Q3 2021 Potlatchdeltic Corp Earnings Call
Good morning, My name is Paula and that'll be your conference operator today.
At this time I would like to welcome everyone to the Potlatch Dalbec third quarter 2021 conference call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question simply press Star one again.
Thank you 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.
Thank you Paula good morning, everyone and welcome to Potlatch <unk> third quarter 2021 earnings Conference call.
Joining me on the call is Eric Cremers, Potlatch, <unk>, President and Chief Executive Officer.
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 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 don't take dotcom.
I'll now turn the call over to Eric for some comments and then I will cover our third quarter results and our outlook.
Thank you Jerry.
Our consolidated EBITDA was $107 million in Q3 down from our record quarterly EBITDA of $275 million in Q2.
Although we experienced a significant drop in lumber prices. It was still an excellent quarter for the company.
To provide context Q3, EBITDA is the highest quarterly amount that we have generated prior to the lumber price run that began in 2020 that.
That statement includes 2018, when our quarterly EBITDA peaked at $102 million.
We are encouraged by recent lumber price trends as lumber prices appear to have found a bottom during Q3 and are now moving higher.
Our wood products segment generated $27 million of EBITDA in the third quarter.
Importantly, the segment's focus on improving safety performance was evident this quarter six out of seven mills had zero recordable incidents during Q3 and all our mills were incident free in August and September.
As discussed on last quarter's earnings call, we had a fire at our Ola Arkansas sawmill on June 13th.
Nobody was injured and the damage was limited to 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 deductible.
We decided to purchase new replacement equipment.
Demolition and construction work is well underway and we are scheduled to receive the new large log line equipment by the end of Q2 of next year and we expect to complete the installation in Q3.
In the meantime, we restarted the small log line this month and we anticipate ramping up to produce approximately 30 million board feet on an annual basis until the large log line restarts.
As a reminder, Ola had an annual capacity of 150 million board feet prior to the fire.
Our plywood business is performing exceptionally well and we continue to expect record profitability from this business this year.
As we have 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 EBITDA of $76 million in Q3, nearly even with the record EBITDA of $77 million last quarter.
Our average saw log price of $191 per ton in Idaho is the second highest on record.
This highlights the value being created by our index, so long sales contracts, which are unique in the industry.
Our Idaho team did a great job managing fire risk this summer, which resulted in our losses being limited to less than $1 million after salvage operations.
In the south weather is constrained logging activity this year, resulting in our harvest volume being lower than planned.
We experienced extreme winter weather in the first quarter and it has been unusually wet and the second and third quarters.
Our resulting shortage of saw logs has caused the price of southern pine saw logs to increase our southern team is working hard to mitigate the harvest shortfall in.
In addition to the weather related risk we continue to expect that our southern saw log harvests will be approximately 200000 tons below our annual harvest plan due to the OSI mill fire.
Our real estate segments EBITDA declined in the third quarter as expected demand for residential lots and should all valley remains strong and we continue to see good interest in commercial and rural acreage.
We will provide more color on the fourth quarter earnings call, but 2022 is shaping up to be another strong year for real estate.
Yes.
Turning to lumber prices random lengths is reported higher lumber spot prices eight weeks in a row since the market bottomed in late August.
The latest framing lumber composite price of $575 per thousand board feet.
Is $186 or 48% higher than the August 27th composite price.
Furthermore, lumber prices lumber futures have also increased sharply since the summer. The November contract is currently well above $600 per thousand board feet in the last prices for 2022 contracts were well above $700 at yesterday's close.
Housing related fundamentals that drive demand in our business remain robust.
Seasonally adjusted U S housing starts of $1 $5 6 million units in September were 7% higher than September 2020, and are near the 2021 average it appears that supply chain challenges continue to govern the pace of construction as the U S Census Bureau reported that there were $145 million.
Housing units under construction at the end of September.
That figure includes single and multifamily units and it is not seasonally adjusted homebuilder confidence remains very strong with the NIH be homebuilder index at 80 this month low.
Low interest rates, a shortage of homes and the large millennial demographic cohort all continued to underpin our view that housing is set up for multi year boom.
Lumber takeaway in the repair and remodel market returned to healthy levels. After labor day, and our business is growing in this market segment.
Long term fundamentals remain positive, including the age of U S housing stock, which is now 42 years on average high levels of home equity and the fact that remote work continues to be a common practice.
On the supply side higher costs, a tight labor market and equipment supplier bottlenecks govern the pace of new lumber capacity.
Fiber availability across western Canada in the Western U S and the shortage of truck drivers are also constraints.
Overall, the fundamentals that drive our business remained favorable and we continue to expect that lumber prices will remain structurally higher than long term historical averages our leverage to lumber strategy is perfectly situated to continue to drive strong financial performance.
Turning to capital allocation, returning cash to shareholders remains a top priority, we expect to pay a special dividend of three to $5 per share in December.
In addition, our board typically evaluates our regular annual dividend, which is currently $1 64 per share per year in the fourth quarter.
Our strong financial position provides a solid platform as we consider additional investments in our existing mills and accretive acquisitions. We are interested in acquiring timberlands mills or a combination of the two near our current operating areas.
Turning to environmental social and governance reporting we are focused on quantifying scope three greenhouse gases climate risks and opportunities across the business and evaluating our greenhouse gas reduction opportunities.
Planned to publish our third annual ESG report next May in our first climate and carbon report later in 2022.
Delta is a leader in sustainable Forest management, and we are committed to environmental and social responsibility and responsible governance.
To wrap up my comments Potlatch Delta strategy is well aligned with favorable industry fundamentals and our strong liquidity imprudent capital allocation strategy positions us to continue increasing shareholder value.
I will now turn it over to Gerry to discuss third quarter results as well as our outlook.
Thank you Eric starting with page four of the slides are adjusted EBITDA decreased from $275 million in the second quarter to $107 million in the third quarter the sequential.
The decline in EBITDA was largely due to lower lumber prices.
Information for our Timberland segment is displayed on slides five through seven the.
The segment's adjusted EBITDA of $76 million in the third quarter was comparable to the record EBITDA of $77 million generated by timberlands in the second quarter.
We harvested 462000 tons of saw logs in the north in the third quarter.
The Idaho harvest volume was seasonally higher than the 354000 tons harvested in the second quarter.
Northern saw log prices decreased from a record $245 per ton in the second quarter to $191 per ton in the third quarter or 22%.
Note that $191 per ton is our second highest quarterly solid price ever.
Demand for Cedar saw logs remains robust and the average price we have realized for our cedar saw logs as approximately 70% higher in 2021 compared to last year.
In the south we harvested.
37000 tons in the third quarter compared to 876000 tons in the second quarter.
Logging activity was constrained by wet weather there was a shortage of trucking and saw our volume was down due to the fire that occurred at the Ola sawmill in June.
Our southern saw log prices were 10% higher than the third quarter compared to the second quarter.
The increase includes 5% higher pine saw log prices, which we believe is due to weather related log shortages, along with a seasonally higher mix of hardwood saw logs.
Turning to wood products on slides eight and nine adjusted EBITDA declined from $205 million in the second quarter to $27 million in the third quarter.
Okay.
Our average lumber price realizations decreased 55% from $1185 per thousand board feet in the second quarter to $533 per thousand board feet in the third quarter.
To provide context. It is helpful to look at our lumber prices by month, our average lumber price realizations per thousand board feet went from $719 in July.
$469 in August and a $433 in September.
The timing of shipments to customers caused our lumber prices to lag the spot prices reported by random lengths in the month of September.
The lag effect is driven both by the timing of shipments and the length of our order file.
We shipped 265 million board feet of lumber in the third quarter.
As Eric discussed earlier, our Ola, Arkansas sawmill has not been operating since a fire occurred on June 13th reducing our overall production.
Our team did a good job managing truck and rail transportation challenges in the quarter.
Moving to real estate on slides 10, and 11, the segment's EBITDA was $9 million in the third quarter compared to $12 million in the second quarter.
Lower rural land sale closings quarter over quarter was partially offset by an increase in residential lot sales and our Chanel Valley Master planned community in little Rock, Arkansas.
Our team has increased the pace at which they are developing residential lots. This year as strong demand has resulted in our unsold lot inventory dropping significantly.
It has been hard to increase lot inventory to more normal seasonal levels as residential lots are effectively selling at the pace they are being developed.
Shifting to financial items, which are summarized on slide 12, our total liquidity increased to $972 million.
This amount includes $593 million of cash as well as availability on our undrawn revolver.
Yeah.
As Eric mentioned, we are planning to pay a special dividend of $3 to $5 per share in the fourth quarter.
Based on the number of shares currently outstanding this would use $200 million to $335 million of cash.
We did not repurchase any shares during the third quarter. As a reminder, we have a <unk> one plan in place, which reflects our ability and commitment to repurchase our shares at attractive prices.
We plan to refinance $40 million of debt scheduled to mature in December 2021, and have locked the interest rate.
Annual interest expense will decline approximately $700000 on this debt beginning in December.
Capital expenditures were $17 million in the third quarter.
Note that this amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement and excludes timberland acquisitions.
The third quarter amount also includes capital expenditures of $5 million to rebuild the Ola, Arkansas sawmill, which are covered by insurance.
We expect that our total capital expenditures will be approximately $70 million in 2021, excluding acquisitions and including the Ola sawmill rebuild we have received initial insurance proceeds of $13 million to date.
I'll now provide some high level outlook comments. The details are presented on slide 13.
We expect to harvest one three to $1 5 million tonnes in our timberlands segment in the fourth quarter.
Total estimated harvest of five 4% to $5 6 million tons for the year is lower than the 6 million tonnes planned.
This shortfall is due to several factors.
First it was uneconomic to redirect approximately 200000 tons of saw logs that we would have delivered to our Ola Arkansas sawmill.
Second as Eric mentioned persistent wet weather in the South earlier. This year has caused our harvest to fall short of plan. Our team is working hard to mitigate the amount of the shortfall.
Third we have lowered our pulpwood volume in Idaho as it has virtually no margin at current prices.
Note that our saw log harvest in Idaho, we will meet our harvest plan on a volume basis, but not on a tonnage basis.
The ratio of tons to 1000 board feet has affected this year by drier than normal saw logs due to the extreme heat and the size of saw logs.
We expect solid prices to be lower in the north and the south in the fourth quarter.
Our average lumber.
Lumber price, thus far in the fourth quarter, including orders booked but not yet shipped as approximately $500 per thousand board feet or 6% lower than our average third quarter lumber price.
Keep in mind that our average price for July shipments was $719 per thousand board feet, which pulled the Q3 average up.
As a reminder, a $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 240 to 250 million board feet of lumber in the fourth quarter.
Shifting to real estate, we expect to sell approximately 4500 acres of rural land and approximately 35 shown all valley lots in the fourth quarter.
Additional real estate details are provided on the slide.
We expect our consolidated tax rate will be approximately 15% in the fourth quarter.
Yeah.
Overall, we anticipate total adjusted EBITDA will decline sequentially in the fourth quarter due to seasonally lower harvest volumes and a decline in saw log prices.
We're very bullish on industry fundamentals and we continue to expect lumber prices to remain above long term averages.
We are well positioned with our integrated operating model to continue to growing shareholder value over the long term.
That concludes our prepared remarks, I'll now like to open the call to Q&A.
Thank you Anza remind you outline for me.
Everyone can you ask a question. Please press star one on your telephone keypad again to ask a question. Please press star one.
First question comes from Kurt <unk> of D. A Davidson.
Great, Thanks, and good morning, Eric and Jerry.
<unk>.
Just starting off on the real estate segment could you remind us where you stand in terms of remaining lot sales pipeline in <unk> Valley.
And kind of.
The runway you have there in terms of.
Yes estimated lot sales over the next couple of years.
Yes.
Good morning, Curt and in terms of remaining lots.
I'll step back and provide some overall background means a 4800 acre master planned community. It was started in 1989 by Delta.
Originally had overall about 5100 total residential lots and there's about just under 1700 that are left and at the current sales rate. That's probably about 10 years of supply. If we kept at the same rate that we are selling out currently.
Got it okay. Thanks for that and then on the harvest.
It sounded like some weather issues and obviously the <unk> meloy can taken the same tonnage as before.
Are there any other challenges there in terms of flexing harvest levels up.
Still a pretty good pricing environment. As you look ahead any thoughts around how you might be able to ramp that in 2022.
Yes, that's a great great question Kurt.
And they're really in when you think about the factors that are constraining harvest and causing us to fall a bit short this year I mean, they're really the the items I just laid out in the in the prepared comments the only other.
Other product lines I would talk about that I didn't mentioned was southern pulpwood and certainly in Arkansas. If you go back to 2019, you know we had a bleached board mill the GP closed and certainly that's that's made a well supplied market even more well supplied so you're asked our team down there what is their biggest challenge it's continuing to move pulpwood now we do.
<unk> supply contracts as well as some FSC certified wood that helps us in that aspect, but and our teams able to move that volume, but certainly that that's the other thing that we think about but there's no doubt in our mind.
I would expect we're in the process of planning now, but I would expect that our plan is 6 million tonnes next year, that's about a sustainable level and our team.
Absent these weather issues and an Ola sawmill fire does pretty good job of usually.
Meeting that plan.
Got it okay. That's helpful. Thanks, Gary and then it looked like there were a couple of discrete items that kind of weighed down wood products in the quarter and Im wondering first how much lag. There is in terms of elevated Idaho saw log prices from Q2 and Q3.
Flowing through on the cost side and then outside of fiber can you just talk a bit about some of the other cost pressures youre seeing on the manufacturing side.
Yeah I'll take the first one of those in terms of the lag in the.
Dynamic where certainly our mill complex in St. Marys, Idaho is purchasing logs on an indexed to lumber basis, which means when you have a run in.
Solid pricing in Idaho like we did earlier this year, that's going to be sitting in inventories and it's not uncommon, especially when you have a pretty precipitous drop in lumber price to see.
See a charge like we had it was $6 4 million, which is in the materials.
So it's not unusual to see that and the lag really depends on the time of the year.
That when you think about what we're doing right now is we're building a log pile to take us through spring breakup next year or so log inventories are building to the collect our high point for the year.
They are at their low point coming out of spring breakup on the other end. So when you think about this particular inventory charge.
I would say inventories are probably more of a normal level through the summer just.
Just to give some context, there and then I'll turn to Erik for the other for the other question. Yes. So your question about where are we seeing kind of cost inflation in wood products.
I would tell you.
Undoubtedly across the entire company costs are moving up meaningfully just about everywhere returned.
Just to give you a few examples in wood products compared to a year ago.
Our <unk> costs are up 20% lube.
Lube oil was up 18% strapping is up 13% plywood resin is up 45% and tires are up a 100%.
And I could give you examples in our other business units as well.
In total across the entire company, we estimate costs are running about 10% to $15 million per year higher than they were a year ago, which is well above kind of normal 3% inflation.
And of that 10% to $15 million I would tell you probably $2 million to $3 million of that is in our as in our wood products business.
Okay, Yes.
Super helpful quantification thinks of that.
Then just last one.
Even after the special dividend it looks like the balance sheet will have.
I think a couple of hundred million dollars of cash how are you thinking about the ability to deploy that to M&A and how long would you be willing to kind of carry an elevated cash balances and some sizable transactions worked to materialize.
Yes, so we will have a sizable cash balance at the end of the year, even after paying our anticipated special dividend.
Yes, the way, we think about all the capital allocation levers that we have.
We like to increase the dividend of course, it's got to be increased on a sustainable basis is largely going to be driven by our timberland cash flows and of course. The board is going to look at that when we get out to to December for what the dividend should be in the following year, we still love spending money in our mills, that's where the highest return projects can be found we're still vetting our potential project.
For next year, but I expect.
An aggressive capital spending plan for wood products for next year and then the heart of your question really M&A, Yes, we are chasing lots of M&A opportunities right now.
I would tell you it's primarily on the timberland side.
We're pretty far down the path with a couple of conversations I'm optimistic that we'll get one or more of these to close in the next quarter or two.
But I think one thing about M&A is that you never want to want to Russia process, you want to let the process play its normal course, if you try to rush the process, especially from a buyer perspective, youll youll tend to overpay.
And our goal with M&A is to create shareholder value.
The only way you do that is if you do a thoughtfully judiciously and let it let it take its time. So we're in no hurry to spend that remaining cash that we have on our balance sheet will we'll let it come out of the balance sheet and into projects on a on a.
On an as needed or.
Proposed.
Slow slow and thoughtful manner, but we will take our time with it.
Right right, Okay that all makes sense well appreciate the color and good luck here in Q4 guys.
Thank you.
Your next question comes from Mark Weintraub of Seaport Research partners.
Thank you.
First Gary you mentioned some of the price directories on lumber and 500 quarter to date, if a random lengths pricing were to stay where it is could you ballpark, where the average price for the quarter would be or where the average price today is.
On your EMEA, Mark Let me, let me, let me take a stab at that.
Our Q4 lumber prices to date as we mentioned they are running about 5% lower than Q3 based on shipments and prices that were included in our order files.
That stretch into early to mid November.
As a reminder, our Q3 prices included shipments in July for orders that were actually taken in June.
At much much higher prices than the full quarterly average as Jerry mentioned, our July lumber shipped at 719 Bucks per thousand versus September $4 33.
And we also had backed up inventories at the end of Q2, if you recall that with transportation challenges in the home centers really pushed back on us.
So a lot of that expense of lumber got shipped early into Q3 and that pulled up our Q3 average now as we get into Q4.
We're down 5% as I mentioned kind of quarter to date, but if you look at it from a spot price standpoint, we're currently running about 2% higher.
And then our Q3 averages. So it's really a question of what happens as we move from now to the end of the year.
And our thought is were in a rising price environment right now, but on the counter side to that is that you are starting to get into the winter months when building. The building season slows. There's a lot of macro factors that are going to support lumber prices going forward whether it's.
Lumber demand for new home construction or relatively strong R&R markets or.
Supply struggling to keep up with demand here, but our sense is prices are going to be flat to maybe down slightly.
At the end of the year, comparing Q4 to Q3 and I think that assumption is it random lengths kind of follows that that same trajectory of kind of flattish from here to the end of the quarter.
San I'll jump and Mark with another piece of data that will help you as you as you think about modeling Q4 pricing.
$500 per thousand board foot price quarter to date that includes shipped an order file priced inventory that represents about 100 million feet out of the $2 40 to $2 50.
We're estimating we shipped for the quarter.
Okay great.
Very clear and helpful.
Second.
I'm curious we.
Have had no lumber prices starting to go back back up again.
And I would think that if I'm, a homebuilder or somebody in the inventory chain. After what had happened earlier this year not didn't have lumber available.
I would want to make sure I'm going to have a lumber.
Are you seeing inventory build in the channel at this point is that one of the things that might be going on or we're not.
No I don't I don't think there is inventory build going on in the channel Mark I mean, I would I think youre kind of onto something here. If I was a homebuilder dealer I might be thinking about building inventories right now because what's happening is if you compare year over year lumber demand.
Do you expect it to go up 3 billion board feet next year versus this year, but then you look at housing starts data housing starts are expected to be in most almost every major econometric forecasting firm thinks housing starts are going to be flat year over year. So you say half starts are going to be flat year over year, but lumber demand is going to be up 3 billion board feet year over year.
Here, what's driving that demand increase while it's not R&R, what's really happening is the order backlogs at the builders is gone it's gone through the roof and those homes have got to be built and they've got to be built with lumber and thats whats driving that extra 3 million board feet.
And if you <unk>.
Interestingly, if you look at the supply side of the equation, what we're starting to hear is that production lumber production in 'twenty one.
Is turning out to be very comparable to lumber production in 2020, and you'd say well how could that possibly be think of all the new mills that have been built in.
And think of early 2020, when Covid first hit 40% in North American Mills went on curtailment, how can lumber production be flat year over year, and it's because there's a whole host of supply chain labor and trucking issues that are impacting the industry and making it challenging to boost lumber production, so with demand going up.
And with supply relatively flat I think the backdrop here is for a pretty strong pricing environment next year.
Okay, great. Thank you and then just.
Two quick ones. One you mentioned costs up 10% to $15 million you mentioned that was more than the typical 3% what does $10 million to $15 million on a percent basis order magnitude.
Translate into.
Might be 5%, 6%, okay, great and then lastly.
On the the regular way dividend the ongoing dividend you.
<unk> talked about timber profitability is a critical driver to how you think about that.
At the same time I think you've argued a compelling case on why lumber is has done so well and is well positioned.
How much what does that potentially feed into your willingness.
To set the dividend.
They potentially at a higher level.
If you think there's legs to it or is that something that is more likely to.
And translate into either.
Onetime returns of capital to shareholders.
No I think it definitely weighs into our thinking it may not be a mathematical exercise, but it points to industry conditions. If we have strong results from our wood products business, we're likely to have strong results from our timberlands business as well so I think it just it's.
Reinforces kind of what our view might be about how positive we are in terms of our outlook.
And.
Have you contemplated having a more.
Our mathematical approach that you share with investors.
Some of your peers do now in terms of the.
The distribution.
Yes, that's a question we've gotten at times over the years, Mark and we're really not looking at it as a pure mathematical exercise certainly a large competitor has moved towards a low base dividend with a variable component.
As it turns out this year, we have a special dividend I wouldn't certainly wouldn't advertise that as we're moving to a similar model, it's really more of a statement that.
It's the right thing to do to make sure that we stay well within our REIT test rules as well as the right thing to do from a capital allocation standpoint to get that cash back but.
We look at it and as Eric and we've reinforced over the year as Eric said this morning.
Really we look at the regular way dividend as it needs to be sustainable and we want to grow it over time.
And it's really pin to the stable part of our cash flow stream.
And then certainly the volatile more volatile cash streams has been where we've been opportunistic in buying shares special dividend. This year investing in mills M&A those types of things so.
We're not sure that it makes sense to put a put a marker out there coincidentally.
Run the math and we do look at our payout ratio over time. If you took the range of the special dividend and looked at it near term within the last 12 months as well as over a longer period of time, we are distributing at about 75% of our cash to shareholders, that's not because thats, the math and Thats, a target, but thats kind of where we're at which is really not off the mark with with.
Others do publish a benchmark.
Thank you I appreciate it.
Your next question comes from Ken <unk>.
Capital market.
Thank you.
<unk>.
I just wanted to come to in our southern timber prices and I recognize that in home prices kind of move.
More around too much quarter to quarter.
But I'm just curious if youre seeing kind of any real signs of.
Kind of uptick in southern timber prices I mean, youll see obviously was up quite nicely, but are you seeing sort of structurally.
Better demand supply and prices going higher.
Yes. It certainly has been an ongoing part of the conversation in terms of one of our southern saw log prices going to tip up given they've been relatively flat since the great financial crisis, but.
As I covered in the prepared comments, we did see pine saw log prices actually were up about 5%.
Quarter over quarter and certainly the other reason saw log prices were up in the south for a seasonally higher mix of hardwood but.
Our view to this point has been it's really log shortages caused by the extraordinarily wet weather.
To this point, we do see a bit of life for a bit of increase in solid pricing pine saw log pricing in the south.
When there are shortages when there is a major new capacity addition, in our wood basket, but so far thats been fairly fleeting.
When we look at the data I mean, there are still certainly is in excess of standing timber relative to what's being harvested each year in our wood baskets.
I think it's too early in our view to call that a structural shift although there's a lot of positive signs there and we certainly have our eye on that as well so.
I think we need more time under our belt before we.
We start calling a victory in terms of a structural increase in saw log pricing now having said that we think we're closer to getting to a balance in the south and we have been and in our comments here over the last summer's we've been meeting with shareholders certainly been constructive in that way so.
25 is it out there a little bit further, but we think we certainly are getting closer to that day. When we finally do see a structural shift if it's not starting at this point.
Understood that's helpful.
With that kind of backdrop that you obtained.
And sort of growing the timber side of the business, especially in the U S South.
As.
Becomes more attractive as you look out next 235 years now given kind of.
And we're getting into sort of a better supply demand balance.
Yeah, Yeah, absolutely we think the place to go to grow our business from an <unk> stand from an M&A standpoint is clearly the U S south.
Markets are very deepen the south theyre very liquid there is a lot of transaction activity.
We do have a favorable outlook longer term near term as Jerry said. The next couple of years, we still think we're in a flattish kind of environment price environment, but you get out there year four year five.
We do think eventually prices are going to are going to turn but don't forget sellers.
<unk> that to happen as well so it tends to get priced into the deal.
I guess, the other thing I'll jump in and then add to that.
As we're also seeing obviously with dialog around carbon credits, we'll see how that plays out but.
More currently we're looking at opportunities in solar and wind and kind of other alternative revenue cash flow streams that we've not seen related to <unk> and certainly that's part of what gives us some confidence as we underwrite deals as well.
Got it that's very helpful I'll turn it over.
Thank you. Thank you.
Your next question comes from John backlog with Bank of America.
Hey, good morning this afternoon.
Just a first question.
And arrange for the special dividend, rather seems to be relatively wide I was just wondering what kind of what's going to drive that to the high and the low end.
Well, yes, John I think it really depends upon the board is going to meet in early December and it is going to look at how are we doing in Q4.
And it is going to look at what's our outlook for next year.
That's really what's going to drive whether it's at the low end or at the high end.
And you can recall, we we saw lumber prices just completely collapsed going from Q2 to Q3.
We expected that to happen at some point during the year. We just didn't know when it was going to happen, but when the board last met there was a lot of uncertainty as to what the outlook was going to be.
So we came up with this range at the end.
Excuse me at the last board meeting.
And Thats, what we agreed to convey to investors and analysts.
Have better visibility into how the quarter is going to play out now and we also have better visibility into next year, but this won't get formalized until we meet with the board in early December.
Okay, and how much do you still have under the <unk> 501.
For share repurchases.
Yes.
We really havent disclosed the parameters of the <unk>, one but in terms of share repurchase authorization, we have just under $60 million available.
Okay.
And as far as the <unk> with the new equipment or are you going to get any sort of capacity additional capacity associated with that what sort of efficiencies.
Be able to expect and then also if you can just.
Generally talk about like how you're thinking about your ability to kind of grow capacity going forward I know in the past you've talked about some of the high return projects that you guys have any more color you can provide on that would be useful.
Yes.
<unk>.
Some mill rebuild is going to be really good when it's done.
We expect cash processing cost to come down about 10% per 1000 at the mill.
We expect 15 fewer employees, because we're going to be purchasing equipment that is.
As more productive more streamlined than what we had previously.
Saw log recovery is going to improve about 10% compared to the pre fire pool, if you will.
Capacity from a growth standpoint is going to be about 160 million board feet with net down to I don't know 150 million board feet more or less.
So the all the saw mill prior to the fire had a stated capacity of 150 million board feet.
<unk> had been challenged to get to that $1 50 level. You may recall, we were kind of running around the $1 30.
Level for the past couple of years since the merger we were slowly chipping away.
Getting volume up with the mill, we've put in a new <unk> put in a new stacker etcetera, etcetera, and so we're working on getting volumes up but we were still kind of stuck around the $131 35 level, while with the rebuild we expect to be right up at the 150 level.
And thats going to push up against are killing constraints as well as our environmental permit so.
That's a really good place to be.
So longer term going forward.
I expect that we will continue to invest in our mills to grow production.
Got a really good track record of growing volumes anywhere from at the low end, 1% per year to the high end, maybe 4% per year.
And I would imagine going forward, that's going to be continue to be the run rate for volume increases out of our mills.
Okay got you and maybe this is kind of too early to say I think you mentioned rather the cost I guess are up.
$10 million to $15 million. This year, how are you kind of thinking about inflation over the next year or so and are you seeing anything on the labor front in terms of inflation.
Well, we're not I'm seeing I'm seeing inflation on the labor front.
In terms of what's going on around the country.
It's challenging to get people to come to work when we have a job opening we put out an AD and historically, we might get 30 people apply now we're getting three people to apply and it may not be that qualified.
I'm reading about potential strikes at the large companies around the country.
I'm reading about how Walmart and Mcdonald's and all these other companies are raising wages raising wages significantly to attract labor.
We haven't formalized our plans next year, but I am very concerned about what's happening on the labor front.
In addition to all these these other items that we purchased to run our business just as an example, fertilizer fertilizer cost is up 30% year over year.
It's going to make it really challenging for us to justify fertilizing, our young timber to improve growth when costs are up 30%.
So it's kind of it's kind of happening all across the business. All three business units are experiencing it and I would expect it is going to find its way into wage inflation as well.
Okay. Thank you that's all I had.
Thanks.
Your next question comes from Paul Quinn of RBC capital markets.
Yes, thanks very much good morning, guys. Just a question on the the Ola sawmill rebuilds of the $70 million Capex budget, how much is <unk>.
So of the $70 million roughly an extra $10 million is going to Ola.
Okay.
Of that 10 million, Paul we expect insurance to reimburse us who know seven to 8 million perhaps.
So insurance to date, it's 13, plus seven to eight so insurance will be 'twenty one basically.
Yes.
So I wouldn't I wouldn't add those ball so.
The insurance.
Claim process will take probably the better part of the next 12 months to sort through when you think about business interruption and everything so so far we have received $13 million in cash.
As reimbursement from the insurers Thats, a combination of <unk> and equipment, it's not been allocated if you will to those two buckets and then separately of the 70 million that you asked about 10 million solar and.
$7 million to $8 million.
That has already been covered by the $13 million of received.
Okay, and then just on the your criteria around.
Kris and your sustainable dividend from.
From the current 164 level.
Is the board looking at just timberland or.
It seems like your real estate business is pretty stable as well are they considering real estate.
Contribution as well.
Yes, I think I mean, the board looks at the entire the entire roll up for the company, which does include real estate cash flows.
But at the end of the day what matters. Most is timberlands and then I would say secondarily, it's it's wood products and real estate.
Okay.
Then just lastly, I mean I probably ask this in the last decade, but that stumpage amount it seems very that dollar per.
<unk>.
Per ton it seems very.
With me and just wondering why it's so low compared to just about every benchmark out there on stumpage.
I mean, it was 21 box in Q3 was $6 in Q2, just wondering why is that.
Low.
Well, that's a number that will move around significantly Paul.
And this time one as you know stumpage doesn't include logging and hauling so.
In the South that's another call. It 'twenty two 'twenty three bucks a tonne, but also it depends on the mix of what's what's available and its heavier to pulpwood, which is lower much lower margin.
<unk>, then certainly saw log stumpage would be.
Okay. That's all I had best of luck guys.
Alright. Thanks.
Your next question comes from Buck Horne at Raymond James.
Hey, thanks for the time.
Going back to the cost inflation question, and what youre seeing across the industry and the economy at large here just the logistics challenges and hurdles out there and just kind of curious your thoughts on.
Do you think this is going to further curtail marginal.
Lumber production capacity, whether that's either British Columbia capacity or how do you think it might play out in Idaho as well do you think it might shake out some marginal producers faster or how do you think about the supply outlook.
The cost inflation the industry is dealing with.
Yes, that's a really good good question our observation Buck I do think that these inflationary items. These supply chain issues. These trucking issues labor issues, it's all going to mean, it's harder and harder to build a new Greenfield mill.
In North America, and as I reflect back on what's happened here a couple of M&A transactions.
You may have noticed that west Frazier bought the Angelina mill, they paid a thousand bucks per thousand board feet of capacity.
Well, the construction, new Greenfield mills, or roughly 6% to 700 Bucks per thousand yes here West Frasier was willing to spend 1000 Bucks a thousand and I think its because theyre looking at it saying, it's really hard to build a new mill. These days. The other observation I would have us look at GP They sold for mills to enter four.
And I recall the transaction price was up over 500 Bucks per thousand.
<unk> of capacity.
<unk> I can I don't know, but I would bet the GP wasn't selling its best mills when it sold those for mills to enter four.
And <unk>, probably looked at and said do we want to build a greenfield route with this capital that we have or do we want to go by these other four mills that GP is selling and they opted to buy the four mills and I think it's because people are starting to recognize just how hard it really truly is to build new greenfield capacity in this in this country and while I'm sure in North America.
So in terms of is it going to shake competitors out of the market I don't know that I see that what I see are structurally higher prices because supply is going to struggle to keep up with demand.
And so I think that means even if you've got a fourth quartile mill and a strong pricing environment, you are probably going to be competitive.
Yeah.
Great that's great color I appreciate those thoughts thank you.
And also just curious you guys are engaged in the M&A market now it seems like you're pretty far down the line on some discussions there seems to be a lot more capital that's kind of being introduced into the timber market.
Just kind of curious maybe pricing wise kind of what youre seeing in terms of per acre values in your regions recently and kind of what new capital is offering out there and just how competitive is it getting.
Yes.
Think it's timberland has always been.
A really competitive asset class.
It seems like every deal has got a pretty full price in it.
I would tell you is that the world is starved for yields right now.
Central banks around the world have kept rates down to where they're real rates are negative in many places, including the U S. Right. Now if you think about where the 10 year Treasury is that relative to where inflation is running so where do investors go to get yield will they tend to turn to real assets.
And timber is is a great real asset for lots of different reasons.
So I would tell you theres more capital chasing timber probably than ive ever seen before.
And I would tell you that that has pushed down the discount rate I don't know exactly where we're at right. This moment, but I guess, probably 20 to 30 basis points lower than where we might've been a year ago.
So call it say in the high high fours from a real discount rate standpoint.
Okay.
Got you Okay. That's helpful.
Alright, Thanks, guys. Good luck thank.
Thank you. Thank you.
At this time I'm showing there are no more questions I'll now turn the call back over to Jerry Richards.
Alright, Thank you Paula and thank you everybody for your interest in Potlatch Delta certainly available.
The regular quarterly follow up calls.
Talk to you soon have a good day.
Today in window, and we'll talk to you next quarter.
Ladies and gentlemen. This concludes today's event. Thank you for your participation you may now disconnect.
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Yes.
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