Q2 2024 PotlatchDeltic Corp Earnings Call
Okay.
Good morning, My name is Greg and I will be your conference operator today at this time I would like to welcome everyone to the Potlatch Delta Inc. Second quarter 2024 conference call all lines have been placed on mute to prevent any background noise.
After the speaker remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star and the number one on your telephone keypad once again star one and if you'd like to withdraw your question Press Star one again. Thank you.
I would now like to turn the call over to Mr. Wayne waste checking Vice President and Chief Financial Officer for opening remarks, Sir you May proceed.
Good morning, and.
And welcome to Potlatch Delta second quarter 'twenty four 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 in the appendix to the presentation slides and on our website at <unk>.
Ww Dot potlatch don't take Dot com.
I will turn the call over to Eric for some comments and then I will review, our second quarter results and our outlook.
Well, thank you and good morning, everyone. Thank you for joining us.
Yesterday after the market closed we reported second quarter total adjusted EBITDA of $103 million. This is a $73 million increase from the first quarter and was largely driven by strong real estate performance.
Overall, we had solid operational execution across each of our business segments. Despite the current economic environment and languishing lumber markets.
Turning to our second quarter results, starting with our Timberlands Division.
This segment generated adjusted EBITDA of $34 million in the second quarter.
We harvested $1 9 million tonnes exceeding our Q2 harvest plan as better than expected weather conditions in both our northern and our southern regions provided favorable logging and hauling conditions.
Saw log prices in Idaho increased due to our indexed agreements coupled with higher cedar prices for the south our average southern log price realizations were comparable to the first quarter, despite challenging lumber market conditions.
Moving to our wood products segment results.
Adjusted EBITDA was a loss of $7 million in the second quarter compared to breakeven in the first quarter.
During the second quarter lumber markets remained challenging as seasonal homebuilding activity did not result in tightening lumber markets. While there is weakness across all lumber markets. It has been most notable for our southern yellow pine.
Southern yellow pine prices are at historically low levels, which stem from pronounced weakness in multifamily construction decline.
Declining demand from treaters and ample supply of product.
While depressed lumber markets continued to weigh on our wood products results. We continue to focus on the areas, we can control, including optimizing our product mix efficiently running our mills and effectively managing costs.
As we look towards Q3, we believe lumber prices are at or near the bottom as we have seen recent signs of a modest upward trend in lumber prices.
Entering the back half of the year, we have reached several significant milestones with our $131 million Waldo, Arkansas mill modernization and expansion project.
The project continues to progress well with completion in Q3 remaining on track and within budget.
And the early part of the third quarter. The mill will undertake a limited period of downtime to tie in the new equipment. This downtime is expected to reduce our wood products division lumber production by approximately 10% or 25 million board feet in the third quarter.
Following completion, we anticipate a ramp up in production through Q4 and into next year.
Based on other brownfield additions in the industry that we have seen we expect it will take six to 12 months to reach the mill's new capacity of 275 million board feet per year.
As a reminder, the project will increase the mill's annual capacity by 85 million board feet. It will improve recovery by approximately 6% and reduce cash processing costs by about 30%.
Once the ramp up phase is completed we expect the mill to generate approximately 25.
So the incremental EBITDA annually under mid cycle sales environment with this project.
Shifting to our real estate segment, this business generated $90 million and adjusted EBITDA in the second quarter.
Our rural real estate side of the business produced very strong financial results as we successfully completed the sale of 43000 acres at an average of $2000 per acre during Q2.
The highlight of our second quarter Rural real estate activity was a closing of the previously announced 34000 acre young timberland transaction for $57 million.
As discussed on the last call. The Timberland was sold at a significant premium as it was just four years old and had no meaningful cash flows for the next 20 years.
<unk> also included other value added transactions at significant premiums to timberland value, including a 2000 acre conservation land sale in Arkansas.
<unk> $4700 per acre.
Demand for our rural real estate continues to remain quite strong.
The development side of our real estate business remained steady in this higher interest rate environment. During the second quarter, we completed a $6 million commercial land sale and sold 13 residential lots at an average price of about $113000 per lot and <unk> All Valley Master planned community in little rock.
While we fell short of our residential lot sales outlook in the second quarter, we remain optimistic about our residential sales the remainder of this year.
Just on strong take up from regional builders on our latest residential lot offerings, just this past week.
Regarding our emerging natural climate solutions business. It continues to evolve and grow starting with solar opportunities are for our portfolio of option contracts with solar developers continues to expand with four new contracts added since the last quarter ended.
Our inventory of solar option contracts now represents 27000 acres or over 1% of our entire timberland holdings with an estimated value of approximately $300 million on a net present value basis.
Given the appetite the utility sector continues to demonstrate for solar energy, we anticipate further growth of our pipeline by year's end, we expect our solar option contracts portfolio to include over 30000 acres with an estimated net present value of roughly $340 million.
We're also actively pursuing an NCS opportunity focusing on subsurface leases for lithium deposits crucial for battery production.
Notably certain areas of our timberlands in southern Arkansas feature geological formations that offer promising prospects for lithium.
Currently we are engaged in discussions with select Counterparties regarding the initial leasing of a portion of our subsurface rights.
Shifting to forest carbon credit opportunities.
The voluntary carbon credit market for high quality credits continues to grow car.
Carbon registries that support voluntary markets continue to evolve in order to ensure high quality credits are being brought to market in.
In fact, the leading carbon registries are shifting their methodologies to have projects adhere to the relatively new.
For carbon principles or CCP Issa.
Established by the integrity council for the voluntary carbon market.
These relatively new core carbon principles are quickly becoming widely recognized as establishing a global benchmark for the highest integrity carbon credits found in the voluntary marketplace.
Consequently, we believe that forced carbon credits that are labeled CCP will garner the highest demand and therefore, we will obtain premium pricing.
With this in mind, we are shifting our approach and redesigning our 50 50000 acre southern Timberland carbon project to meet these new CCP standards.
We believe this will ensure our project or any future projects that we identify will be globally recognized as having real and verifiable climate impact under a transparent methodology using best practices, along with creating strong demand in premium pricing.
Once we further assess the redesign of our carbon project, which is expected by the end of this year, we will have a clearer picture of the type and time horizon of bringing a CCP labeled carbon project to market.
We have also identified potentially valuable prospects and carbon capture and storage as well as bioenergy and biofuels.
While these ventures are not expected to materialize immediately they hold the potential for substantial value in the long run.
We continue to believe that all of these natural climate solutions opportunities will increase demand for our rural land likely driving timberland values higher due to increasing and diverse cash flows.
Moving to capital allocation, we remain committed to our disciplined and opportunistic approach and we constantly evaluate all of our capital allocation opportunities to grow shareholder value over time and.
In the current economic environment capital allocation is dynamic and can change from quarter to quarter aside from our dividend share repurchases were very attractive option in Q2, as we were trading considerably below our estimated net asset value.
In the second quarter, we returned $25 million to shareholders through share repurchase activity.
<unk> 610000 shares were repurchased at an average price of $41 per share.
We have now utilized half of our current share repurchase authorization with $100 million remaining under the program.
Now turning our attention to the U S housing market.
The overall market continues to be weighed down by elevated mortgage rates and affordability challenges. Despite these factors new single family residential construction continues to demonstrate a fair level of resilience as starts have exceeded 1 million units and seven out of the last eight months.
This has contributed to some level of stability in the market. This level of activity has been supported by large homebuilders continuing to use incentives such as mortgage rate mortgage rate buy downs to address affordability.
As for the multifamily segment of new residential construction has experienced a pullback due to an influx of supply entering the market and the excess of cost of financing construction.
There are some positive macroeconomic indicators, including inflation data is showing signs of easing. If this trend in inflation continues it is anticipated that the federal reserve will start to pivot from its restrictive rate policy and begin to lower rates, possibly as early as September.
Consequently, we would expect the housing market to see renewed momentum once mortgage rates dropped.
Not only with new homes become more affordable, but existing home sales would improve as well as existing homeowners are not is locked into a low mortgage rate.
Longer term, we remain optimistic on new residential housing fundamentals. This is supported by an underlying shortage of housing stock, which some pundits estimated 4 million units and a strong demographic tailwind.
Now moving to the repair and remodel segment, which in fact is the largest demand driver for lumber demand in this market has softened, especially in the do it yourself segment, the near term headwinds on repair and remodel appear to be driven by elevated interest rates, thus raising the cost of discretionary projects.
Coupled with the low turnover of existing homes, which typically spurs R&R activity.
Looking forward favorable longer term fundamentals continued to remain with an aging housing stock at over 40 years on average continued work from home policies and elevated home equity levels.
Back in May we released our 2023 corporate responsibility report highlighting the continued momentum we are generating around our corporate responsibility goals and initiatives.
Looking ahead, we continue to be diligently focused on completing our strategic modernization and expansion project at the Waldo sawmill on schedule within budget and with the utmost safety for our employees and our contractors. Additionally, we remain committed to enhancing operational and financial performance across all of our business segments.
In light of tough market conditions have implemented additional cost controls across all of our mills, our investment grade balance sheet ample liquidity and disciplined capital allocation strategy positioned us to deliver long term value for our shareholders.
I will now turn it over to Wayne to discuss our current second quarter results and our outlook.
Thank you Eric.
Starting with page four of the slides.
Adjusted EBITDA was $103 million in the second quarter compared to $30 million in the first quarter.
The sequential quarter over quarter $73 million increase in EBITDA was driven by.
Strong rural real estate sales.
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 contributed $34 million in EBITDA to our second quarter results, which was comparable to the first quarter.
Second quarter EBITDA benefited from higher saw log prices in Idaho, which were offset by seasonally higher forest management and road costs across our regions.
Our SAR log harvest in Idaho was 365000 tons in the second quarter compared to 329000 tonnes in the first quarter our team leveraged good hauling conditions coming out of spring breakup, which led to exceeding our planned harvest volume for the second quarter.
Our Idaho saw log prices increased from $103 per ton in the first quarter to $113 per ton in the second quarter or 9%.
The favorable per ton increase reflects higher lumber indexed and cedar saw log prices and the positive effect of a normal seasonal decrease in the dense saw logs.
Turning to the south we harvested $1 5 million tons in the second quarter compared to $1 6 million tons in the first quarter.
Slide seven shows our saw log prices down, 2%, which is on a rounded basis, but actual southern saw log prices were 1% lower in the second quarter compared to the first quarter.
The moderate decline can be attributed to a higher mix of smaller diameter pine saw logs along with the market factors effected by log inventories at or near capacity across the region.
Moving to wood products on slides eight and nine.
<unk> EBITDA decreased from breakeven in the first quarter to a loss of $7 million in the second quarter.
Lower average lumber prices combined with higher per unit cash processing costs, primarily associated with our Waldo, Arkansas sawmill with its ongoing modernization and expansion project drove the decline.
Our average lumber price realizations decreased 2% from $430 per thousand board feet in the first quarter to $423 per thousand board feet in the second quarter.
By comparison, the random lengths framing lumber composite price was 5% lower than the second quarter compared to the first quarter.
Note that our regional mix and product mix is not the same as the composite there's also a timing difference between our sales and the composite.
Lumber shipments increased by 15 million board feet from 271 million board feet in the first quarter to 286 million board feet in the second quarter.
Shifting to real estate on slides 10 and 11.
The segment's adjusted EBITDA was $90 million in the second quarter compared to $6 million in the first quarter.
EBITDA generated by rule sales was considerably higher in the second quarter led by the closing of the previously announced $57 million Southern Timberland transaction.
Our rural real estate business remains robust as we closed on a total of 47 transactions aggregating to 43000 acres.
EBIT generated by our Chanel Valley Master planned community increased in the second quarter by nearly $5 million compared to the first quarter due to a 12 acre commercial real estate sale for $500000 per acre.
During the second quarter. We also closed on the sale of 13 residential lots at a lower average price than in the first quarter due to a different product mix of lots.
Turning to capital structure, which is summarized on slide 12, our total liquidity was just under $500 million.
This amount includes $200 million of cash on our balance sheet as well as availability on our undrawn revolver.
We repurchased 610000 shares at $41 per share for a total of $25 million in the second quarter, we have $100 million remaining on our $200 million repurchase authorization.
We intend to refinance $176 million of debt that is due for maturity in October November of this year on our balance sheet. We currently hold notional forward starting swaps of $200 million.
Valued at approximately $38 million, our strategy will be to optimize the use of these swaps either partially or in full to refinance this debt at interest rates below the prevailing market rates.
Capital expenditures were $28 million in the second quarter.
That amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement.
Our full year capital expenditures remained in the range of $100 million to $110 million not accounting for any possible timberland acquisitions.
This estimate includes approximately $44 million for the final installments on the modernization and expansion project at the Waldo, Arkansas sawmill of which approximately $27 million remains to be spent for the rest of the year.
Furthermore, we anticipate that our annual Capex will drop significantly and returned to a more normalized level next year as we do not plan to undertake any major projects comparable to the Waldo initiatives.
I will now provide some high level outlook comments. The details are presented on slide 13.
We expect to harvest one nine to 2 million tons in our timberlands segment in the third quarter with nearly 80% of the volume in the south.
Harvest volumes in the north are planned to be at their seasonal peak as the third quarter typically has the best logging and hauling conditions of any quarter during the year.
We anticipate a decline in northern solid prices in the third quarter due to lower prices for index saw logs.
In the South we plan to harvest approximately one 5 million tons in the third quarter.
We expect our southern saw log prices in the third quarter to be comparable to the second quarter.
We plan to ship $250 million to 260 million board feet of lumber in the third quarter.
This forecasted shipment volume takes into account a reduced production level in the third quarter for scheduled downtime at our Waldo Arkansas sawmill.
This pause in operations as necessary to complete the installation of new equipment as part of the expansion and modernization project.
Our full year projected shipment volume remains at approximately $1 1 million board feet.
Our average lumber price, thus far in the third quarter was 9% lower compared to our second quarter.
Average lumber price.
This is based on approximately 135 million board feet of lumber.
As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million consolidated EBITDA for us on an annual basis.
Shifting to real estate, we expect to sell approximately 6600 acres of rural land in the third quarter <unk>.
Additionally, because of notable strong demand for rural real estate, thus far this year, we anticipate the sale of roughly 55000 acres of rural land in 2024.
For real estate development, we expect to sell approximately 45 Chanel valley residential lots in the third quarter <unk>.
Additional real estate details are provided on the slide.
Overall, we anticipate our total adjusted EBITDA will be lower in the third quarter compared to the second quarter. This expectation is based on the decline in rural and real estate activity.
That concludes our prepared remarks, Gregg I would like to open the call to Q.
Great. Thanks, Brian.
At this time I would like to remind everyone in order to ask a question press star one on your telephone keypad. Once again star one and we will pause just a moment to compile the Q&A roster.
Okay. It looks like our first question comes from the line of Anthony Pettinari with Citi. Anthony. Please go ahead.
Hi, good morning.
Youre pointing here lumber paid the full year lumber shipment guidance is unchanged from the beginning of the year I think at $1 1 billion board feet.
And some of your competitors are taking.
<unk> may be sharper actions on capacity and I'm just wondering if you would consider.
Similar actions given profitability has been challenged for maybe longer than we expected or just generally how you think about that.
Yes, Anthony this is Eric and I guess as a starter.
We mentioned on the prepared remarks that while that was going to be down for a portion of Q3, which is going to lower our shipments 25 to 30 million feet in the quarter. So in some ways. We are we are taking downtime here, but you know as we do that and everybody is everybody is financial situation.
Are there mills sit on the cost curve everybody's situations, a little bit different from the next competitors.
For us.
We are more than covering our cash variable costs at all of our mills.
So for us taking out volume.
Secondly, what that does is it hurts the P&L even more so.
So the math for us is to keep running.
As hard as we can know the math is going to be different for other competitors and that's why you're starting to see others closed mills and take out shifts and take out overtime and whatnot. So thats kind of our posture in this current market environment.
Got it got it and you referenced.
Seen kind of uptick in lumber I guess in recent weeks is there anything specifically that you didnt attribute that to and are you seeing.
<unk> or closures by competitors, maybe accelerate or maybe start to be felt in the market a little bit more.
Do you think the Canadian tariffs could be meaningful.
The extent you can how you kind of think about lumber in July and August.
And the trends we're seeing.
Yes, that's a good question I think July will be the low point for lumber prices for the year I mean, I guess, the forecasting lumber prices a bit of a fool's errand as you as you know in the commodity markets like this but our sense of it is that July.
Going to be the low point for the year.
In the past couple of weeks and in fact, if you go all the way back to the start of the year. We've seen I don't know two and a half to 3 billion board feet of capacity come out of the markets.
We saw a couple of mills.
Housing just announced closing of mill, <unk> Rover, and John de Oregon, just announced closing of mill.
Stimpson just down the road here in plumber, Idaho announce or closing their mill.
Okay.
Mine it with.
Curtailments that were seeing from well west Frazier Cam for.
Weyerhaeuser, all announced meaningful capacity.
What's in just the past week.
In total that amounts to about two five to 3 billion board feet coming out of the market.
Meanwhile, I think demand is kind of bottoming here.
As I look out into next year.
With interest rates coming down I can see housing starts being up I don't know 150000 units to maybe $1 5 million next year.
I can see R&R markets coming back as we get out into next year with lower financing costs I can see multifamily coming back as we get out into next year with all this new supply that's come on the market as it gets absorbed I see European imports rolling over.
So I think market is setting up for a decent run in lumber prices now is it going to happen in Q3 or Q4, probably not because we are going into a seasonally slow period of the year with construction activity slowing but I think as you get out into next year I think things are things are looking a lot better.
Okay. That's very helpful I'll turn it over.
Thanks, Great. Thanks Anthony.
And our next question comes from the line of Michael <unk> with <unk> Securities. Michael. Please go ahead.
Yes, Thank you, Eric and waiting for taking my questions.
How much of the weakness that we're seeing in housing start to seek relief to small builders, who don't have the wherewithal of the larger builders to also meaningful incentives.
Yes, I think I think it's a lot of the weakness in the market Michael.
You look at the big builders with their big balance sheets. They continue to take market share from small builders and I think the public builders now up over.
50% of the market and their ability to buy down rates.
I compare and contrast that with what I'm seeing in our own master planned community in Schnall, where you've got builders that might do one to five homes, a year more or less I don't have the big balance sheet, it's their own personal equity that's on the line.
I think that's driving a lot of the market right now.
Speaker Change: Got you and so I guess the club.
It's really to your point, Eric is really a matter of rates coming in a bit.
Which will give these regional and bill there is a little bit of breathing room.
Yeah, and I am encouraged I mean, yes, if you listen I mean, our repaired remarks, we talked about a very successful lot draw that we had just last week in Schnall now those were higher end homes golf course lot homes so to speak.
But we have really good uptake in that in that draw so demand is there.
To us like demand.
There has to be a lot firmer on the high end of the market than it does the low end of the market.
But with rates coming off and we've already seen 30 year mortgage rates I mean last year. They peaked at around seven eight and today. They are around 67% six eight so they've already come down 100 basis points, we get a few interest rate cuts from the fed and we get the spread between treasuries and mortgage rates, if we get that to compress a little bit which that spread is pretty wide right now.
I think we can we can see a lot of we could easily see homebuilding get back up to I think one 5% next year is my base case forecast and then I think into 2006 it could be 161, 7%. There's just a ton of pent up demand out there. It's just that people can't afford it.
Got it.
It makes sense and just one quick final question in terms of.
Because you mentioned in your opening remarks, as well as focusing on cost focusing on things that you are in your control given the persistent weakness in lumber can you just provide any color on the initiatives that you're pursuing in your in your mills to improve profitability.
Speaker Change: Well, yes, we've got a strict edict out to the mills now.
You need to make sure what youre buying is what you absolutely need to be buying to keep your mill running now we're not going to do stupid things like deferred maintenance Thats, just going to bite us down the road.
But it's really making sure that everything that they are buying is something that they need to keep their mill running successfully but that's not the only thing that work that we're doing to we're shifting our product mix we.
We don't produce a lot of two by four but if you've been watching too bye for southern yellow pine prices they've been at rock bottom levels. So with some of our mills, we're able to flex our product mix to capture premium prices, but generally that that is somewhat limited.
Got it thank you.
Great. Thank you Michael.
And our next question comes from the line of George Staphos with Bank of America. George. Please go ahead. Thanks, so much everyone. Good morning. Thanks.
Yeah.
Market.
Hey, George we can we can barely hear you.
Let's try that has that is that better much better yes, that's much better. Thank you.
I appreciate that so good performance tough operating quarter macro quarter I should say can we go to slide eight and look at the waterfall and just as we sort of think about third quarter recognizing there are no guarantees on pricing.
Speaker Change: <unk>.
With Waldo going through its less ages thats going to cost you. Some volume so volume is probably.
A negative in <unk> versus <unk>.
Can you give us a sense on how that manufacturing cost portion of the waterfall might look sequentially <unk> versus <unk> will it be maybe better because <unk> was so tough or minus there'll be a little bit lower just because youre going through those last stages. How should we think about those two two box if you will or two bars.
Yes, George it's Wayne.
When we think about I think when we look to move from Q2 into Q3, especially as it relates to Waldo.
We believe we absorb most of those costs.
Speaker Change: Higher costs with the modernization project and its effect on manufacturing.
So we have that negative impact in Q2, but we think that will reverse itself over the back half of the year, so that $3 million will kind of roll out in Q3, and Q4 with both improved costs better fixed cost absorption.
Speaker Change: Throughout the remainder of the year. So I think it will be more favorable as we trend the rest of the year. Okay. So we should see some green bars.
On manufacturing cost in the third quarter.
Speaker Change: Without getting into the pennies in dollars here that should be a positive.
Speaker Change: And.
Are there any other things.
That might help you in terms of your overall wood products EBITDA again, recognizing you're at cash cost or better in <unk>.
<unk> profitability.
The.
Speaker Change: Cost reduction opportunities that you see as a way to put a dollar amount on that things that youre doing right now just given where we are in the cycle.
Well, yes, so so I think George the way to think of it as that we're pushing both processing costs and fiber costs down at all of the mills.
Speaker Change: In total we think our cash processing cost were going to come down maybe 2%.
Full year over full year we.
Speaker Change: We think our fiber costs, especially at St Maries and that our Gwinn, Michigan mill are going to come down.
Speaker Change: 6% more or less.
So we think our total cash costs at our mills are going to decline roughly 4% full year over full year. So there will be a there will be a benefit here.
It's not going to be gargantuan it's.
It's tough to move the needle because we're always theoretically we're always working as hard as we can to get log costs down and to get operating cost down, but there will be a modest modest pickup from these efforts okay.
Okay.
I appreciate that Eric I appreciate that Wayne.
Couple more questions for me I'll turn it over and come back can you talk a little bit more about the CCP registry and kind of what's different.
About how they evaluate credits to what you had been using and ultimately what it can mean in terms of value for credit.
And then just maybe back to wood.
You talked about two and a half to 3 billion board feet of capacity being taken out of the market either permanently or temporarily.
The extent that you have a purview on this what do you think in the south in particular the amount of remaining excess capacity is if in fact, you think theres any remaining excess capacity. Thank you.
Yes, I'll, let I'll, let Wayne take the first one and I'll take the second one.
Yes, so george on the carbon credits.
Certainly.
The project team.
We're developing we believe.
Certainly achieve additionality and produce high quality credits.
Thank you.
The market the voluntary market, though continues to evolve and develop certainly buyers continue to.
Demand greater governance, and transparency and I think the market is really searching for greater alignment of standards for these type of projects and as Eric mentioned this integrity council for for voluntary credit markets developing these core principles, which are coming globally recognized I think.
It establishes a common standard and we think that these principles will stabilize.
Carbon trading markets really once they become mainstream and so we believe that these standards. These label projects will attract the highest demand and achieve higher premium pricing, we think potentially upwards of 50% premium pricing and keep in mind. These type of projects they are not.
It's not a one to two year project. These are <unk>.
Speaker Change: Tend to be multi decade projects. So we're really thinking about the long term value here.
That's why we are pivoting to.
Implement these new standards on a project, yes, George you may have seen I mean, theres been a few articles out just in the past couple of weeks about dubious credits being being issued.
And one was in the Wall Street Journal There is another big article in the Guardian.
So we think buyers are getting little bit suspicious about forestry carbon credits now a lot of those <unk> credits are coming out of third world countries.
Speaker Change: But nonetheless.
<unk> has decided that there needs to be a global framework.
For for capturing carbon credits out of forestry.
So like Wayne said, we expect pricing to be this is going to really clear up the marketplace and we think prices are going to be upwards of 50% or more compared to where they are today. So we think about okay. If we defer delay our project.
Two years, whatever it takes to get 50% higher pricing. It's just the right thing to do for our shareholders. So that's kind of how we're how we're thinking about it now your second question with regard to how many more mills in the south can can close.
Honestly I cannot answer that question all I know is what our mills, what our P&L will look like.
And I am sure.
There are a lot of other mills, especially the smaller private ones, where people have got to make really really tough decisions about do they want to keep running in this kind of an environment.
It's really it's really really hard to know all I can all I can tell you is I've seen cost curve for the south.
And at least half of the mills in the South are are losing a lot of money right now.
Yes, thanks for that Eric It was less about cost care more about just overall excess supply recognizing there somewhat.
Somewhat joined at the hip but.
If you had a view on excess supply great if that I'll turn it over.
Okay.
Speaker Change: Thank you.
Okay. Thanks George.
And our next question comes from the line of Matthew Mckellar with RBC capital markets. Matthew. Please go ahead.
Hi, good morning, Thanks for taking my questions good.
Good morning call it a potential opportunity around lithium on a couple of the recent calls could you provide just a bit more color on the potential size of the opportunity here and maybe what kind of timeline, you're thinking about for something to come to fruition.
Yes, I think as far as the size of the opportunity I think we're still working through that potential it's a little bit early to give.
Given the sort of guidance on where we think that could end up but we certainly think thats attractive opportunity when the spectrum of NCS opportunities. That's more near term than say for example, where we think carbon capture and storage is for us that's a little bit longer tail to that but lithia.
We believe has.
And the next.
A couple of years, we think that that opportunity could come to fruition.
Thanks, that's helpful.
And then you called out European lumber inputs rolling over as part of how Youre thinking about the outlook can you give us a sense of what youre seeing on that front today.
Yes, so year to date.
Offshore imports down 14% most of that is from Europe.
And I think the fact of the matter is markets are very weak in Europe right now.
So European producers have been looking for a home for their for their lumber they've been beneficiaries of.
This spruce bark beetle that has made fiber really cheap for their mills.
Fortunately, that's coming to an end here.
The us markets being where pricing is at today is not nearly as attractive to European producers as it was a year or two ago, which is why you are seeing.
Speaker Change: Imports dropped 14.
14% number we think we think imports are going to continue to rollover.
As we as we move forward.
Think probably the biggest factor behind that.
Is it going to be a European recovery, we're now starting to see Europe lower interest rates ECB I think just cut rates 25 basis points, a month or so ago.
And so we expect more lumber to stay within Europe.
And less of it to get to get exported to the U S. So we see.
Speaker Change: Softening in those are those imports going forward.
Alright, thanks, so much for the help I'll turn it back.
Thanks.
Thank you Matthew.
And our next question comes from the line of Kurt Yinger with D. A Davidson. Please go ahead.
Great. Thanks, and good morning, everyone.
Good morning.
Good morning, sorry, if I missed this but in terms of northern saw log pricing. How are you thinking about I guess the degree about which those could be lower Q3 versus Q2.
Yes for northern saw logs.
We're looking our estimates probably kind of mid single digits down from.
The second quarter, some even around 5% and I think there is a mix there. So a couple of things driving that.
I believe certainly indexing the index saw logs down keep in mind Theres, a one month lag there so thats pricing from June to August.
But on the flipside offsetting some of that weaknesses, we have more cedar in the mix plus.
Cedar Cedar pricing for us is actually quite strong.
Yes.
To historical averages.
We have pretty tight supply in the Idaho region, and Thats really driving some strong pricing so kind of those two factors combined we're looking to be down around 5%.
Got it Okay. That's helpful and then on the <unk>.
Speaker Change: Solar side.
How are you guys thinking about kind of the timeline in terms of when we could start to see.
Speaker Change: I guess, a couple a handful or a meaningful total of some of these options really starting to convert to leases.
Yes, we've talked about this on prior calls how challenging it is the backlog of projects that these utilities. These developers have got.
Waiting to get clearance from from regulators and FERC and whatnot.
So the timing of these things is really hard to predict we have actually closed when we closed one back in Q1 of 2022.
It was a sale in ketch Mark of course, we don't catch Mark now, but it had one that closed in Q1 of 2018. So too are actually already already close now that was before the IRA. So now that the IRA has in place.
There's been just a tremendous amount of activity in.
We think next year Theres a potential for one maybe two.
Our projects to get executed.
And so we'll see we're in discussions now with with that partner, but we will see but I think starting next year Youll see some of these options get exercised.
Okay. That's great and then just last one for me on Capex levels.
It makes sense that they would come down next year I guess, if I were to just kind of take the current outlook and then take off kind of the remainder spending related to Waldo this year.
Is that a reasonable kind of starting point for thinking about 2025, maybe in that $60 million Zip code.
Yes, I think at this point, we're we'll see how markets continue to progress the remainder of the year I mean, we have a number of we're always looking at projects and our.
Wood products business.
Higher return and.
Have a high IRR. So yes, I think it's a bit early for us to give guidance on capex for next year.
Okay fair enough well, thanks for the color guys and good luck here in Q3.
Speaker Change: Thanks.
Thanks Kurt.
And our final question today comes from the line of Mark Weintraub with Seaport Research partners Mark. Please go ahead.
Thank you first of all just following up on the solar because as you've highlighted it can be a real dial mover when thinking about the degree of value. It can represent of the existing enterprise, but we are it seems running into.
Maybe delays isn't the right word, but it's been hard to realize these money to start to see them flow through.
Is there something that you can kind of communicate to take give us more confidence to give the market more confidence that it's coming when its coming why it's coming.
Speaker Change: Well, yes, mark so there's been an enormous amount of renewable energy work that's been done in the past year or two.
In the U S. I think something like 23 was a record year is 32 gigawatts.
Speaker Change: <unk>, which was <unk>.
Considerably from prior year, Mark is supposed to be up three fold by 2030 solar power. So there is just a flurry of activity here.
Speaker Change: And.
One of the first things that developer has to do to really get their project rolling.
Is identify a piece of property.
That they can use for their solar farm.
And so we happen to be at the very front end of that whole that whole project.
As we get into next year, and we start having more conversations with these developers that have got these projects by the way, they're paying us all along the way here.
And they've got no revenue right now.
From these farms so it isn't their very best interest to accelerate their projects as much as they possibly can but I think as we get out into next year.
And we perhaps get one or two of these over the goal line.
I think we will have a lot better feel for.
What the runway looks like for the ramping up of these projects.
But right now it's.
Speaker Change: Most of those option agreements or four or five years in length.
A lot of them have been signed just in the last 12 months to 24 months.
So it's really a bit it's really a bit soon to say when they're going to start hitting the.
First option term is coming to an end in the next two to three years for a lot of these contracts.
Hopefully we will see activity.
The contracts executed over that two to three year timeframe.
And is it really not until you get over the goal line, where you can have a very high level of confidence on an individual project or are there milestones, where you can be able to point to why you have a higher degree of confidence today on some of them. Then you have which are getting closer than that.
Say three months ago or is it really it's going to.
B that call at the end of the day, whether it.
Speaker Change: Goes forward or not.
Yes, I think as we get closer and closer to when the contract expires, we'll have we'll have more conversations with the developer.
Speaker Change: About where they're at with their with their project.
Ironically, we had we had one I think it was last year that did not get executed we were very happy that the option did not get executed because we turned around and we leased it to another developer at an even higher rate.
So sometimes these things falling apart can be it can be a good thing, but I think we won't really get have much visibility into what each and every one of these projects looks like until we get closer to having them come to fruition now I do know that for next year, we are having conversations with one or two of them.
And I'm optimistic about those.
But we're not we're not there yet either.
Right and so if I understand correctly. So the carbon credits I think you had thought maybe you would have some by the end of this year.
And I think that that is now being pushed back as youre going as you change tack.
Is there any sort of.
Some of your competitors have kind of put out targets and timelines in fact, both at Europe temporary competitors is there anything maybe not right now but is that something you'd be ready to share with us at some point soon if or if theres color you can give us now.
Yes, I think mark over over the next few quarters I think it's reasonable to assume that we might come up with a forecast I mean, you can just see I'm sure you read that Greenwashing article in the Wall Street Journal, just a couple of weeks ago.
There is a lot of crosscurrents in the carbon credit market right now and we have been a bit reluctant to give to give guidance knowing that there's all this turbulence.
As the dust settles and we get greater clarity I mean, Wayne talked about are our lithium deposits in Arkansas with the state of Arkansas, Hasnt, even set the royalty rate yet on what we are.
Going to get paid for our lithium.
And so I can't tell you, if that's a $1 million opportunity a year or a $20 million opportunity. We just we just don't know.
So I'm reluctant to give detailed guidance, but I think as we move further along the path here and we get more clarity on where these markets are headed I think we'll be in a good position to give to give guidance.
Super I appreciate it thanks guys.
Thanks Mark.
Thank you Mark.
And at this time I'm showing there are no more questions. So I will now turn the call back over to Wayne waste check Wayne.
Thank you everyone for joining us this morning and for your continued interest in Delta have a good day. Thanks.
And ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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