Q2 2022 Potlatchdeltic Corp Earnings Call
[music].
Good morning, My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the potlatch. It I'll take the second quarter 2022 conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press the Starkey followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again I'd 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 David Good morning, everyone and welcome to Potlatch Delta X second quarter 2021 'twenty two 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 regarding 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 Eric for some comments and then I'll review, our second quarter results and our outlook. Thank.
Thank you Jerry.
We reported second quarter total adjusted EBITDA of $175 million after the market closed yesterday.
This is the second highest EBITDA potlatch Delta has ever reported in the second quarter. Additionally, our quarterly EBITDA has exceeded $100 million in seven out of the last eight quarters, we have generated nearly $1.4 billion of EBITDA over those eight quarters.
Those financial results reflect the strength of our leverage to lumber strategy.
Speaking of lumber wood products generated $107 million of adjusted EBITDA in the second quarter.
As expected lumber prices moderated during the quarter from the extraordinarily high levels. We saw in Q1, when the random lengths framing lumber composite price exceeded $1300 per thousand board feet.
The composite prices increased every week since reaching a low of $578 per thousand board feet in the middle of June and lumber prices are at very attractive levels, we expect lumber prices to remain well above long term averages for the rest of the year.
We shipped 254 million board feet of lumber in the second quarter, which was 21 million feet more than we shipped in Q1.
Transportation continues to be a significant challenge for example, our Warren Arkansas Mill, which typically ships about 50% of its lumber by rail only received five railcars out of 260 requested in Q2.
Our wood products team worked miraculously to shift virtually all of Lauren's shipments to truck and they continue to go above and beyond to solve these types of issues, while maintaining their focus on working safely.
Transportation challenges continued to present risk to our business.
Restarting the large log line at our Ola, Arkansas sawmill remains a top company priority.
The new sawmill equipment has been installed which is an important milestone.
We expect to wrap up the project during the third quarter and our target is to complete the startup phase by the end of the year.
As a reminder, OLED rebuild will significantly lower cash processing costs improved log recovery and increased production volume after it completes the startup phase.
Our timberlands segment generated adjusted EBITDA of $58 million in the second quarter.
Southern Timberlands team took advantage of favorable logging conditions to generate harvest volumes that exceeded our expectations.
Idaho harvest volumes were lower this quarter due to unseasonably wet weather in June after the typical pause for spring breakup.
On a positive note the wet spring should reduce forest fire risk in Idaho This year.
Saw log prices remained strong in both regions, which is notable for the south because what it was favorable and there was decent log availability.
Our real estate segment had another strong quarter with adjusted EBITDA of $22 million on.
On the rural side of the business, we closed the Minnesota conservation sale comprised of more than 10000 acres.
This is notable because this sale effectively completes our long term strategy to sell our Minnesota landholdings for prices well above timberland value.
Over the course of the last 16 years, we estimate that the Minnesota land sales have created approximately $300 million of value for our shareholders.
We also continue to see strong demand in the development side of our real estate business.
Residential lot inventory in our <unk> Valley Master planned community remains at rock bottom levels, and we continue to sell residential lots as fast as our team can create them.
We also completed two more commercial real estate sales during the quarter for $2 million in the aggregate are nearly $700000 per acre.
Turning to housing fundamentals, we believe that the long term backdrop still remains favorable.
Specifically the housing shortage estimated to be approximately 4 million units in the United States still exists.
<unk>, who are the largest demographic cohort in history, and who have entered their prime home buying years still have a strong desire to own a single family residence exist.
Existing U S housing stock remains the oldest in 42 years on average and the history of the statistic.
Those three examples support our belief that housing related investment new residential construction as well as repair and remodel will remain strong over the next several years.
While we remain optimistic about the future we must acknowledge some negative factors that have moderated housing starts in recent months, we believe that the combination of more expensive homes higher mortgage rates and a decline in consumer confidence have pushed many potential buyers to the sidelines.
Until expectations about the U S economy improve we believe housing starts will settle at modestly lower levels, perhaps around a $1 5 million annual run rate.
We also expect a mix shift away from single family towards multifamily.
In the meantime, the number of housing units under construction was a record $1 7 million units in June the.
The elevated level of housing units under construction bodes well for lumber demand in the near term.
In addition, homebuyers and builders have leavers to offset affordability issues.
Gration to less costly housing markets, given the durability of remote work.
Builder concessions and smaller houses are examples of factors that may mitigate the effect of higher mortgage rates.
Shifting to repair and remodel markets, we think lumber demand will continue to be healthy in this market segment.
Underlying fundamentals remain favorable and higher interest rates, usually have less of an effect on repair and remodel demand and other factors importantly home equity remains at record levels across the U S. The job market is very strong consumer balance sheets are in great shape, and if you cannot I cannot afford to trade up to a new or existing home.
<unk> is a very attractive option for homeowners.
Our home center takeaway remains solid at pre Covid levels.
Turning to the topic of growth we've been very active recently.
Last month, we announced a $131 million project to modernize and expand our Waldo Arkansas sawmill.
The project will increase the mill's annual capacity by 85 million board feet and significantly reduced cash processing cost.
Which we expect will result in incremental EBITDA of $25 million to $30 million per year.
And a 22% IRR in our base case.
The existing mill will continue to operate during the project with just three weeks of downtime expected in 2024 to tie in the new equipment.
Project completion is expected by the end of 2024.
Shifting to the catch Mark merger, there's been a lot of progress since we announced the transaction at the end of May.
The registration statement on form S. Four was filed July 11th.
The next steps are to finalize the S four and for ketch Mark to conduct its shareholder vote. We expect the merger will close late in Q3, and we continue to be excited about the strategic and financial benefits of the transaction.
We've also been the successful bidder on three bolt on timberland transactions. This year aggregating $100 million in total the first transaction closed in May the second closed earlier this month and we anticipate closing the third transaction later this quarter.
The three bolt on transactions at approximately 46000 acres to our ownership in Mississippi and Arkansas.
Combined this year's bolt on acquisitions, and Ketchmark represent an increase of nearly 400000 acres or 22% and our fee timberlands.
We remain committed.
Committed to growing our regular dividends sustainably.
Increasing our stable cash flows with the Ketchmark merger and the bolt on timberland transactions provides the opportunity to continue doing so we typically review the regular dividend with our board in the fourth quarter.
Given our strong results in the first half of the year, we expect to pay another special dividend. This year, while the amount depends on our performance for the remainder of the year. We expect the amount will be much lower than the $4 special dividend, we paid last year.
We will provide updates as the year progresses, and we have better line of sight.
Finally on the theme of returning cash to shareholders, we repurchased $5 million of our shares recently at approximately $44 per share under our <unk> one plan.
We plan to discuss our share repurchase strategy with our board at our next regular meeting.
At the end of Q2, we had $511 million of cash on the balance sheet and liquidity of $810 million.
Our leverage remains the lowest of the timber Reits and our financial strength provides a solid platform for continued growth.
Regarding environmental social and governance reporting we published our third annual ESG report in May our team is currently working on developing a full ESG section of our website and we plan to publish a carbon and climate report in the fall.
At last Delta has a strong ESG story and we are committed to do our part to mitigate climate change and continue our legacy of responsibility across the ESG spectrum.
To wrap up my comments Potlatch Delta remains very well positioned to take advantage of favorable industry fundamentals and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value.
I will now turn it over to Gerry to discuss our second quarter results and our outlook.
Eric starting with page five of the slides adjusted EBITDA was $175 million in the second quarter.
While the amount is lower than the $246 million of EBITDA that we generated in the first quarter. It was the second most profitable second quarter in the company's history.
Quarter over quarter decline in EBITDA was primarily due to lower lumber prices and harvest volumes.
I'll now review each of our operating segments and provide more color on our second quarter results.
Information for our Timberland segment is displayed on slides six through eight the.
The segment's adjusted EBITDA decreased from $76 million in the first quarter to $58 million in the second quarter.
We harvested 276000 tons of saw logs in the north in the second quarter compared to 385000 tonnes in the first quarter.
Spring breakup and unseasonably wet weather in June constrained, our harvest volume in the second quarter.
Because our team took advantage of favorable logging conditions in the first quarter our year to date saw log harvest volume is in line with our annual harvest plan in the north.
Northern saw log prices were 8% higher on a per ton basis in the second quarter compared to the first quarter the.
The increase in saw log prices reflects higher prices for index saw logs and the effect of seasonally lighter logs.
Our index prices reset on a one month lag, which means the first quarter index prices did not include peak lumber prices in March and second quarter Index prices did not include lower June lumber prices.
In the South we harvested 1 million tons in the second quarter relatively dry conditions and solid execution by our southern timberlands team allowed us to take advantage of strong saw log demand.
While it's not evident in the rounded prices on slide eight our southern saw log prices were 1% higher in the second quarter compared to the first quarter.
While we expect southern yellow pine saw log prices to moderate in the second half of the year. We remain encouraged by the recent signs of tension that we've seen in our wood baskets.
Moving to wood products on slides nine and 10, adjusted EBITDA was $107 million in the second quarter compared to $150 million in the first quarter.
Our average lumber price realization decreased 20% from $1075 per thousand board feet in the first quarter to $865 per thousand board feet in the second quarter.
By comparison, the random lengths framing lumber composite price was 33% lower in the second quarter than the first quarter.
As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite which is closer to a real time indication of price.
Our lumber prices declined each month during the quarter.
Our average lumber price realizations per thousand board feet were $1050 in April .
$895 in May and $690 in June .
Lumber shipments increased 21 million board feet from 233 million board feet in the first quarter to 254 million board feet in the second quarter.
As Eric mentioned, our team worked hard to mitigate the effect of transportation issues to achieve that result.
Shifting to real estate on slides 11, and 12, the segment's adjusted EBITDA was $22 million in the second quarter compared to $30 million in the first quarter.
EBITDA generated by rural sales declined sequentially due to the mix and timing of transactions.
For example, second quarter results included a 10700 acre, Minnesota Conference Conservation transaction at just over $800 per acre while the first quarter included the sale of 1700 acres for $7500 per acre for our commercial solar farm.
And our should all valley Master planned community in Little Rock, Arkansas residential lot sales remained strong and we closed the sale of two commercial real estate lots for an average price of nearly $700000 per acre in the second quarter.
Turning to financial items, which are summarized on slide 13, our total liquidity increased to $810 million. This amount includes $511 million of cash as well as availability on our undrawn revolver.
We plan to refinance the $40 million of debt scheduled to mature in December of 2022.
We've locked the refinance rate at 235% net of patronage, which will reduce our annual interest expense approximately $500000.
Petsmart had debt of $300 million at the end of March we plan to use about half of our forward starting interest rate swaps to refinance 277 $5 million of Ketchmark stead at a fixed rate of approximately two 5%.
We plan to pay off the remaining $22 $5 million of Ketchmark static closing.
We repurchased 103000 shares for $5 million at the end of June and in early July under our <unk> one plan.
Note that we have largely been precluded from discretionary share repurchases since our first quarter earnings call due mostly to merger discussions with Ketchmark.
We are required to suspend our <unk> one plan once the registration statement is declared effective.
We remain committed to repurchasing our shares at attractive prices and we look forward to increased flexibility. After we close the ketchmark merger.
We expect to pay another special dividend in December .
While the actual amount is dependent on our financial performance for the rest of the year. We believe that this year's special dividend will be much lower than the $4 per share we paid in 2021.
Capital expenditures were $31 million in the second quarter that amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement and it excludes timberland acquisitions.
As Eric mentioned, we were the successful bidders on three bolt on timberland acquisitions in Mississippi, and Arkansas for $101 million in the aggregate we.
We used cash of $40 million to close the first transaction in May.
Neither have used or plan to use cash of $61 million to close the other two transactions in the third quarter.
I will now provide some high level outlook comments. The details are presented on slide 14.
We expect to harvest one seven to $1 9 million tonnes in our timberlands segment in the third quarter.
<unk> volumes in the north are planned to be at their seasonal peak as the third quarter typically has the best logging conditions of any quarter during the year.
We expect northern solid prices to decline significantly in the third quarter due to lower prices for indexed and Cedar saw logs.
In the South we expect harvest volumes to be seasonally higher and solid prices to be flat compared to the second quarter.
We plan to ship 250 to 265 million board feet of lumber in the third quarter.
This assumes our team continues to successfully worked through a myriad of transportation challenges that we and the rest of the industry face.
Our average lumber price thus far in the second quarter is approximately $290 lower than our second quarter average lumber price. This.
This is based on approximately 100 million board feet of lumber.
Our lumber spot prices also approximately $290 lower than our second quarter average lumber price.
As a reminder, at $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
Shifting to real estate, we expect to sell approximately 3000 acres of rural land and approximately 45 should all valley residential lots in the third quarter additional real estate details are provided on the slide.
Our total capital expenditures are planned to be in the range of $85 million to $90 million in 2022, excluding acquisitions.
That estimate includes approximately $15 million to rebuild Ola, which we expect will be reimbursed by insurance.
Estimate also includes $12 $12 million deposit for the Waldo monetization expansion project that we announced last month.
For modeling purposes, our quarterly wood products depreciation will increase approximately $3 million per quarter, starting with the third quarter.
That's because depreciation is being accelerated on Waldo assets that are being replaced in the modernization and expansion project.
Overall, we anticipate our total adjusted EBITDA will be lower in the third quarter.
This was based on expectations for lower lumber and index saw log prices and lower real estate activity.
Having said that we remain confident that industry fundamentals will continue to be positive and lumber prices remain at very attractive levels. We are well positioned to continue growing shareholder value over the long term.
So David that concludes our prepared remarks, I'd now like to open the call up to Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster and we will take our first question from of Keaton and Toro with BMO capital markets. Your line is open.
Thank you Hi, Debbie Hi, Eric.
Good morning question.
Just maybe on the third quarter, you talked about northern falloff prices in auto declined significantly jetty instead of way to think about that.
The magnitude of drop given.
And then the volatility in lumber prices that we've seen.
Yeah, you bet Cade and then certainly that's that's a key is the key factor that is driving Q3 results, but when you think about.
Our solid prices actually went up in Idaho in in Q2 versus Q1. So we're starting at a fairly high level in Q2, when you think about what's happened to lumber prices since that time, and obviously, we had the composite went down 33% Q2 versus versus Q1, so something in the probably the 35 to 40.
Percent range feels right in terms of our index.
I'll log prices are going to go for us in Q3.
Understood that's helpful.
And then can you talk a little bit about.
The T bolt on transactions.
And that that Youre doing right now maybe any color on the kind of.
In all parts of the of buying weather, thus far as kind of a competitive bid.
Yeah. So Keith this is Ed this is Eric so yes as you noticed as we mentioned in our prepared remarks, we are in the process of acquiring three bolt on deals. They total about 46000 acres really right in our backyard and frankly in Mississippi and Arkansas totaled.
Total purchase price for the three is about just a little over $100 million on $101 million.
All told it's about 'twenty $200 per acre.
And I will talk about all three deals combined on average they were 20 years old.
They were done at around a 5% discount rate real discount rate.
The stocking level was relatively high it.
A little over 70 tons per acre you know typical in the south might be 40% to 50% to 70 is pretty pretty good.
Scott relatively high site index of 71, which is higher than our southern average of around 66 or so.
It's going to generate all told about $7 million of incremental EBITDA.
It's going to.
At about two to 250000 tons per year to our harvest plan.
And the way we think about it is we spent $101 million and we're going to pick up $7 million of EBITDA and that's the average over the next the next 10 years.
So all told these deals were done at about a 14 multiple.
So I look at other comparable timberland transactions.
I look at where publicly traded timberland REIT trade at which is typically up in the 2021 times kind of range and I feel really good about these are these these three deals.
We're excited about all three of them.
Does that answer your question.
It does very helpful color really appreciate it and I'll jump back in the queue.
Okay.
Next we'll go to Kurt Yinger with D. A Davidson your line is open.
Okay.
Great, Thanks, and good morning, Eric and Jerry.
Morning.
Just looking at southern harvest levels going forward.
It looks like this year, you're expecting to come in around $4 3 million tons next year I suspect with Ola back online that should be a positive and then you just talked about on these recent deals you've done and we have the numbers for catch Martin I guess, assuming that deal closes is it reasonable to think that southern harvest.
Levels could be.
I guess comfortably north of 6 million tons potentially next year.
Yes ill jump in on that one Curt and that's kind of in the right Zip code because.
Because we guided when we announced the Ketchmark merger that harvest sustainable harvests. There was between the $1 six $1 8 million ton per year range and then as you noted there has been some nice other.
Some nice other incremental harvest opportunities as well so that's probably in the ZIP code, we actually will come back in on our third quarter earnings call and provide some more specific color about ketchmark.
And then when we have our fourth quarter call. That's when we'll kind of set expectations for 2023. After we go through our budgeting process.
Okay, all right that's fair and then.
<unk>.
You talked about I guess volumes to kind of the home center channel being still above pre pandemic levels, but.
Yes could you just talk about how order trends.
I guess, the cadence of those over the quarter and what you're seeing here in early July and just what Youre seeing and also in terms of channel inventory levels and how that squares with your view of underlying demand and current pricing dynamics.
Yes, so so yes, Kurt so on the on the home Center front, we did reference takeaway being comparable to pre COVID-19 levels solid takeaway there has been no real drop off in demand.
I suspect that the rolling over of lumber prices is kind of stimulating demand in the R&R segment, if you will.
DIY it might be a little a little on the soft side, but the pro contractor segment is still very very solid so.
Our home center businesses is very good right now.
So on the other side of it we don't sell directly to to homebuilders. There is clearly going to be a pullback here in housing starts we don't think theres going to be a significant drop off there may be a pause here with these mortgage rates they ran up and but you look at what's happening here lately, there were kind of taken a pause year, they're even pulling back I saw.
The 10 year Treasury was at $2 seven this morning.
So we expect mortgage rates to rollover here, a little bit and as we get into next year. We think we think demand is going to is going to come back inventory throughout the distribution channels remains of just rock bottom levels.
We've got order files that stretch out a couple of weeks.
So it's not like.
It's not like businesses completely collapsed, there's still really good takeaway in our in our lumber business.
Got it Okay. That's helpful color and then just for my last one Jerry.
I think you made the comment on the expectation that southern saw log prices to moderate over the balance of the year.
Can you maybe just expand on that what's kind of the I guess the driver of that thinking.
Yes. Good question, Kurt and you did hear me correctly that we do expect southern pine saw log prices to moderate a bit in the back half and the other key point is solid pricing, we expect to be flat Q3 over Q2, so when you dig into that and to provide some more color. We have a seasonal increase in hardwood logs in Q3, So that's probably.
By itself is probably has an effect of a positive 5% on that solid price increase which means to get to flat you need a 5% decrease in southern yellow pine saw log pricing and when you think about that 5% negative. It's about half of it's mix size mix heavier mix of chip N saw which sells for a lower per ton price.
And probably the other half is just due to its a seasonally strong harvest window in the south.
Like you see with our harvest volumes are expected to peak in the South in Q3. There is just more logs available, but when you look through at long term, we're still very optimistic about continued <unk> and when you step back we've seen southern saw log pricing increase about 3% to 4% two years in a row now and we continue to see positive signs attention. So we can see.
To be very optimistic.
As capacity continues to come in to the South and we think that's only going to continue to become a more positive part of our story.
Right, Okay that makes sense.
Well I appreciate all the color and I'll turn it over.
Next we'll go to our Mark Weintraub of Seaport Research Partners. Your line is now open.
Thank you.
I'm curious on the bolt on transactions.
They are in it.
It seems there in wood baskets, where you are already present.
Are there much in the way of our synergies or anything that you bring along that made these transaction and especially good for you versus others and curiosity.
Well they are they are in our backyard Mark and so we'll use our existing staff to manage these properties. These properties will use contractors, we have strong relationships with that we will be selling to customers that we've got strong relationships with.
Look at most of most of this acreage was in Mississippi 39000 acres of our Mississippi and you look at the mill expansion is taking place here, whether it's B, We're mission forest products Toco Hank.
Hankins I mean, they're just there is an endless list of mill expansion is taking place in that market area and eventually that increased demand is going to it's going to translate to higher log prices.
So just.
We were the logical buyer for these these three properties as they are literally right in our backyard.
And then.
Talking about log prices as you noted they are going to be going down.
<unk> and Idaho.
How does that how does that run through your your lumber business. So as we're thinking about the third quarter, you've sort of given us a sense of at least four average prices have averaged in where they are currently.
What's likely to happen to your lumber costs.
As we look through Q versus <unk>.
While there will be a benefit to the saw mills from lower log prices of course, and that's especially true in Idaho, where the long prices are indexed back to lumber.
All told you have to take into consideration the timing effects, but all told our our St. Maries mill was probably going to benefit I don't know one $2 million, perhaps due to the declining log prices.
So there will be there will be a benefit to the lumber side of the equation.
Okay Super Thanks, very much.
Yes.
Next we'll go to Paul Quinn with RBC capital markets. Your line is now open.
Yes, thanks for <unk> morning, guys.
<unk> OLED restart.
With the production pick up that we can expect in 'twenty three and is there is there.
Additional volume that you may be able to get in 'twenty for us.
Yes, so Paul so so this year, we expect to get around right around 50 million board feet out of Ola. So recall the small log line is running today at about a 30 million foot production level per year.
And then we're expect to get some volume in Q4, and a large log line when it when it starts up so all told we get about 50 million feet. This year.
When the large log line is fully up and running which we hope to have accomplished by the end of the year that large log line will run at about 150 million feet per year run rate.
So we could expect to see a step up of 100 million feet next year versus versus this year.
And that we're always looking at each of our mills looking for pieces of equipment that we can.
Modified and improved production volumes and I don't expect it to happen at the Ola mill, just because we've really thought through every step of the production process with this rebuild.
But certainly we will have projects at other mills that will that will allow us to increase production volumes.
Okay. So once you start up the large bloodline, you're shutting down a smaller loan.
Sorry <unk>.
That's correct.
Okay.
And then just the economics of that 22% to $35 million EBITDA incremental light for Waldo.
But are you using on on lumber pricing assumption for that.
Yes. So Paul is as is typically our case I'll use a seven year average and coincidentally it pencils out at around $500 per thousand board feet, which.
Think about that in our optimistic lumber prices stay at a relatively high level and as it turns out that's probably at the lower end of the range of lumber prices that we see going forward, yes, we haven't really talked about it on this call Paul but <unk> got a pretty pretty high cost structure right now open.
$5 5600 dollar kind of range.
And we think that high cost structure up in BC, which is of course, 15% of North American lumber production that should provide a nice a nice a floor on pricing.
Yes, no I agree and Nbc's well over 600, right now just stepping point out July one.
In terms of Waldo, what's the 131, what are you doing with the mill.
Oh gosh Theres very few parts of the mill that we're not going to be touching will have a new kiln.
We have a new primary breakdown system new planer.
<unk>.
Log yard is going to be improved maintenance virtually every every part of the production process is going to be impacted.
Okay.
And then just suddenly said three three acquisitions that you've done.
Multiple seems pretty low at 14 five times much competition in the area.
He said these timberland pieces.
Well I would.
It's like any region there as <unk> got the you've got the team modes that are in the area and you've got other timber Reits in the area.
I'd like to say that we're particularly good at buying timberland, but timber is a very very very efficient market as you as you well know.
So I don't I suspect may be these are not.
Markets like we're picking up with Ketchmark veteran really super tight wood baskets, where theres a ton of pricing tension. These.
These are markets where.
It's going to take a little while for there for that tension concept to really to really play out. So it may not have attracted as much attention as the acreage over in say, Georgia, the Carolinas, but its great timberland in the log prices are probably the cheapest in the south in these markets, but theyre poised to go higher with with <unk>.
Mental capacity going in the region.
So it's a question of do you want the attention immediately or do you are you willing to let it let it happen a year or two down the road after capacity goes in place. So I would guess, it's probably what's behind a little bit less competitive bidding for these markets.
Okay. That's helpful.
Good luck guys. Thanks.
Thanks. Thanks.
Next we'll go to John Babcock with Bank of America and Orlando.
Thanks for taking my questions just quickly on the Ketchmark deal could you just talk about the key milestones we should be mindful of there also I do remember you guys are targeting the second half close there just wondering if theres any update.
Yeah, John So the key milestones I mean really it comes down to finalizing the registration statement on S. Four.
As well as the Ketchmark shareholder vote, and I'd say, we're really.
Really pleased with the progress as Eric said in his comments prepared comments.
And we think we're on track to close late in late in Q3.
Okay. Thank you.
And then.
Also if you could just talk about your housing outlook and ultimately what's driving that I mean, it sounded like youre looking for kind of one 5 million starts with.
With perhaps.
Over the balance of year, a little bit more growth on the multifamily side. So the single family side.
Overall, just how are you thinking about that I mean is that more consensus driven argue.
You're kind of baking in your own expectations into that.
Yes, John so given given the sharp increase in interest rates that we've seen here recently, we have lowered our near term outlook.
Basically I think this year will come in at $1 six maybe one five something like that.
Next year, we're kind of looking at similar kind of a one five kind of a number so a little bit of softness here next year, but once we get past. This tightening cycle, we still envision starts getting back up to the $1 8 million level and that could be by 2024, given all the pent up demand that there is for housing.
Do you think about it what's what's driving starts these days, it's relatively scarce inventory millennial age cohorts it.
Hi levels strong home prices, you've got this work from home trend consumer balance sheets are in great shape.
<unk> got a strong job market.
The U S is under built by four to 6 million units you've.
You've got all these different factors that they really have not gone away I think there is just a pause in terms of when people will pull the trigger to buy their house and we've seen so much volatility mortgage rates, they've just shot up overnight.
From the 253% levels up over 6% and now theyre starting to moderate a little bit you've also see mortgage rates really blow out relative to the 10 year Treasury.
We think that gap could could tighten.
So I think there is a there's reason to believe here the fed is going to be aggressive trying to control inflation in the short term, but I'm now starting to read things to say there may be cuts from the fed come early next year.
Due to economic weakness.
We have taken our near term housing starts down but go out to 2024, we think the right back up again.
Okay, and just with the rise in mortgage rates are you seeing any notable changes in behavior among your different buyers and throughout the broader channels for lumber.
Well I would say no because we're not we don't sell directly to homebuilders, we sell to home centers and we send them the dealers basically and those dealers turnaround and they can be selling it took for R&R projects. They can be selling in for new home construction, we can't really we can't really track it.
But what I would tell you is that we do have really good line of sight to as the home centers and the home centers right. Now we've got we've got solid takeaway, we have not seen any any hiccups there.
And the rest of the business are still solid takeaway. Our order files are two weeks, which is probably typical for us.
So continues to be solid solid takeaway and I think that goes back to something we said in our opening remarks, which is that there is a lot of homes that are being constructed right now the homebuilders have really strong order backlogs.
In the 2022.
And they're now in the process of completing those homes, so hence the need for lumber and takeaway and Thats what work that's what we're seeing in our business.
Okay and then just one last quick question. It does look like corporate youre guiding to be I'll call a little bit in the back half whats kind of driving that I know, it's not significant but just wanted to get some clarity there.
Yes, so what.
When you look at corporate certainly was up in Q2 as well John and what's happened is with our strong performance.
We've increased the accrual rate on our annual bonus.
Much like we did last year or so.
That's really the sole factor here as to why you see corporate bump up a little bit.
Okay. Thank you.
Next we'll go to Mike <unk> with Truest your line's open.
Thanks, very much congrats Eric and Jerry on a good quarter.
Thanks.
One quick question.
I've mentioned the special.
Dividend wondering why you call out that the special dividend potentially could be a lot lower this year relative to last year, if youre comfortable with the whole housing dynamic and if you don't really think housing starts are going to fall that much.
And given the fact that you also have a pretty strong liquidity.
Yeah, No. It's a great question, Mike and I think it's helpful to start with.
Why did we pay the special dividend last year.
It was largely driven by the excess cash we were generating both in the REIT with index log prices, but more so in on our lumber business with cash it was generating and as it turns out who would've thunk, but there actually is a cap on how much cash we can hold in the company. So we had to.
Hit the release valve, if you will and distribute cash in the form of a special dividend last year or so.
We would prefer to buy shares to be honest with you, especially today.
With where the stock prices have been paid in cash out in the special dividend to be honest.
So the components last year were excess REIT taxable income over the regular dividend.
Again, it was a release valve for the wood products cash it generated and importantly about 40% of that special dividend was actually discretionary.
I think it's important to.
To focus on that component as well so what's changed.
One <unk>.
Idaho log prices are lower this year year on year, So theres less REIT taxable income that would be one factor number two our regular dividend payout has increased.
This year versus last year, and really what that does is it converts what might've been a special dividend in a component of that to the regular dividend. This year, and then last but not least as I mentioned buying shares at the current price is certainly in a.
A much more attractive than including a discretionary component and the special dividend.
As Eric talked about bolt ons and investing in Waldo we have some great other uses of cash.
This year as we think about our strong liquidity so <unk>.
Significant amount of growth here recently, we look forward to pulling the right levers to continue growing shareholder value and with a strong liquidity, we just think theres better options than than putting a discretionary component and a special dividend this year.
Got you great. Thank you for the color just one quick follow up there would it be fair to say then that with respect to share repurchases of the stock hangs around these levels, we should see more maybe more aggressive share repurchases in the back half.
Well I think as Gerry as Jerry mentioned.
We're basically going to be blocked out of the market here.
When this registration statement goes effective here pretty soon so it's hard to say how this is going to play out we are going to revisit our estimated NAV discussion with our board and that's really what drives our share repurchase strategy.
At an upcoming board meeting so I don't want to get in front of the board on this one.
Got it I didn't appreciate it just one last question just can you help us frame.
How youre thinking about harvest and a slowing housing demand environment and I know your forecast is for a modest decline, but assuming that.
It's even more than that.
Yes, I'm trying to relate this to what happened during the great recession, not saying, we're going to head there, but what I'm trying to get at is during the recession the industry deferred obviously, a significant out of harvest.
Call correctly potlatch itself. This is pre deltec.
Even deferred harvest by about 500000 tons in late 2009, 2010, now again I'm not saying, we're headed there, but how would you deal with us.
Our aggressive slowing housing market.
With respect to harvest deferrals, particularly given the fact that in the U S. South the beauty I really havent overcome the excess timber inventory that's down there.
Yes, that's a really good really good question I think this cycle is going to be a lot different than the last cycle.
And the reason why is the last cycle, we had a lumber prices got so low it was below variable cash costs for mills.
So at some point, you really do need to throttle back production curtail whatever it takes.
To save cash.
In this in this cycle, we think the production cuts that come due to lower lumber demand due to lower housing starts those production cuts are going to happen up in Canada, and they're going to happen up in British Columbia that Scott. This crazy high cost structure, that's one place where the cuts are going to come the other place is going to come probably is lower imports from.
Europe , if you look at the data. So we're getting roughly 2 billion board feet of lumber per year right now from from Europe European exports really that was where do those exports come from there driven by the spruce beetle epidemic that hit Central Europe number one and number two the incredibly high prices that we had here in the U S attracted European exports, but if you look at the 10 years.
His prior.
So when the spruce beetle hit and when lumber prices ran up here in the U S. There were virtually no European exports of lumber to the U S.
As these prices moderate.
That European exports are going to moderate as well so getting back to your question of what's going to happen in log demand in the south I think theres going to be plenty of margin for mills to keep running as hard as they can in the south which anytime you've got favorable margin youre going to run your mills as hard as you can.
I don't I don't I don't see a risk to our harvest volumes in the south at all from this.
Got it.
Back in the queue good luck in the quarter.
Thanks.
And next we'll go to George Staphos with Bank of America. Your line is now open.
Hi, guys. Good afternoon, and good day, and sorry for the double teaming here, but I wanted to pick up on that question.
The cash you're so recognizing that these markets are regional right and there isn't one monolithic southern market. When do you expect growth versus drain will ultimately turn negative in the south that you talk about pension in the markets, but for the folks that we talk about they expect inventory of standing inventory to keep growing really.
For the rest of this decade would you disagree with that and what's your view.
Yes, George that's a great question. It really does you can talk about the south as a whole and I think the data that I've seen on the south as a whole is that theres, probably another I don't know three years four years may be where timber inventory standing timber inventories across the south continue to expand but it really is a market by market.
Sort of analysis that you need to do.
I would guess that if you go over to Georgia, South Carolina, those areas I think growth to drain might already be in drain mode.
Whereas in Mississippi, and Arkansas might still be in slight increase mode.
So really very does it really does vary dramatically from from wood basket to wood basket, but yes.
Yes, I think the data that I've seen says in the next three to four years timber inventories were going to peak and then start to rollover.
Okay, and I want to pick up on John's question, I'll turn it over so recognizing again youre not selling directly to homebuilders.
Today, we saw new home sales fall kind of to a two year low youre expecting only maybe about 100000 drop off in starts next year versus this year. What we're hearing is that perhaps builders they like their margins, they're having difficulty finding people laborers and so.
To preserve margins are not going to be as quick to try to expand and build out and rather just enjoy what they have got as you thought about that and what that might mean, if you agree with the premise maybe you disagree.
How do you think that then in turn plays into your lumber forecast on your harvest and why one five is a reasonable place to be thanks, guys and good luck in the quarter.
Yes, that's a really good question I mean, the homebuilders here I've got two options here either they can try to preserve their margins, which by the way the margins are at record levels.
So they've got some room to give their if they want to keep moving volume I think it all comes back there's fundamental pent up demand thats out there. It goes back to this under building over the last decade 46 million units short in the U S. You got this millennial age cohort they all want to buy.
I think the homebuilders are going to have to make a decision here on what they what they'd rather do it but they want to drop prices and move volume.
Or do they want to keep prices high and preserve preserve margins, obviously, if they keep prices high and preserve margins, it's going to be less less lumber demand.
I haven't heard them say that I thought I heard <unk> say this morning that theyre looking at price concessions to stimulate demand.
I think we'll just have to wait and see how that how that plays out but obviously, if they preserve margins it won't be good for lumber demand.
I appreciate the thoughts there take care guys.
Thanks.
Okay. At this time Im showing there are no further questions and I will turn the call back over to Jerry Richards.
Okay. Thank you David and thank you everyone for your questions and for your interest in Potlatch Delta.
To recap our results for the first half of 2022 were very strong we look forward to providing updates on the performance of our leverage to lumber strategy, our pending merger with ketch, Mark and our progress on increasing shareholder value.
This concludes today's conference call you may now disconnect.
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