing the fact that Youre pulpwood.
Good prices and profitability is very low.
For the reasons you noted down south in the at the same time, we've been reading about how there has been some increase in pulp wood costs.
Because of weather et cetera, I guess, its sort of really brings to the forefront that maybe there are regional differences.
Does that go on.
In the south from.
Certainly from time to time, and so just trying to get a sense of I know that you you sell a lot of logs and you also buy a lot of logs in the south as the starting point or are you basically selling and buying in the same wood baskets or do you have exposures in some wood baskets, where.
Where youre selling more on youre buying more than others within within the south.
I guess to start with Mark.
My reference to weaker pulpwood prices was Idaho specific.
The Big picture, we're seeing.
Pretty stable saw log prices on pulpwood.
The prices in our southern wood baskets.
Kind of applies on the face of timber Mart South report that came out recently, which on a simple average basis indicated saw log pricing up 13% in line.
Some people got excited that maybe maybe the solid price recovery is here.
Our view is it's not.
Couple of things.
I will share is 1 we think the timber Mart south date of wallets. It's good to have it out there it's probably based on thin set of transactions. For example, we don't submit information that's included in that database.
We are second largest.
Timberland owner in the state of Arkansas. So it was a big big part of the data that's not in.
The like I said, we see typically a little bit of lift from time to time as there is a new large mills either.
<unk> brought up in the Greenfield fashion or there is an expansion.
<unk>, we see what weather premiums usually it might be a buck or 2 and then it seems like every time up to this point has kind of settled back.
Down into this long term norm, which for us is probably around the $44.45 per ton on a delivered basis saw logs. So I think our view is 1 of going to be cautious with the data.
We have a lot of data that we look at on our wood baskets and it's been pretty stable at this point and any.
Like I said premium has been short lived and things of kind of settled into the long term average norm.
Okay.
Hopeful and so just to clarify.
And so you think that would sort of not putting on the spot, but you don't see all the different regions.
The comments to be really specific to.
Where you have a presence or do you think that's a fair description for the U S South overall.
Yes, I can only speak to our wood baskets, Mark I mean, that's where we have fairly deep data and we just we don't have direct exposure to the other southern wood baskets. So.
My comments are of Potlatch Delta.
Judgment specific share there.
Shifting gears just back to the the capital allocation and thanks for the.
The color on the the special being multiples of the regular doing that's helpful and sort of framing.
You also on I think Eric also mentioned or maybe if you Gerry that you'll also be re looking at.
The kind of the regular dividend as well.
Last year, you had for the first time in quite a while given the relatively small bump.
What would sort of be the what would be sort of the determinants of the drivers that wood that wood.
Lead you to your conclusions.
On what's the appropriate now I mean, it seems like you'll have maybe a bit more cash on the balance sheet, but a bunch of it is going to be paid out in the special.
So what would sort of be the thought process that would make.
Make it makes sense to be pushing that up.
This year or.
Or is it sort of just more of this like inflationary type of small increases debt.
1 should expect from from time to time.
Yeah, So mark.
Our dividend.
Any changes we make to it any increases that we make we need to be convinced we need to have conviction that as it is sustain.
First and foremost.
I think as you as you know are in the Ho our Idaho index saw log contracts. They are unique in the industry.
And they are creating a tremendous amount of cash at these current saw log prices, even though they've come down in the coming down still creating an enormous amount of cash for us.
Given that our.
Sustained was that lumber prices are going to remain relatively high over the next several years, especially given this backdrop the BC needs roughly $600 lumber to you know.
To get to breakeven.
Our sense is that cash flow is youre going to remain relatively strong in our timberland business, especially as it relates to the Ida.
Our view, though I would just say that we're well positioned for our board to consider increasing that base dividend beyond our current dollars 64 per share, but thats decided in December of each year.
That makes a lot of sense.
The I guess on that point on the cash cost in BC being so high on <unk>.
The Ho have you mentioned also that there were some curtailments I think can come for us that 1 of them are we seeing anything in D C or anywhere else.
Related to the this higher cash costs that sort of reinforced that conviction.
The higher wood costs, there are going to help.
Floor or is that still kind of yet to be seen.
Well I can't for is the only 1 to come out and publicly state that they're curtailing, but we are hearing lots of rumors and we have customers that we know are curtailing and cutting back hours. They may not be making the public announcement about it but it's but it is happening behind the scenes.
Creative as it relates to be see what I would say is that those log decks that those mills have right now are from logs that had been purchased on the prior quarter or 2.
So there is still relatively low cost logs.
But they're facing real headwinds as we get into Q3 in Q for windows log prices reset so.
I think the clock is ticking is kind of how I would I would word it.
Thank you Eric.
At this time I'm showing there are no more questions I'll turn the back call back over to Jerry Richards.
Alright, Thank you may and certainly appreciate everybody's.
So the Kristen Potlatch Deltec.
Am available for the follow up detailed modeling questions. The rest of the day and we'll talk to you next quarter if not sooner.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
[music].
Good day.
[music].
Sure.
Yes.
[music].
Yes.
Yeah.
Yes.
Yes.
Yes.
Okay.
Okay.
[music].
Okay.
Okay.
Good morning.
Okay.
<unk>.
[music].
Okay.
Yes.
Yes.
Yes.
[music].
Sure.
Yeah.
And on.
[music].
Yes.
Yeah.
Yeah.
Okay.
[music].