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spk07: Good morning, my name is May and I will be your conference operator today. At this time, I would like to welcome everyone to the POTLatch Deltic second quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Gary Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.
spk03: All right. Thank you, May. And good morning and welcome to Potlatch Deltax Second Quarter 2021 Earnings Conference Call. Joining me on the call is Eric Cremers, Potlatch Deltax President and Chief Executive Officer. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll now turn the call over to Eric for some comments, and then I will cover our second quarter results and our outlook.
spk05: Thank you, Jerry. Lumber prices continued their historic run in the second quarter, driving another quarter of financial performance for the company. Our consolidated EBITDA was $275 million in Q2, which is our fourth consecutive quarter record financial performance. Our wood product segment generated $205 million of EBITDA in the second quarter. To provide context, this amount exceeded wood products EBITDA for full year 2020, which was an annual record itself. As previously announced, we had a fire at our Ola, Arkansas sawmill on June 13th. Fortunately, nobody was injured and the damage was limited to just the large log primary breakdown machine center. Insurance will cover the cost of restoring operations at the mill, along with lost profits above a $2 million deductible. Our team is actively working on demolition and equipment replacement options. Although we have not yet finalized our plans, we are working on restarting the large log line as soon as possible, potentially in late Q1 of next year. It is premature to commit to that schedule as we have not yet finalized the purchase of a replacement line. As a reminder, OLA had an annual capacity of 150 million board feet prior to the fire. Our plywood business continues to perform exceptionally well, and we expect record profitability from this business this year. As we have discussed on prior calls, our industrial-grade plywood is used in big-ticket boats, RVs, truck trailers, and furniture. Demand for these items remains very strong. Our timberland segment earned record EBITDA of $77 million in the second quarter, despite Idaho harvest volumes being at their seasonal low point due to spring breakup. Our average saw log price of $245 per ton in Idaho highlights the value being created by our indexed saw log sales contracts, which are unique in the industry. Our Idaho team did a great job exceeding the harvest plan in the first half of the year, realizing attractive saw log prices and reducing the risk of not meeting our annual harvest plan because of high fire danger. Our southern team did a good job managing through extraordinarily wet weather during the second quarter after dealing with extreme winter weather in the first quarter. We expect that our southern harvest will be approximately 200,000 tons below our annual harvest plan, primarily due to the Ola sawmill fire. Our real estate segments EBITDA declined in the second quarter, as expected, as homebuilders digested over 120 Chenal Valley lots purchased in the prior two quarters. Demand in Chenal remains strong, as evidenced by lot draws thus far in the third quarter, and we continue to see good interest in commercial and rural acreage. Turning to lumber prices, we believe that the steep decline in lumber prices that occurred over the last nine weeks has reached a bottom. Psychology most certainly has played a role over the past couple months, and it is not uncommon for lumber prices to overshoot on the upside as well as the downside. The peak Western SPF price of $1,630 per thousand board feet reported by Random Links for two and better two-by-fours in May was not sustainable. Proports of lower home center lumber demand appears to be a key factor that triggered the price decline. Lumber futures led cash prices down, and the July contract settled at $650 per thousand board feet. Well, the market tone shifted last week. Random Links reported that the price of two-and-better 2x4s increased $55 per thousand board feet in the second half of the week, which is the first increase in nearly nine weeks. Random Links also reported that downward pressure in other western species of lumber and southern yellow pine eased late last week. Nobody wanted to catch a falling knife during the lumber price correction. We believe that reports of sawmill curtailments provided comfort to lumber buyers that their downside risk was limited at current lumber price levels. As a result, lumber futures moved up sharply at the end of last week. The various contracts are in the $600 per thousand board foot range, which suggests that lumber prices could bounce nicely as liquidity returns to the market and lumber buyers replenish lean inventories. housing related fundamentals that drive our business remain robust and fea stated that new residential construction is quote on the cusp of a multi-year boom in a recent set of slides frankly we agree on the demand side new residential construction remains strong with june starts at 1.64 million units on a seasonally adjusted basis permits of 1.6 million units are 23 percent higher than the prior year as well as the 50-year average of 1.5 million units We expect new residential construction will remain very strong due to massive underbuildings since the great financial crisis, record low inventories of home for sale, historically low mortgage rates, and millennials entering their prime home buying years. On that first point, Freddie Mac estimates that the shortage of U.S. single family homes is 3.8 million units, and the National Association of Realtors estimates that the U.S. is underbuilt by 5 to 6 million units. D.R. Horton stated on their earnings call last week that demand remains, quote, extremely robust. Lumber demand in the repair and remodel market declined after Memorial Day as people reacted to high lumber prices that had turned into front-page news. Return to work and discretionary spending shifting to leisure activities likely also played a role. Long-term fundamentals in this segment remain positive, including the age of U.S. housing stock, which is now 42. Economists expect lumber demand in the repair and model segment to continue to grow, and demand has likely just been deferred, not destroyed. On the supply side, higher costs, a tight labor market, and equipment supplier bottlenecks govern the pace of new lumber capacity. Wildfires across the West and a shortage of truck drivers may also create constraints in the near term. Overall, the fundamentals that drive our business remain favorable, and we continue to expect that lumber prices will settle at relatively attractive levels. Our leverage to lumber strategy is perfectly situated to continue to drive strong financial performance for the remainder of 2021 and beyond. Turning to capital allocation, returning cash to shareholders remains a top priority. We continue to expect that we will pay a meaningful special dividend in the fourth quarter. In addition, our board typically evaluates our regular annual dividend, which is currently $1.64 per share, in December. Our strong balance sheet and $891 million of liquidity provide a solid platform as we consider additional investments in our existing mills or accretive acquisitions. We're interested in acquiring timberlands, mills, or a combination of the two near our current operating areas. We published our second environmental, social, and governance report in May, and the report is available on our website. Highlights include disclosures of Scope 2 greenhouse gases, expanded information about our carbon sequestration, and storage and climate-related analysis. Potlatch-Deltic is a leader in sustainable forest management, and we are committed to environmental and social responsibility and to responsible governance. To wrap up my comments, Potlatch-Deltic is very well positioned to take advantage of favorable industry fundamentals, and our strong liquidity and prudent capital allocation strategy positions us to continue increasing shareholder value. I will now turn it over to Jerry to discuss second quarter results and our outlook.
spk03: Thank you, Eric. Starting with page four of the slides, our adjusted EBITDA increased from $195 million in the first quarter to $275 million in the second quarter. This is our fourth quarterly EBITDA record in a row, and we have generated $769 million of EBITDA over the last 12 months. The effect of higher lumber prices more than offset seasonally lower harvest volumes in the second quarter. Information for our timberland segment is displayed on slides five through seven. The segments adjusted EBITDA increased from $68 million in the first quarter to $77 million in the second quarter. Our team leveraged good logging conditions and strong markets to harvest 354,000 tons of saw logs in the north in the second quarter. This volume is seasonally lower than the 427,000 tons that we harvested in the first quarter due to typical spring breakup. Northern saw log prices increased from $178 per ton in the first quarter to a record $245 per ton in the second quarter, or 38%. Lumber indexed and cedar saw logs both experienced healthy price increases. In the south, we harvested 876,000 tons in the second quarter compared to 893,000 tons in the first quarter. Logging activity was constrained by wet weather. Our southern saw log prices were flat sequentially. Turning to wood products on slides 8 and 9, adjusted EBITDA increased from $126 million in the first quarter to $205 million in the second quarter. This is another quarterly EBITDA record for this segment. Our average lumber price realizations increased 33% from $890 per thousand board feet in the first quarter to $1,185 per thousand board feet in the second quarter. To provide context, it's helpful to look at our lumber prices by month. Our average lumber price realizations per thousand board feet increased from $1,045 in April to $1,218 in May, and finally to $1,280 in June. We shipped 260 million board feet of lumber in the second quarter. While this was approximately 7% below our expectations, our team did a good job managing a drop in home center demand after Memorial Day and truck and rail transportation challenges to limit the shortfall. Also, as Eric discussed earlier, our Ola, Arkansas sawmill has not been operating since a fire occurred on June 13th, reducing our production. Moving to real estate on slides 10 and 11, the segment suggested EBITDA was $12 million in the second quarter compared to $17 million in the first quarter. The sequential decline reflects a $3 million commercial real estate sale completed in the first quarter and fewer Chenal Valley lot sales in the second quarter. The latter was expected as builders were digesting robust lot purchases that were completed in the prior two quarters. Shifting to financial items, which are summarized on slide 12, our total liquidity increased to $891 million. This amount includes $512 million of cash, as well as availability in our undrawn revolver. We did not repurchase any shares during the second quarter. As a reminder, we have a 10 plan in place, which reflects our ability and commitment to repurchase our shares at attractive prices. Capital expenditures were $14 million in the second quarter. Note that the amount I just mentioned includes real estate development expenditures, which are included in cash from operations in our cash flow statement, and it excludes Timberland acquisitions. We expect that our total capital expenditures will be approximately $60 million in 2021, excluding acquisitions. Plan 2021 capital expenditures also exclude costs to replace equipment damaged in the Ola Sawmill fire that we expect will largely be covered by insurance. I will now provide some high-level outlook comments. The details are presented on slide 13. We expect to harvest 1.5 to 1.7 million tons in our timberland segment in the third quarter and approximately 5.7 million tons for the full year. As Eric mentioned, our southern harvest will be lower than planned this year because it is uneconomic to redirect logs that would have been consumed by our Ola, Arkansas sawmill. Harvest volumes in the north are planned to be seasonally higher in the third quarter. Fire danger is very high in Idaho, which may constrain logging in the quarter. We expect northern saw log prices to be lower in the third quarter and that they will approximate first quarter 2021 saw log prices. Harvest volumes and saw log prices in the south are expected to be seasonally higher in the third quarter. Our lumber order file is currently prompt to two weeks, depending on the mill. Our average lumber price thus far in the third quarter, including orders booked but not yet shipped, is approximately 50% lower than our average second quarter 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. We plan to ship 260 to 270 million board feet of lumber in the third quarter. We will treat the insurance proceeds associated with the OLA Arkansas sawmill as a special item, and we will exclude the amounts from consolidated and segment-adjusted EBITDA. Shifting to real estate, we expect to sell approximately 2,400 acres of rural land and approximately 50 Chenille Valley lots in the third quarter. Lot demand remains strong, and we expect to sell approximately 150 lots for the year. Additional real estate details are provided on the slide. We expect our consolidated tax rate will be approximately 15 percent in the third quarter and 20 percent for the full year. Overall, we anticipate total adjusted EBITDA will decline sequentially in the third quarter as the effect of lower lumber prices will exceed seasonally higher harvest volumes. We are very bullish on industry fundamentals, and we expect lumber prices to remain above long-term averages. We're well positioned with our integrated operating model to continue growing shareholder value over the long term. That concludes our prepared remarks. May, I would now like to open up the call to Q&A.
spk07: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Keith and Mantora with BMO Capital Markets. Your line is open.
spk00: Thank you, and congrats on a very strong second quarter, Eric and Jerry. First question on capital allocation. Maybe to start with, and recognizing that you don't want to jump in front of the board on special dividends, can you give us some sense of, you know, what is the right way to think about the framework around sort of the level of special dividends. Do you think about it in terms of cash flow for the year? Should we be thinking about it in terms of leverage? Any color there will be helpful.
spk03: Yeah, that's probably a really good place to start, Keaton. This is Jerry. I'm sure that's topical for a lot of folks, including a lot of shareholders. You know, first off, you know, we have this high class problem where, you know, our leverage to lumber prices has really generated a lot of value this year. And, you know, fortunately, a lot of that value is going to be shared with shareholders in the form of a special dividend. And, you know, we do expect that the amount that will be paid out will be significant. And we've also have described it in presentations this last quarter as multiples of the regular dividend, which is currently $1.64 a share. And to set the stage, what really drives, again, it goes back to the value we're creating through the indexed log arrangement in Idaho, as well as these strong lumber prices that are coming through our lumber business. And as a REIT, we can only retain so much cash. I mean, we have the benefit usually to retain a fair amount. But, you know, the earnings have been so high this year that, you know, we have to distribute that to maintain our REIT status, which, you know, we will never jeopardize that. And certainly our destiny is within our control here. So nobody should be worried that, you know, we're in danger of breaching those requirements. In terms of the amount, there's a lot of moving parts, you know, with a key one being, you know, what are lumber prices for the rest of the year? And there's a lot of complexities, you know, given it's requirement-driven. There's a lot of complexities and a lot of variables we are in the process of looking through and discussing with our board. So, unfortunately, at this point, I can't give, you know, much more guidance or color or sideboards other than it will be significant. It will be in the fourth quarter.
spk05: And, Keaton, I'll just add one comment to what Jerry just said. You know, there's a lot of volatility right now in our earnings stream, particularly in wood products, as you might imagine, given the change in lumber prices. And just, you know... A month or two ago, we had a wood products forecast for the year earnings that was roughly $200 million for the year higher than where we think we're going to end up now. So think about that $200 million spread across, you know, 70 million shares more or less. The amount of volatility in that earnings stream and therefore that dividend is enormous. So we're going to wait until we get to the end of the year to decide what the appropriate special dividend is.
spk00: No, that's absolutely fair and appreciate the color and the context there. Switching to the other side of capital allocation around M&A, can you talk about, you know, sort of what is your pipeline looking like and where do you see the most opportunities at the moment? I know it's, you know, you look at sort of both on the Timberland side, you know, plus Timberlands and so on. I'm just curious kind of how the pipeline looks right now.
spk05: Yeah, there's a number of deals that we're currently looking at and we're currently working on. I don't like to get down into the specifics of these deals for competitive reasons. But what I would tell you and what I do think is interesting is that we've been competing for these deals. And on three recent ones, we were actually the high bid group. and yet the seller changed their minds and decided to not transact, even though we were the high bid. In one case, we hit the number that they were looking for, and they just changed their minds and walked away from the deal. so i think timberland m a is is is is picking up it's it's getting interesting people are seeing timber mart south data you know they're seeing 1500 1600 lumber and they're getting excited and so the bid ask uh spread may may still be wide between buyers and sellers but We continue to kick the tires on deals, and, in fact, we did one in Mississippi this last quarter. It was 1,100 acres. It was an 11% IRR, so it created a lot of shareholder value for us. But we're not going to chase deals and overpay. We're only going to do deals that create shareholder value, just like that one that we closed in Q2.
spk00: Got it. That's very helpful. I'll turn it over and jump back in the queue. Good luck in the back half of the year. Thanks.
spk07: Your next question comes from the line of John Babcock of Bank of America. Your line is open.
spk02: Hey, hi, and thank you for taking my questions. I guess just right now, could you talk about, you know, I know you mentioned, you know, a little bit about what you're seeing in the market right now in terms of lumber. Just want to get a sense for how demand is right now, you know, relative to last week, relative to two weeks ago, you know, particularly at home centers. It sounds like that was where, you know, You know, some of the weakness and demand has been, you know, just kind of curious if that's picked up. You know, and then also, you know, what you're broadly seeing from builders, if there's been any change in the trend there, you know, any kind of data you can provide around that or at least, you know, commentary would be useful.
spk05: Yeah, so on the home center demand question, yeah, you know, when prices got up to $1,600 or so, you know, a month or two ago, essentially there was a buyer strike. It looks like to us DIY demand just dried up. And probably some of that might have just been due to, you know, people spending time on leisure activities in the summertime. You know, it could have been that, you know, COVID was now in the rearview mirror. People would go out and travel and go to movies and restaurants and whatnot. But there was a real buyer strike that happened a month or two ago. And so demand just ground to a halt, virtually no takeaway. And we have started to see demand pick up from the home centers. It's not where it was a year ago, but it is increasing. So our view is that, you know, nobody wanted to get caught with a lot of $1,600 lumber on the balance sheet. And so they stopped buying. Prices have now drifted lower. And now we're seeing demand come back because the risk is off for the home centers. So we feel like demand is coming back. And now that we're getting into the fall, we're going to start to see R&R activity pick up again as people return from summer vacation and whatnot. You know, what I tell you on the housing start side is I don't know that I've ever been this optimistic regarding the outlook for housing. It is just incredible. If you look at what the home builders, the public company home builders have been saying with recent earnings releases, whether D.R. Horton, Lennar, Pulte this morning, I could just go on and on about the very favorable things they're talking about in terms of exceptional demand out there. Now, they're struggling to produce those housing units because of shortages and supply chain issues, but there is just an unbelievable amount of demand. And if you look at what a lot of the pundits are saying, like FDA, for example, thinks that we're going to, new housing starts, they're going to keep marching higher up to 1.8 million units per year, you know, over the next four or five years. So just really favorable demand outlook on the housing start side.
spk02: Okay. And then just following up on that, particularly as it pertains to the home centers, I mean, it sounds like You know, they were essentially trying to work through some of the higher-priced inventory. Can you talk about, you know, to the extent that you have any color on this, really, you know, how much, you know, might be left, you know, for them to work through on that front? Also, you know, how should we think about, you know, when, you know, prices might, you know, come lower on that side at the home centers? I know that, you know, you're not directly in that business, and so it might be difficult to predict, but just trying to get a sense for, you know, that because that ultimately may come into play, you know, in terms of overall, you know, lumber demand.
spk05: Yeah, it's really hard for us to know exactly where home center inventory and demand is. But what I'd tell you is that because they went on buyer strike and there still is takeaway at the home centers, their inventories have got to be really lean right now. And like I said, with these prices coming down to $600 or so, they're starting to step back into the market and replenish inventories. So, yeah. I don't know. We don't have direct insight into what the home center is doing, just kind of anecdotal.
spk02: Yeah, no, that's fair. And then just last question before I turn it over. I just wanted to, you know, get a quick sense on in Northern Saltwater pricing, you know, and how we should think about how that rolls through results over the next, you know, quarter or two, particularly just given the volatility in lumber pricing. So if you could just talk about the lag and, you know, kind of some of the color, I guess, that you've provided in the past, that'd be useful.
spk03: Yeah, I'll take that one, John. This is Jerry. So in terms of the lag, as a reminder for the group, it's about a four-week lag in terms of lumber price resets. So when I talked in the script about You know, lumber prices for us were down 50% so far in the third quarter compared to the second quarter average. You know, you do have to lag that when you think about index saw log pricing. Again, that's about a four-week lag. The other thing that's in the mix is cedar, you know, which typically sells four, three, and sometimes four times the value of mixed saw logs. So we certainly have cedar continues to be, you know, relatively strong and certainly is not going to come off at the same level. And then the last thing I'll give you is actually in the prepared comments, you know, I had kind of guided that, you know, we think third quarter northern solid pricing is probably, you know, approximately the same as Q1 of 2021. So that really should help you all dial in at least what our expectations are.
spk02: Okay.
spk03: Thank you.
spk07: Your next question comes from the line of Paul Queen of RBC Capital. Your line is open.
spk06: Yeah, thanks very much. Morning, guys, and great results. Maybe I'll start with the fire at Ola. I know you got the $2 million deductible. How bad was the fire? Is that a $20 million insurance claim? Maybe you could give us some context for it.
spk05: Yeah, so as we said in our opening remarks, I mean, the fire, you know, thankfully nobody was hurt. Thankfully the whole mill didn't burn to the ground. It was really just one machine center that got damaged. Now, unfortunately, it was a very important machine center. You know, the primary large log breakdown line, that's an integral component to running a sawmill. And obviously those machine centers are in very high demand right now from the equipment vendors. So we're trying to find a new line. We've identified a really good used one, and we've been in discussions with all the vendors about buying a new one. We'll see how the discussions play out, but I'm optimistic that we will wind up getting the used one, which it's been gently used, so to speak. And we will wind up paying a premium. It's probably, if I had to guess, it's in the $15 million kind of range. Now insurance is going to cover that purchase. There will be demolition and install costs, which again will be covered by insurance. It's hard to know what the full extent of our claim is going to be because from a business interruption standpoint, it's really dependent upon what happens to lumber prices. But we will be protected. Our P&L will be protected as if that whole sawmill was up and running, you know, from a business interruption standpoint. So right now, I'd say, you know, it's $15 million for that machinery. It's probably another $5 million to relocate it and install it. And then it's plus business interruption.
spk06: Okay. And then just on the equipment providers themselves, yeah, my understanding is that they've got long lead, you know, order files, you know, two years plus. And
spk05: uh so i suspect that wasn't a that was an option how are you able to source a used one and it said is it a working is it working right now in a sawmill or is it idle well so so so two different two different things there one is on the on the new equipment side we can get one as early as middle of next year um so it's not it's not two year lead time so that that particular piece of equipment um So we could get a new one by the, who knows, late second or third quarter of next year. The used one, it's about eight to nine years old. It's at an idle sawmill today, so it's not being run. It's roughly been sitting idle for, I don't know, two to three years. It's very well maintained. That piece of machinery is still sold today by the vendor, which is a leading vendor in the industry. In fact, if we had to go out and buy a new one today, that's the exact piece of equipment we would buy. Now, there have been modifications. to that thing since it was originally sold software and whatnot. But we will make all those changes prior to implementing and installing that piece of equipment. So from our view, it's as good as new.
spk06: Okay, so I'm still, like, it doesn't sound like there's a huge difference between, you know, you bringing up this used one and maybe the end of Q1 22 and a new one in probably Q3 of 22. So, and insurance is covering the issue. Why would you go used versus new?
spk05: Well, because we think that the used is basically as good as the new. We're going to do diligence. on that piece of equipment. We're going to have the original vendor go in and inspect it. And we've been assured by them that this is as good as new. So in our mind, there really is no difference. And we would just as soon get that mill back up and running as soon as we can. You know, when you have a mill down, you know, your people tend to scatter. And we've talked about this on prior calls, how challenging it is for the industry right now to get skilled labor to We don't want our people to scatter. We want them to stay at that mill. We want them to work. The longer we delay that startup, the harder it's going to be for us to retain those people.
spk06: Yeah, no, that's a very good point. Okay, so maybe just turning the lumber, just on, I like their monthly breakdown in pricing. What is your July average price to date?
spk05: July average forecast is 720 bucks. Now, remember, our order files, so, Paul, remember our order files, you know, we're always selling stuff out into the future. So some of that 720 captures, you know, those high prices that we were still seeing back in June.
spk06: Yeah, no, I understand the like. Okay, and then just you highlighted how strong the plywood market is. Is that a meaningful pickup? Is that like a 5% off, you know, its annual run rate this year, or is it more meaningful than that?
spk05: I would say, you know, we don't like, for competitive reasons, we don't like to break out the results of our plywood business. But just like with lumber, the earnings in that business, it's multiples of what it would be in a normal year. Okay.
spk06: That's helpful. Thanks very much, guys. Thanks a lot. Thanks, Paul.
spk07: Your next question comes from the line of Kurt Yinger of B.A. Davidson. Your line is open.
spk04: Great. Thanks, and good morning, Eric and Jerry. Morning. Morning. Hey, just starting off on the harvest outlook, I guess first, what should we be expecting in terms of normalized Idaho harvest levels going forward? And secondly, as we think about 2022 weather and demand permitting, is that roughly 6 million ton harvest level that was originally outlined for this year a reasonable starting point?
spk03: Yeah, so, Kurt, I'll take that one. This is Jerry. In terms of, I'll start with the back part of your question because I think it tees up the answer well, which is 6 million still is our normal run rate. You know, when you think about our Idaho and our southern harvest, you know, 6 million tons, give or take, is about the sustainable level, i.e., we're harvesting roughly the same amount that's growing each year. There's some moving parts this year in the harvest, unfortunately. First off, Eric had touched on in his comments that in our Ola Timberlands district, our Ola Sawmill was a key outlet for and purchaser of a lot of the saw logs that are produced in that region. You know, we think part of the reason why the harvest guidance for the year has come down from the 6 million tons is we think we're going to be 200,000 tons short in that district because of the Ola fire this year. So that harvest volume would be deferred. You know, it would continue to grow, fortunately, and it will be delivered in future years. The other thing that's happening here, you know, is in Idaho, certainly we have prioritized delivering saw logs. So when we have logging contractor availability, We're going to push it to the saw logs just to make sure that we can deliver into these strong markets. And pulpwood becomes less of a priority. So when you look at the volume so far this year, pretty anemic on the pulpwood side in Idaho, but as you recall, that's pretty low margin business to start with. And like I said, we really shifted the logging capacity. So, you know, the other, you know, the other explanation as to why we're short, you know, 5.7 million tons versus a six is there's probably a hundred thousand tons, you know, in the pulpwood that in, in Idaho, you know, at the end of the day, it's just low margin stuff to, to, at the end of the day. So.
spk05: Well, especially when you think about all the sawmill residuals that are being produced or have been produced here over the last few quarters, it's really put downward pressure on pulpwood prices to where, like Jerry said, there's low or no margin in producing that stuff.
spk04: Got it. Okay. That makes a lot of sense. And I guess just sticking on the log side, it looked like that was a modest headwind. versus last quarter, but could you remind us how to think about the lag of those fiber costs in Idaho? Is that something you'd expect, I guess, more pressure from in Q3 as you absorb Q2 pricing?
spk03: Yeah, just to clarify your question, are you thinking in terms of wood products purchase of logs, Kurt?
spk02: Correct.
spk03: Okay. So, you know, that lag that I talked about earlier, it's about a four-week lag in terms of a price reset. So, You know, where, again, we saw or expect, you know, northern saw log pricing to come down, you know, call it 25%. You know, if you just take the marker, which is Q3, probably looks very similar to Q1 in terms of a realization. That will tell you you get some price relief, you know, going forward in the St. Mary's Mill Complex in terms of the index saw logs, but, you know, probably not as fast as you're seeing the lumber price realizations come down.
spk04: Okay, got it. All right, so it's the same, I guess, as the pricing going through the term plant segment. That makes sense. Okay, and then I was just curious if you could talk about with all this volatility, whether you're seeing any change in the approach to inventory or buying from your distributor customers and ultimately how you think that may impact the market going forward. You know, you spoke to the psychology impact there. Is that something that you think will just be another factor kind of lending itself to more big swings going forward?
spk05: Yeah, there is a huge psychology impact from lumber purchasers. When prices get to really high levels, people start to get really nervous. They don't want to get stuck with a lot of inventory, as you can imagine, on their balance sheet. And so they'll stop buying. But they want to meet end customer demand, so they tend to buy lumber shipped directly from mills via truck and not like rail where it takes a month or something. uh so the psychology is is huge we got to those high prices um buyers went to really lean inventories and then prices collapsed especially as as diy wasn't wasn't showing up at the home centers to buy inventory so now the situation is prices have really come down and the home centers have got really lean inventories We think as we get into the fall and people return from vacations and whatnot, we do think there's going to be a pickup in the DIY and the R&R segments, and demand is going to come back and the home centers are going to have to replenish inventories, and we think that's going to provide some support for pricing here in the third and fourth quarters. So psychology is a large part of what happens here.
spk04: Right, right. OK, great. Well, appreciate all the color, and good luck here in the back out, guys.
spk05: Thank you.
spk07: Your next question comes from the line of Mark Weintraub of Seaports Research Partners. Your line is open.
spk01: Thank you. So it's kind of interesting, as you were referencing the fact that your pulpwood prices and profitability is very low. for the reasons you noted down south. And at the same time, we've been reading about how there's been some increase in pulpwood costs because of weather, et cetera. And I guess it sort of really brings to the forefront that maybe there are regional differences that go on in the South, certainly from time to time. I know that you sell a lot of logs and you also buy a lot of logs in the South as a starting point. Are you basically selling and buying in the same wood baskets, or do you have exposures in some wood baskets where you're selling more and you're buying more in others within the South?
spk03: Yeah, I guess to start with, Mark, you know, my reference to weaker pulpwood prices was Idaho specific. You know, big picture, we're seeing, you know, pretty stable saw log prices and pulpwood prices in our southern wood baskets. And that kind of flies in the face of Timbermark South report that came out recently, which, you know, on a simple average basis indicated saw log pricing up 13%. And, you know, I think some people got excited that maybe the saw log price recovery is here and Our view is it's not. A couple of things that I will share is, one, we think the Timbermark South data, while it's good to have it out there, it's probably based on a thin set of transactions. For example, we don't submit information that's included in that database. You know, we are, you know, second largest, you know, Timberland owner in the state of Arkansas. So, you know, there's a big part of the data that's not in there. And, you know, like I said, we see typically a little bit of lift from time to time as there's a new large, you know, a mill is either, you know, brought up in a greenfield fashion or you know, there's an expansion. We see what weather premiums, you know, usually it might be a buck or two. And then it seems like every time up to this point, it's kind of settled back down into this long-term norm, you know, which for us is probably around this $44, $45 per ton on a You know, I think, you know, our view is, you know, one, you know, got to be cautious with the data. You know, we have a lot of data that we look at in our wood baskets, and it's been pretty stable to this point. And any, like I said, premium has been short-lived, and things have kind of settled into the long-term average norm.
spk01: Okay, that's helpful. And so just to clarify, and so you think that would sort of, Not putting it on the spot because you don't see all the different regions, but would that comment be really specific to just where you have a presence, or do you think that's a fair description for the U.S. South overall?
spk03: Yeah, I can only speak to our wood baskets, Mark. I mean, that's where we have, you know, fairly deep data, and we just don't have direct exposure to the other southern wood baskets. So my comments are Paulette's Deltic experience specific. Fair, fair.
spk01: And shifting gears just back to the capital allocation, and thanks for the color on the special being multiples of the regular dividend. That's helpful in sort of framing. You also, I think Eric also mentioned, or maybe it's you, Jerry, that you'll also be re-looking at the kind of the regular dividend as well. Last year you had, for the first time in quite a while, given a relatively small bump. What would be the determinants, the drivers that would lead you to your conclusions on what's appropriate now? It seems like you'll have maybe a bit more cash on the balance sheet, but a bunch of it's going to be paid out in the special. What would be the thought process that would make sense to be pushing that up this year? Or is it sort of just more of this like inflationary type of small increases that one should expect from time to time?
spk05: Yeah. So, Mark, you know, our dividend, any changes we make to it, any increases that we make, we need to be convinced. We need to have conviction that it is sustainable first and foremost. You know, I think as you know, our Idaho index saw log contracts, they're unique in the industry. And they are creating a tremendous amount of cash at these current saw log prices, even though they've come down or they're coming down, still creating an enormous amount of cash for us. Given that our view is that lumber prices are going to remain relatively high over the next several years, especially given this backdrop that BC needs roughly $600 lumber to get to break even, our sense is that cash flows are going to remain relatively strong in our timberland business, especially as it relates to Idaho. So, you know, I would just say that we're well positioned for our board to consider increasing that base dividend beyond our current $1.64 per share. But that's decided in December of each year.
spk01: That makes a lot of sense. I guess on that point on the cash costs in B.C. being so high, you mentioned also that there were some curtailments. I think Canfor is that one. Are we seeing anything in B.C. or anywhere else? related to this higher cash costs that sort of reinforce that conviction that those higher wood costs there are going to help create a floor, or is that still kind of a yet to be seen?
spk05: Well, I can't force the only one to come out and publicly state that they're curtailing, but we are hearing lots of rumors, and we have customers that we know are curtailing and cutting back hours. They may not be making a public announcement about it, but it's happening behind the scenes. You know, as it relates to B.C., what I would say is that, you know, those log decks that those mills have right now are from logs that have been purchased, you know, in the prior quarter or two. And so they're still relatively low-cost logs. But they're facing real headwinds as we get into Q3 and Q4 when those log prices reset. So I think the clock is ticking is kind of how I would word it. Thank you, Eric.
spk07: At this time, I'm showing there are no more questions. I'll turn the call back over to Jerry Richards.
spk03: All right. Thank you, May, and certainly appreciate everybody's interest in Potlatch Deltic. I am available for the follow-up detail modeling questions the rest of the day, and we'll talk to you next quarter, if not sooner. Thank you.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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