Q2 2023 PotlatchDeltic Corporation Earnings Call
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Good morning, My name is Henry and I will be your conference operator today at this time I would like to welcome everyone to the Potlatch <unk> second quarter 2023 conference call. 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 Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you I would now like to turn the call over to Mr. Wayne waste check interim Vice President and Chief Financial Officer.
For opening remarks.
You May proceed.
Yes.
Yeah.
Good morning, and welcome to Potlatch Delta second quarter 2023 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.
W Dot potlatch Delta Dot Com I.
I will turn the call over to Eric for some comments and then I will review, our second quarter results and outlook.
Thank you Wayne.
Looking at our second quarter, we reported total adjusted EBITDA of $46 million after the market closed yesterday.
Wood products segment's adjusted EBITDA was $12 million in the second quarter compared to breakeven results in the first quarter.
Higher lumber prices were the primary driver of the improved results.
We have seen a steady uptick in the composite lumber price since mid June driven by several factors, including favorable housing data wildfires in Canada, following European lumber imports and additional capacity constraints from no closures and curtailments, particularly in British Columbia.
We continue to expect that lumber prices will remain above long term averages.
We shipped 280 million board feet of lumber in the second quarter, which was 18 million feet more than we shipped in Q1 and 26 million feet more than we shipped in Q2 of last year.
In June of 2022, we announced a $131 million project to modernize and expand our Waldo Arkansas sawmill.
<unk> activity is currently focused on site prep and engineering and the project remains on track to be completed by the end of 2024.
The project will increase the mill's annual capacity by 85 million board feet and significantly reduced the mills cash costs.
<unk> will continue to operate during the project with approximately three weeks of downtime expected in 2024 to tie in the new equipment.
Our timberlands segment generated adjusted EBITDA of $29 million in the second quarter.
Harvested one 6 million tons in the quarter, which includes the impact of Idaho harvest volumes being at their seasonal low point due to the typical pause for spring breakup.
Our southern team achieved planned harvest volume in the second quarter, despite adverse operating conditions due to significant rainfall across the region.
Both our northern and southern Timberlands teams did a great job of exceeding our harvest plan in the first half of the year.
Our real estate segment had a solid quarter with adjusted EBITDA of $12 million.
On the rural side of the business, we sold 900 acres that nearly $5000 an acre. Additionally, our real estate team completed the stratification of the catch Mark Timberlands and has now identified approximately 70000 acres that have the potential to be sold for significantly higher values than core timberlands.
The development side of our real estate business remained strong despite the higher interest rate environment.
<unk> lot inventory in our <unk> Valley Master planned community remains at low levels and we continue to have good take up on our lot offerings.
During the second quarter, we sold 42 residential lots at an average price of $107000 per lot.
And completed nearly $5 million in commercial land sales, which averaged over $800000 per acre.
As it relates to natural climate solution opportunities, we continue to make great progress in this area.
Our team is working on a carbon credit project, which could come to fruition as early as the first half of next year.
We are also exploring opportunities to supply mill residuals, and pulpwood to pellet manufacturers and biofuel producers.
In addition, we continue to see strong interest from solar farm developers to complete solar deals in the south.
Our pipeline of potential solar land sales and leases.
At nearly $200 million on a net present value basis.
And we expect this pipeline to grow.
All of these natural climate solutions opportunities will increase the demand for our rural land likely driving timberland values higher.
Shifting to housing we are seeing signs of improvement sales and net orders for large homebuilders have recently improved.
There is a record low level of existing homes for sale in the U S, forcing prospective homebuyers to look at purchasing a new home versus an existing home.
This has translated into higher single family housing starts as June was the second month in a row, where single family starts were above 900000 units.
This is important as a single family unit uses approximately three times the lumber as a multifamily unit.
Also homebuilder sentiment has increased seven months in a row and is at the highest level since June of 2022.
We continue to believe there are strong positive tailwind to the housing market. Our view is based on a fundamental shortage of housing stock due largely to the combination of under building after the great financial crisis and favorable demographics in the form of millennials, who have reached prime home buying ages.
In our view the final element needed for housing construction to fully rebound as lower interest rates.
Acknowledging it will take time, we continue to expect that U S. Housing starts will return to levels above the long term average of one 5 million units per year once mortgage rates, he's making homes more affordable.
Turning to the repair and remodel segment, which represents about 40% of lumber demand and the underlying fundamentals remain favorable for several reasons.
Existing U S housing stock remains the oldest in the history of the statistic in 42 years on average. This is important because older homes are significantly smaller than new homes on average remote work means more people need more space and older homes typically need more repairs.
For modeling as a very attractive option for homeowners given strong levels of home equity across the U S. A robust job market and the fact that consumer balance sheets are generally in good shape.
Also with higher mortgage rates prospective homebuyers are more likely to stay in their existing home and remodel versus move up.
As one indicator of continued strength of the repair remodel segment, our volume sold to Big box home Center retailers is up 17% year to date over last year.
Moving to capital allocation, we repurchased 9000 shares for $400000 during the quarter at $45 per share under our <unk> one plan.
We continually evaluate evaluate all of our capital allocation opportunities to grow shareholder value over time, and we will not act hastily towards any one of these options far too many companies indiscriminately buyback shares destroying shareholder value.
We remain committed to repurchasing shares, but only when they trade at a significant discount to our estimated net asset value analysts on average peg our NAV at around $63 per share.
As a reminder, we have $150 million remaining on our $200 million repurchase authorization.
At the end of the quarter, we had $331 million in cash on the balance sheet and liquidity of $630 million.
Our strong balance sheet with low leverage and significant liquidity provides us with the flexibility and a solid platform to continue growing shareholder value.
Regarding environmental social and governance, we published our fourth ESG report in May our ESG report formally links our ESG strategy to four pillars force planet people and performance and advances our ESG strategic initiatives through short and long term goals.
Potlatch Delta is committed to social and environmental responsibility and strong governance practices and we are proud of our progress and the initiatives we have underway in these areas.
To wrap up my comments Potlatch Delta it remains very well positioned with an investment grade balance sheet and a portfolio of high quality assets. Our strategy is well aligned with industry fundamentals and emerging opportunities and we remained a disciplined and opportunistic capital allocation approach.
These attributes demonstrate our strong commitment to increasing shareholder value over the long term.
I will now turn it over to Wayne to discuss our second quarter results and our outlook.
Yes.
Thank you Eric.
Starting with page four of the slides adjusted EBITDA was $46 million in the second quarter compared to $58 million in the first quarter.
EBIT decreased quarter over quarter as the effect of higher lumber prices in the second quarter was more than offset by lower seasonal harvest volumes and the sale of fewer rural acres.
I will 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 five through seven.
The segment's adjusted EBITDA decreased from $47 million in the first quarter to $29 million in the second quarter.
Our team leveraged good logging conditions to harvest 319000 tons of saw logs in Idaho in the second quarter. This volume is seasonally lower than the 471000 tons that we harvested in the first quarter.
Due to typical spring breakup.
Our Idaho saw log prices increased 2% on a per ton basis in the second quarter compared to the first quarter.
Higher saw log prices were a result of the positive effect of a normal seasonal decrease in the density of saw logs.
In the South we harvested $1 3 million tons in the second quarter compared to $1 6 million tons in the first quarter.
Our second quarter harvest volume was impacted by challenging operating conditions due to unusually wet weather and softer market demand.
Our southern saw log prices in the second quarter were flat compared to the first quarter.
Moving to wood products on slides eight and nine adjusted EBITDA increased to $12 million in the second quarter from breakeven in the first quarter.
On average our average lumber price realizations increased 9% from $435 per thousand board feet in the first quarter to $476 per thousand board feet in the second quarter by comparison, the random lengths framing lumber composite price was 1% lower in the second quarter compared to the.
First quarter.
Note that our regional mix and product mix is not the same as the composite.
Furthermore, there is a timing difference between our sales and the composite.
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.
Lumber shipments increased 7% to 280 million board feet in the second quarter, our shipments were higher in the second quarter. As a result of increased production at our all of sawmill higher rates in our northern mills due to warmer weather and planned maintenance at our Warren mill that impacted production in the first quarter.
Shifting to real estate on slides 10, and 11, the segment's adjusted EBITDA was $12 million in the second quarter compared to $19 million in the first quarter.
EBIT generated by our rural sales declined sequentially due to the mix and timing of transactions.
However, EBIT generated by our Chanel Valley Master planned community was higher in the second quarter compared to the first quarter due to an increase in residential lot sales along with two commercial real estate sales for a total of six acres with prices that averaged over 800000 per acre.
During the second quarter, we closed on the sale of 42 residential lots at a lower average price than in the first quarter due to a different mix of what price points.
Turning to capital structure, which is summarized on slide 12.
Our total liquidity at the end of June was 630 million. This amount includes $330 million of cash as well as availability on our undrawn revolver.
We have $40 million of debt that is scheduled to mature in December . We are currently evaluating our options of whether to pay off or refinance. This debt, we still have $250 million of forward starting interest rate swaps on our balance sheet that we can utilize to refinance debt at well below market rates.
We repurchased 9000 shares at $45 per share for a total of 400000 in the second quarter.
As a reminder, we have a <unk> one share repurchase plan in place with $150 million remaining on our $200 million repurchase authorization. This reflects.
Our ability and commitment to repurchase our shares at attractive prices as part of our broader capital allocation strategy focused on increasing shareholder value over the long term.
Capital expenditures were $12 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 excludes timberland acquisitions for.
For the full year, we are planning to spend $135 million to $145 million, excluding any potential acquisitions.
Our capital expenditure estimate includes $74 million for the Waldo, Arkansas sawmill modernization and expansion project.
We received $23 million of insurance recoveries in the second quarter for property damage and business interruption related to the Ola sawmill fire.
Since our claim was filed in 2021, we've received $73 million of insurance recoveries and expect to finalize our claim before the end of the year.
I will now provide some high level outlook comments. The details are presented on slide 13.
Harvest volumes in the north are planned to be seasonally higher in the third quarter, but lower than a typical for our third quarter as our team was able to pull forward a portion of our planned third quarter harvest volumes in the first half of the year.
We expect northern solid prices to rise about 8% in the third quarter compared to the second quarter.
In the South we plan to harvest, one 6 million tons in the third quarter, we expect our southern saw log prices in the third quarter to be flat to the second quarter.
We plan to ship 270 to 280 million board feet of lumber in the third quarter.
Our average lumber price thus far in the third quarter is approximately 2% higher than our second quarter average lumber price.
This is based on shipments of approximately $120 million board feet of lumber.
Our lumber prices have been increasing recently and our spot price is currently about 6% higher than our second quarter average lumber price 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.
Shifting to real estate, we expect to sell approximately 2600 acres of rural land and 35, Chanel Valley residential lots in the third quarter.
We're also still expected to sell approximately 18000 acres of rural land in 2023.
Additional real estate details are provided on the slide.
Overall, we anticipate our total adjusted EBITDA will be higher in the third quarter compared to the second quarter. This is based on the expectations for higher lumber prices and a seasonal increase in harvest volumes.
We are encouraged by the resiliency of new home demand and the steady improvement in homebuilder sentiment. We remain bullish on long term housing fundamentals and believe we are well positioned to continue growing shareholder value over the long term.
That concludes our prepared remarks, Henry I'd like to now turn the call over to Q&A.
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 will pause for just a moment to compile the Q&A roster.
Our first question.
From George Staphos from Bank of America. Please go ahead.
Thanks, everyone. Good morning.
Eric Thanks for the details.
Couple of questions. So first of all is there a way to quantify what the effect of the weather was particularly in the south.
In timberlands, what that might have cost you either in terms of volume or EBITDA from what a normal <unk> would be recognizing the weather always is something that you need to contend with.
Yes, Thanks, George Yes, as it relates to the impacts from weather, we talked about in Q1.
The team did a great job of really exceeding the plan in the first quarter and we.
Going into the second quarter, we knew.
Adverse weather conditions, and we knew that we were going to kind of end up with.
Our planned volume for year to date, so Q2, while there was adverse weather, we really met our plan given what we have done in the first quarter of the year. So.
I think the.
The key takeaway is we will be there our planned harvest volume for the full year is what we would expect so.
And on the pricing side, George I would I would say that mills never got so low on volume that there was price pressure, sometimes when mills get low on logs, you see Iran and pricing, we didn't really see that in Q2.
Just it was just really challenging quarter and the team had to work around that weather.
Yes actually that was my next question.
Thank you for that.
In terms of the pull forward on volume and.
<unk> from <unk>, what do you what do you estimate that is again Russell recognizing that you are on plan for your volume and your heart.
This profile for the year, but any way to quantify that if you didn't.
Perhaps I missed it.
Yes, well I think to look at two things one if you look at our northern volume so for year to date, we're probably 100000 ahead and so that will.
Impact.
Q2, and Q3 and Q4, probably half in each of Q3 and Q4 and then for the South we're on track. So we're kind of normal volumes for.
The back half of the year.
Kind of the $1 $6 million range.
In the south for each quarter.
Okay.
Two last ones for me and I'll turn it over one to the extent that you have any view on this what are you seeing in the fiber markets in terms of.
Timber right now are you seeing.
Customers coming back to the market and buying obviously theres been a little bit of it.
Through the first half reduction.
The reduction in demand from from the from the paper Mills, what are you seeing there to the extent that you can offer any commentary and then.
Part of the story on wood products in housing. This year has been driven significantly by the fact that rates are high.
Youre seeing not as much in the way of existing home sales because people have a home are locked in at a lower rate.
So that's propelling more new home construction with rates starting to come down what are your contacts telling you in terms of what that might mean for the pace of existing home sales and then in turn what that might mean for for new construction. Thanks guys.
Yes, so George I'll take the first one on pricing so I think for the going from Q to Q Q2 to Q3, I think we're looking for.
Southern prices to be relatively flat I think from a demand standpoint certainly.
Yes, we saw some mills take take some economic downtime some quotas and you know this is all market dependent so probably where we've seen more tension on the coastal side, our legacy ketch Mark we've seen more.
More quotas and downtime taken but I think we're encouraged by what we're seeing that start to loosen up here going into Q3. So I think demand, we're seeing a little bit pickup in demand there and like I said.
Pricing relatively flat, we're expecting from Q2 to Q3.
And I'll take I'll take the second half of your question George regarding you have rates rollover, which I think is going to happen to existing.
I do think existing home sales will start to pick back up again, if rates come down and the reason existing will pick back up again is because people won't feel like they're trapped in their existing home.
Hopefully that means theyre looking to buy a new home in a different location, perhaps so I don't think if rates come down I don't I don't see new home sales necessarily rolling over.
I think thats really driven by the fact that the U S is just flat out under belt somewhere between two and 4 million units number one and number two you've got this age cohort. It's in the low thirty's, that's anxious to buy a home.
So rates rolling over existing home sales will pick up but I don't I don't envision that impacting new home sales.
Sounds good thanks, Mark I'll turn it over.
Thanks.
Our next question comes from Catan Mint men Toura from BMO. Please go ahead.
Thank you and thanks for taking my question.
First question coming back to us.
Im more curious about southern pulpwood prices.
There is a pretty big drop reported by timber Mart South I'm, just curious as you think about your wood basket.
But you will see any impact.
You're kind of regions as you move into sort of Q3 and that in the back half.
In terms of pressure on pulp prices.
Yes, I can't Miss Wayne Yes.
It's difficult.
Difficult are a bit challenging to compare certainly our prices aren't as down as much as timber Mart South I think when you look at.
Timber Mart South data a couple of factors one its.
It's pretty thin on the data and two I think.
My understanding is they use a simple average for versus a weighted average so that that information really can cause some volatility in pricing.
So, especially when you compare it to ours.
So I think as it relates to pulpwood.
We're probably.
Still a little bit flat to maybe slightly down we expect going from Q2 Q2 to Q3.
Still like I said, we see some.
Quotas and downtime on the pulp and paper business. So yes that's.
Active of where we see pricing.
Into Q3, and maybe the latter half of the year.
I think it's interesting Keaton if you if you if you step back and look at it from a long term perspective.
This renewable energy.
<unk>.
That's taking off across the United States right now solar wind there is a lot of biofuel work and sustainable jet fuel work and Bioplastics work, that's going on right now.
And I think I read the other day, there's something like $70 billion worth of new capital investment that's going into the U S South announced projects.
That by and large youre going to use pulpwood <unk> mill residuals to.
To provide the raw material feedstock for those mills. So you could look at it and say well prices are going to be down quarter over quarter, but I think long term, especially in the weaker pulpwood markets across the south and I would include Mississippi, Louisiana, Arkansas and that in that region.
The long term outlook is actually quite quite quite bright given all the work that's underway.
Got it.
Helpful color Eric.
Another question that I had was around.
European lumber I know that.
The amount of lumber Thats coming in has come down I'm just curious in terms of the inventory that's hitting out.
Along the East Coast, you have a sense of kind of.
Van.
<unk> just qualitatively have devote most of that or is there still some inventory that's sitting out on the floor.
Hi, I don't know specifically, keeping I mean I can only.
Get get my information from our sales team, which is this is all anecdotal information, but I think those volumes have come down quite a bit.
It seems like it feels like we're not running into European Wood in places like Houston for example, I think we ran into some European wood.
And I think it all makes sense that European imports into the U S would be coming down.
Lumber prices have really collapsed over the past 12 months or so.
The dollar.
Has gotten weaker here since year end.
Just a whole bunch of reasons why.
Europe would not find the U S quite so attractive and so you are right. We are seeing we are seeing those imports start to rollover and I think that trend is going to is going to continue as we as we move through the year.
Got it and one final question from my side.
In terms of the solar beans.
I thought I heard you say about 100 million of kind of opportunity.
Can you talk about.
At least for US how should we think about that.
Tough cadence not trying to pin you down with a specific number on it.
But in terms of sort of timeline of this opportunity.
How should we think about that.
Well.
That's a good question what I would tell you right now is that what we have under option.
Is five different deals.
Of those five different deals, it's roughly 16000 acres.
Roughly two thirds, two thirds of those or sale transactions and roughly one third is <unk>.
East type of a transaction now the options that are in place for these deals or they run anywhere from two to five years. So the developer has the option to pull the trigger.
And proceed with the deal.
For anywhere from two to five years.
I think these guys, they're all scurrying about trying to line up their equipment trying to line up who are they going to sell the power too.
All of the engineering work that needs to be done.
And they won't they won't pull the trigger on exercising the option for the land until the very last minute.
But I would I would tell you we've seen a couple of solar deals closed now one closed on Ketchmark ground and one closed on potlatch ground.
We've got we've got five deals that are that are under option. We've got another four deals that we're negotiating right now that we think are going to be done by the end of the year.
And then we're having conversations with with a bunch of more folks that I'm not even really talking about here today. So the momentum is only building for this for this solar opportunity.
And I think it's remarkable when you think about what's under option of what we're negotiating this roughly $200 million of NPV. That's roughly 20000 acres of our land that we're talking about transacting for solar outcome. So 20000 acres, roughly 1% of our land, but yet $200 million out of our R. R.
Enterprise value of who knows call it $5 billion.
1% of our land for call it 4% of our enterprise value.
That's a pretty good trade.
Again, it feels to me like the momentum in this business is only picking up.
And that IRI legislation that was passed provided a lot of incentives for renewable energy.
And that's really what's behind all of this momentum.
Got it that's very helpful. I'll jump back in the queue. Good luck in the back half.
Thanks Keith.
Yes.
Our next question comes from Anthony Pettinari from Citi.
Please go ahead.
Good morning, Mr. Cremers Mr. <unk>. This is Greg on for Anthony.
Gregg Hey, Greg.
Yeah.
Just a quick question for me on real estate. So I think you mentioned 70000 acres in the acquired Ketchmark portfolio can be sold at higher values in timberlands.
It seems like a pretty large amount to me I'm, just hoping you could provide some color on the types of opportunities you've identified and what premium do you expect you can capture on the HBU lands and just as a point of clarification, how many of those 70000 acres.
Are included in the $200 million for solar land sales and leases.
Yes, so Greg so when it comes to the Ketchmark stratification that we just completed yes.
Yes, we are about.
We acquired 350000 acres and so we've identified almost 20% of those acres or about 70000 acres.
Sure.
20% of those acres or about 70000 acres as higher premiums to timber values and that's driven off of recreation potential conservation.
Adjacent landowners.
Even solar.
Solar potentials, but.
Yes.
And the reason I think for that higher percentages were near.
Large population areas. So just that increases the increase the potential for.
Premiums on those values, so and I think the next thing is when we look at what <unk> historically done they were selling timberland for for a premium that timber values, but our approach is we're going to do.
We're selling HBU for a higher premium.
And we're providing a little bit different product to the market than what Ketchmark did historically had done so we're looking at more tracks, but a higher value per acre so and again, that's driven off of these opportunities around recreation conservation.
Adjacent landowners and so forth so and we've already started listing some of these properties.
We're really seeing some we're pleased with the activity that we've seen so far.
Then as it relates to <unk>.
Your question on the solar.
None of those none of this stratification is included in.
The $200 million that Erik referred to.
Okay. That's very helpful. Thank you and then just a quick one on <unk>.
Lumber sales to lumber volumes excuse me the big box retailers, you mentioned are up 17% year over year.
Can you speak maybe if possible could you speak to how much of that may have been driven by an inventory rebuilds inventories reached very low levels.
In the first half so how much of that was driven by a rebuild and I guess where are inventories now at these big box retailers in August and what level of fall demand do you think they are preparing for.
Yes, Greg I don't I don't think I can answer your question. All I would say is we've seen pretty steady takeaway at the end of the day from the home centers I don't think this was driven by an inventory rebuild.
Don't know that Theyre lumber volumes are necessarily up 17% year to date I think it may have something to do with the specific product that we're selling them, which are which are <unk>.
Which tend to be used in a wide variety of applications.
So I wouldn't I wouldn't read into this that there they're lumber business is up 17%.
I would just reiterate that our sales through those channels have been very very steady which indicates to me that the repair and remodel business is also very steady it's not going through some.
Catastrophic decline here, it's hanging in there pretty good that's what I would read into it.
Okay, great. Thank you very much.
Our next question comes from Michael Rockland Trust Securities East Go ahead Michael.
Thank you, Eric and waiting for taking my questions.
Just one with respect to the housing the improvement in housing what have you seen regarding lumber curtailments have you seen any mill to idle mills jump back into the fray to try to capitalize on better demand and higher prices.
No Michael we've seen we've seen roughly 3 billion board feet of curtailments now roughly half of that has been announced as a permanent closure and roughly half is the temporary curtailment.
It's really hard to get good data on what individual mills are doing.
So I don't know that Ive heard of any mills that are starting back up again, just to just for home center R&R demand.
Mrs have come up that could compel people to to restart their mills, but I have not heard of any at this point.
Got it thanks, and just one quick one as well.
In terms of what's what's happened with with housing and obviously improved housing market have you seen any increased tension, resulting from certain timber markets.
<unk> from <unk> and.
An improvement in demand for wood products.
No it's too early.
Yeah, I would say, it's too early I mean, we've.
Prices are down slightly but.
Compared to last year, but I think they've held up.
Right well.
What we have expected so.
I think thats were encouraged by that but.
I think those will kind of hold steady.
I think on the long term, we expect those markets to continued attention and we would expect the summer southern prices to continue to increase.
Thanks, guys, just one last one because they're typically a lag that you see is it.
Six months nine months, where if you have housing improving wood products improving is it what type of lag do you have between when you start to see attention the wood baskets versus the wood products side.
Okay.
Yes.
I don't know if we've.
I think theres a lot of factors that go into the prices around.
Not only.
The demand, but there can be some volatility.
Weather related and other factors so.
But I think.
I don't know if theres a specific.
Timetable on when.
That lag looks like.
I just wanted the biggest drivers Mike was just going to be lumber inventory that's in the system.
The dealers do they feel compelled to have to buy the lumber or do they look at their existing inventories and say I've got enough now to meet demand. So I think to Wayne's point Theres, just a whole host of factors that weigh into how long that process takes.
Got you thanks.
Thanks, guys. Good luck in the second half.
Thanks.
Our next question comes from Kurt Yinger D. A.
Davidson. Please go ahead Sir.
Great, Thanks, and good morning, Eric and Wayne.
Hey, Kurt.
Hey, I just wanted to start out on wood products could you just talk about how youre thinking about log and unit manufacturing costs kind of heading into Q3 and also just give us an update on the industrial plywood business I mean, it looks like that was a decent drag in Q2 and Im curious if thats tied to the weakness in the RV market at all.
Yes, Kurt so so the first thing is going into Q3.
I do think that assessing cost in log costs are going to be lower in Q3 versus Q2.
We will continue to get benefits out of our Ola mill, our cost per thousand and always going to continue to decline.
Similarly, some of our mills in the south.
Warren for example lost some shifts in Q2 to a power outage in.
That cost us some volume in Q2, so we will get we will get better absorption of.
Overhead costs in Q3 versus Q2.
Fiber costs.
At St Marys.
<unk> has been.
Been coming down so I think we are going to see lower cost per thousand in Q3 versus versus Q2.
Answer to your first question. Your second question regarding yes, plywood and residuals they were a drag of nearly $4 million.
Comparing Q2 to Q1 in our industrial grade plywood business.
<unk> talked about this before but what really producing high quality plywood for use in things like boats, and rvs and truck panels things.
Things that are typically financed by by consumers and as we've seen interest rates increase of course demand for these items is dropped.
And so as demand has dropped pricing has dropped.
And so.
<unk> business has been under pressure now we do think that's going to turnaround as we get into Q3.
We do think demand is starting to come back some of our dealers.
Really brought their inventory levels to rock bottom levels in Q3, and we think theyre going to start rebuilding in excuse me in Q2, they're going to start rebuilding inventories in Q3, and so we think demand is starting to come back to that to that business.
And on the residual side, yes, we had a we had some some outages from some customers in the second quarter in particular packaging Corp's will Lula containerboard mill in Washington State Theyre, taking downtime and I don't think going to start back up until I don't know if fourth quarter perhaps.
Out in Michigan, <unk> got a paper mill. It took three weeks of downtime you may recall, they had some kind of a focus that was running through their mill. They took three weeks of downtime in Q2 due to some fungus outbreak. So frankly I think the way I would characterize it is that Q2 was a low point.
And I think when you look at our results for the for Q3 Youll.
You'll see that that variance youll see that flip back to a positive variance again.
Got it fungus outbreak that that's a new one.
Okay.
I guess turning to the forest carbon project could you maybe talk about where that's located in and any more color that I guess youre willing to provide at this stage around that.
Yes, Kurt so it isn't it is in the U S south it isn't some hardwood bottom land.
It's roughly 50000 acres in size.
We're going to get it done across the goal line sometime in the first half of next year.
We think that our project is <unk>.
Going to involve about the highest quality carbon credits that are that are possible. So consequently, we expect pricing for our carbon credits to be quite high.
I'm really quite optimistic about about this piece of our business. When you think about all the net zero pledge is that are being made out there.
By companies around the World and I read something the other day its like 9000 international companies have pledged to get to net zero you got to get there somehow.
And even Delta Airlines was just written up as buying flaky credits not not too long ago. So increasingly companies that have made net zero pledge as they they want high quality credits and that's the type that we're going to we're going to offer them.
And the other thing that I would highlight is that theres a lot of private capital that is now flowing into the carbon credit space and forestry think about Oak Hill menu life J P. Morgan.
So we think our I think I heard Weyerhaeuser say something about I don't know 20 Bucks, a ton or something like that and I think that our our carbon prices. We it's early to say, but they could be $20 to $40 a ton somewhere in that range and it could be roughly 100000 tons of credits a year or roughly $3 million a year.
Of EBITDA more or less.
We've got a long ways to go to get from here to there.
To get good high quality credits issued a lot of work.
But the team is working very hard to get it done. So we will give you will give you progress updates on this every every quarter, but to wrap it up on this I really am quite optimistic about it.
Got it Okay. That's super helpful color I appreciate it and then just lastly.
I guess talking broadly what are you seeing out there in terms of timberland transaction activity.
And the opportunity set for for pilots Delta at this stage.
Yeah, well the timberland M&A market, it's relatively quiet right now.
And we think people are holding off with their properties out there waiting for lumber prices to improve they are waiting for interest rates to come down there waiting for some carbon deals to get accomplished so people have more more faith in that.
That value stream.
So the market's kind of kind of quiet right now on the stuff that is getting brought to market is going for a very high price.
I think we've competed.
Over the past year or so.
Seven different M&A transactions.
We've been in the bottom half.
Virtually every single bottom half of bidders.
And every one of those transactions.
We're sticking to our traditional valuation metrics our cost of capital has gone up.
Yes, it seems as though the value of timberland has only gone up so what that's forcing us to do is to and we've always done this but and I think we're actually particularly good at it.
We're proceeding with deals that are off the auction market.
So there are one off deals.
Where we think we can get a particular, particularly good deal at the end of the day, it's hard to create value when you've got well. There's one deal that we did where there were 48 bidders.
If you can if you can imagine that.
Youre not going to create shareholder value, winning an auction where you're competing against 47. Other bidders. So we're going to we're going to try to go find those one off deals where the.
Auction intensity is not not quite so high and we think we can we can get a good deal on and off market property.
Okay makes sense and good luck here in the second half guys. Thank you alright. Thanks, Thanks Curt.
Our next question comes from Mark <unk>.
From Seaport Research partners. Please go ahead.
Thank you.
Follow ups first just on the cash Mark stratification, I think you've been selling order of magnitude 15 to 20000 rural acres last couple years I think that's sort of what you view as trend line correct correct me, if I'm wrong, there, but with the cashbox stratification might that bump up a bit.
In the next couple of years and by how much perhaps if indeed, that's the case or does it sort of get folded in and you just keep going at a most likely similar rate.
Yes, there's a couple of things there mark.
One.
When we look at when we think about our rural sales program, we really target and based on our history and what we've been able to accomplish probably about looking to sell about 1% of our portfolio. So.
Our run rate would be around 20000 acres a year.
And I think with the stratification that still maintains that level I think.
One reminder, if you look back for even for example.
<unk> thousand 22, we sold around 20000 acres will half of those acres were tied into Minnesota. So we had about 10000 acres of Minnesota and now we've we've liquidated our portfolio in Minnesota and now that shifted to the south So really I think where you.
Where we've seen because of the liquidation in Minnesota.
Being made up by what we see in our program in the South.
Okay and.
On the carbon credits.
Eric you threw out kind of a 100000 tons per year is that specific to the 50000 acres, where you were working or is that kind of more.
Is that.
Number perhaps based on something beyond the 50000 and did I hear you right that you would expect that to be a recurring number as opposed to having to go out and create new projects too to keep that number.
In the 100000 tons per year range.
Yes.
Think the property that we're looking at it will generate roughly 100000 tons or excuse me 100000 credits per year.
For the life of the project. So we're not we're not done finalizing the project, but it could be a 30 year kind of a project where we.
These credits every year.
And at roughly if we pick the midpoint $20 to $40 a ton range, we pick the midpoint 30 Bucks.
That would be roughly.
$3 million a year.
Carbon credit sales.
Okay.
That would be pretty good.
And let's just see one last question.
Lumber markets.
It kind of feels like pricings are little bit wobbly again.
I guess seasonality could be part of the explanation, but we've talked about housing being strong you've talked about repair remodel still being pretty stable.
What are your thoughts what's going on.
What's your Crystal ball tell you as to how things might play out through the rest of this year, if you're willing to share.
Yes, Mark I wouldn't say, they're wobbly necessarily I would say they feel like they are kind of plateauing here.
You're right. We've had several weeks of random lengths. Just every week, it was higher and higher and higher and higher and that was driven by a whole bunch of things fires up in Canada European imports rolling over better housing data.
I think about those factors for example will fires are starting to impact the U S. West we've seen some pop up.
Out here in the West no impact our ground by the way, but we've seen fire activity start to pick up but the fire activity up in Canada, I feel like is kind of roll over a little bit.
I heard Weyerhaeuser talk about they've restarted their two mills in Alberta that were impacted for example.
We've also seen European imports rollover and but also the latest housing print was.
It was not quite as strong as the prior ones. So and Youre also getting into the time of the year, where you do get into a little bit of seasonal weakness as we get out into those winter months. So I don't anticipate a collapse in prices clearly the first quarter was a low point in my mind for the year.
We've had a nice run here and I expect these prices to kind of stay where they're at or maybe drift slightly lower as we move into into Q4.
Okay I appreciate the color thanks, Eric.
Thanks Mark.
Okay.
Our next question comes from Paul Quinn from RBC capital markets. Please go ahead.
Yes, thanks, very much good morning, guys.
Good morning.
Carbon capture.
Just wondering if you could help us understand the 50000.
Baker.
Projects, you've got what about timberlands like in that areas that marginal timberlands.
Are you planning any kind of projects for say some of the stuff that you've got in.
In northern areas like Idaho.
Yes. So this is our first deal that we're looking at getting done Paul it's.
It's a very again to issue good credits high quality credits, which is where the where the money is.
It's a painstaking process.
This is not.
High quality industrial grade plantation forestry in the south.
This is the hardwood bottom lands.
That can be harvested, but it may not be harvested year round.
<unk>.
It may be difficult to harvest.
<unk>.
But yet it's still it's still property that we would we would look to harvest.
We didn't put it into a carbon program.
So.
Carbon values are not yet to the point, where they impact plantation forestry.
But we'll see with with demand being what it is for carbon credits and supply being where it is demand is just far outpacing supply. So there assuming company stick to their net zero commitments, there's upward price pressure.
On carbon credits and as it relates to Idaho, Yes. Once we get this first deal done I think we're going to we're going to learn a lot from this deal and we'll apply that knowledge to all of our acres just like we always do we're out to maximize the value of each and every acre that we own.
And I'm sure we will look at acreage in Idaho to see if.
Carbon makes sense in Idaho.
Okay. Thanks for that so given that its a bottom land hardwoods, yet I suspect that the harvesting impact long term harvesting and fact based settings ethanol Covenant project is not going to be.
The material.
Yes, I wouldn't expect it to be material at the end of the day.
Okay, and then on the carbon storage front any opportunities there for you yet.
We're still we're still looking at it we've got great geological formations in southern Arkansas.
Where we can we can store carbon.
The key is to have your geologic formation be close to where the emitters are.
And so that way you don't have to pipe it and theres not a lot of capital cost to get the carbon to the formation. So we're exploring.
And this is this is going to take time, we're also having conversations with folks that want to.
Bill biofuel plants of one form or another and Arkansas.
And then immediately carbon capture and store.
The carbon that comes off the process.
So it's it's definitely an opportunity for us it's just it's several years out.
Alright, that's all I had selecting.
Alright, Thanks, Bob Thanks, Paul.
Our next question comes from Buck Horne from Raymond James. Please go ahead.
Hey, Thanks, guys. Most of my questions have been answered I just got one quick one for you on the commercial land sales at Chanel Valley just.
Just give a little color on that particular acreage and how you were able to achieve such a high price point and.
What else do you have any other crown jewels Chanel valley similar to that that we could factor into the portfolio.
Yes.
This Wayne Yes couple of things I think the two properties that we sold this quarter. One was for I believe a bank and the other one was a medical office.
And but those were they were at prime locations. So depending on the location that really drives the price per acre.
I think we have just under 300 acres of commercial land available at all.
<unk>.
I think as we.
We continue to develop the pipeline as you know that can be lumpy and it's a little bit challenging to predict when those commercial sales will close but I think as we continue to increase with residential being positive and thats continuing to go strong.
Think as that continues to grow Rus rooftop density increases to <unk>.
<unk> continues to increase and then I think that only benefit commercial so.
Okay.
Thats all I got thank you guys.
Thanks, Bob Thanks, Bob.
At this time I'm showing there are no more questions I'll now turn the call over back to Wayne waste check.
Yes. Thank you for your questions and your interest in Potlatch Delta that concludes our call.
Ladies and gentlemen, thank you for all joining you may now disconnect.
Please wait the conference will begin shortly.
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