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spk00: Good morning. My name is Paula, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Potlatch-Delphic third 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, simply press star one again. Thank you. I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.
spk07: Thank you, Paula. Good morning, everyone, and welcome to Potlatch Deltics Third Quarter 2021 Earnings Conference Call. Joining me on the call is Eric Kramers, Potlatch Deltics 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 third quarter results and our outlook.
spk06: Thank you, Jerry. Our consolidated EBITDA was $107 million in Q3, down from our record quarterly EBITDA of $275 million in Q2. Although we experienced a significant drop in lumber prices, it was still an excellent quarter for the company. To provide context, Q3 EBITDA is the highest quarterly amount that we have generated prior to the lumber price run that began in 2020. That statement includes 2018 when our quarterly EBITDA peaked at 102 million. We are encouraged by recent lumber price trends as lumber prices appear to have found the bottom during Q3 and are now moving higher. Our wood product segment generated $27 million of EBITDA in the third quarter. Importantly, the segment's focus on improving safety performance was evident this quarter. Six out of seven mills had zero recordable incidents during Q3, and all our mills were incident-free in August and September. As discussed on last quarter's earnings call, we had a fire at our Ola, Arkansas sawmill on June 13th. Nobody was injured, and the damage was limited to the large log primary breakdown machine center. insurance will cover the cost of restoring operations at the mill along with lost profits above a two million dollar deductible we decided to purchase new replacement equipment demolition and construction work is well underway and we are scheduled to receive the new large log line equipment by the end of q2 of next year and we expect to complete the installation in q3 In the meantime, we restarted the small log line this month and we anticipate ramping up to produce approximately 30 million board feet on an annual basis until the large log line restarts. As a reminder, OLA had an annual capacity of 150 million board feet prior to the fire. Our plywood business is performing exceptionally well and we continue to expect record profitability from this business this year. As we have discussed on prior calls, our industrial-grade plywood is used in big-ticket boats, RVs, truck trailers, and furniture. Demand for these items remains very strong. Our timberland segment earned EBITDA $76 million in Q3, nearly even with the record EBITDA of $77 million last quarter. Our average saw log price of $191 per ton in Idaho is the second highest on record. This highlights the value being created by our indexed saw log sales contracts, which are unique in the industry. Our Idaho team did a great job managing fire risk this summer, which resulted in our losses being limited to less than $1 million after salvage operations. In the south, weather has constrained logging activity this year, resulting in our harvest volume being lower than planned. We experienced extreme winter weather in the first quarter, and it has been unusually wet in the second and third quarters. The resulting shortage of saw logs has caused the price of southern pine saw logs to increase. Our southern team is working hard to mitigate the harvest shortfall. In addition to the weather-related risk, we continue to expect that our southern saw log harvest will be approximately 200,000 tons below our annual harvest plan due to the Yola sawmill fire. Our real estate segments EBITDA declined in the third quarter, as expected. Demand for residential lots in Chennault Valley remains strong, and we continue to see good interest in commercial and rural acreage. We will provide more color on the fourth quarter earnings call, but 2022 is shaping up to be another strong year for real estate. Turning to lumber prices, Random Lengths has reported higher lumber spot prices eight weeks in a row since the market bottomed in late August. The latest framing lumber composite price of $575 per thousand board feet is $186 or 48% higher than the August 27th composite price. Furthermore, lumber futures have also increased sharply since the summer. The November contract is currently well above $600 per thousand board feet and the last prices for 2022 contracts were well above $700 at yesterday's close. Housing-related fundamentals that drive demand in our business remain robust. Seasonally adjusted U.S. housing starts at 1.56 million units in September were 7% higher than September 2020 and are near the 2021 average. It appears that supply chain challenges continue to govern the pace of construction, as the U.S. Census Bureau reported that there were 1.45 million housing units under construction at the end of September. That figure includes single and multifamily units, and it is not seasonally adjusted. Homebuilder confidence remains very strong with the NAHB Homebuilder Index at 80 this month. Low interest rates, a shortage of homes, and the large millennial demographic cohort all continue to underpin our view that housing is set up for a multi-year boom. Lumber takeaway in the repair and remodel market returned to healthy levels after Labor Day, and our business is growing in this market segment. Long-term fundamentals remain positive, including the age of U.S. housing stock, which is now 42 years on average, high levels of home equity, and the fact that remote work continues to be a common practice. On the supply side, higher costs, a tight labor market, and equipment supplier bottlenecks govern the pace of new lumber capacity. Fiber availability across Western Canada and the Western U.S., and a shortage of truck drivers are also constraints. Overall, the fundamentals that drive our business remain favorable, and we continue to expect that lumber prices will remain structurally higher than long-term historical averages. Our leverage to lumber strategy is perfectly situated to continue to drive strong financial performance. Turning to capital allocation, returning cash to shareholders remains a top priority. We expect to pay a special dividend of $3 to $5 per share in December. In addition, our board typically evaluates our regular annual dividend, which is currently $1.64 per share per year, in the fourth quarter. Our strong financial position provides a solid platform as we consider additional investments in our existing mills and accretive acquisitions. We are interested in acquiring timberlands, mills, or a combination of the two near our current operating areas. Turning to environmental, social, and governance reporting, we are focused on quantifying scope theory greenhouse gases, climate risks, and opportunities across the business, and evaluating our greenhouse gas reduction opportunities. We plan to publish our third annual ESG report next May and our first climate and carbon report later in 2022. Populatch Delta is a leader in sustainable forest management, and we are committed to environmental and social responsibility and responsible governance. To wrap up my comments, Potlatch's Deltic strategy is well aligned with 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 third quarter results as well as our outlook. Thank you, Eric.
spk07: Starting with page four of the slides, our adjusted EBITDA decreased from $275 million in the second quarter to $107 million in the third quarter. The sequential decline in EBITDA was largely due to lower lumber prices. Information for our timberland segment is displayed on slides five through seven. The segments adjusted EBITDA of $76 million in the third quarter was comparable to the record EBITDA of $77 million generated by timberlands in the second quarter. We harvested 462,000 tons of saw logs in the north in the third quarter. The Idaho harvest volume was seasonally higher than the 354,000 tons harvested in the second quarter. Northern saw log prices decreased from a record $245 per ton in the second quarter to $191 per ton in the third quarter, or 22%. Note that $191 per ton is our second highest quarterly saw log price ever. Demand for cedar saw logs remains robust, and the average price we have realized for our cedar saw logs is approximately 70% higher in 2021 compared to last year. In the south, we harvested 1,037,000 tons in the third quarter compared to 876,000 tons in the second quarter. Logging activity was constrained by wet weather. There was a shortage of trucking, and saw log volume was down due to the fire that occurred at the Ola Sawmill in June. Our southern saw log prices were 10% higher in the third quarter compared to the second quarter. The increase includes 5% higher pine saw log prices, which we believe is due to weather-related log shortages, along with a seasonally higher mix of hardwood saw logs. Turning to wood products on slides eight and nine, adjusted EBITDA declined from $205 million in the second quarter to $27 million in the third quarter. Our average lumber price realizations decreased 55% from $1,185 per 1,000 board feet in the second quarter to $533 per 1,000 board feet in the third quarter. To provide context, it's helpful to look at our lumber prices by month. Our average lumber price realizations per 1,000 board feet went from $719 in July to $469 in August and to $433 in September. The timing of shipments to customers caused our lumber prices to lag the spot prices reported by random links in the month of September. The lag effect is driven both by the timing of shipments and the length of our order file. We shipped 265 million board fetal lumber in the third quarter. As Eric discussed earlier, our Ola, Arkansas sawmill has not been operating since the fire occurred on June 13th, reducing our overall production. Our team did a good job managing truck and rail transportation challenges in the quarter. Moving to real estate on slides 10 and 11, the segment's EBITDA was $9 million in the third quarter compared to $12 million in the second quarter. Lower rural land sale closings quarter over quarter was partially offset by an increase in residential lot sales in our Chenal Valley master plan community in Little Rock, Arkansas. Our team has increased the pace at which they are developing residential lots this year, as strong demand has resulted in our unsold lot inventory dropping significantly. It has been hard to increase lot inventory to more normal seasonal levels as residential lots are effectively selling at the pace they're being developed. Shifting to financial items, which are summarized on slide 12, our total liquidity increased to $972 million. This amount includes $593 million of cash, as well as availability on our undrawn revolver. As Eric mentioned, we're planning to pay a special dividend of $3 to $5 per share in the fourth quarter. Based on the number of shares currently outstanding, this would use $200 million to $335 million of cash. We did not repurchase any shares during the third quarter. As a reminder, we have a 10b-5-1 plan in place, which reflects our ability and commitment to repurchase our shares at attractive prices. We plan to refinance $40 million of debt scheduled to mature in December 2021 and have locked the interest rate. Annual interest expense will decline approximately $700,000 on this debt beginning in December. Capital expenditures are $17 million in the third quarter. Note that this amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement and excludes Timberland acquisitions. The third quarter amount also includes capital expenditures of $5 million to rebuild the Ola Arkansas sawmill, which are covered by insurance. We expect that our total capital expenditures will be approximately $70 million in 2021, excluding acquisitions and including the Ola sawmill rebuild. We have received initial insurance proceeds of $13 million today. I'll now provide some high level outlook comments. The details are presented on slide 13. We expect to harvest 1.3 to 1.5 million tons in our timberland segment in the fourth quarter. Total estimated harvest of 5.4 to 5.6 million tons for the year is lower than the 6 million tons planned. The shortfall is due to several factors. First, it was uneconomic to redirect approximately 200,000 tons of saw logs that we would have delivered to our Ola, Arkansas sawmill. Second, as Eric mentioned, persistent wet weather in the south earlier this year has caused our harvest to fall short of plan. Our team is working hard to mitigate the amount of the shortfall. Third, we have lowered our pulpwood volume in Idaho as it is virtually no margin at current prices. Note that our saw log harvest in Idaho will meet our harvest plan on a volume basis, but not on a tonnage basis. The ratio of tons to 1,000 board feet is affected this year by drier than normal saw logs due to the extreme heat and the size of saw logs. We expect saw log prices to be lower in the north and the south in the fourth quarter. Our average lumber price thus far in the fourth quarter, including orders booked but not yet shipped, is approximately $500 per 1,000 board feet, or 6% lower than our average third quarter lumber price. Keep in mind that our average price for July shipments was $719 per thousand board feet, which pulled the Q3 average up. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. We plan to ship 240 to 250 million board feet of lumber in the fourth quarter. Shifting to real estate, we expect to sell approximately 4,500 acres of rural land and approximately 35 Chenal Valley lots in the fourth quarter. Additional real estate details are provided on the slide. We expect our consolidated tax rate will be approximately 15% in the fourth quarter. Overall, we anticipate total adjusted EBITDA will decline sequentially in the fourth quarter due to seasonally lower harvest volumes and a decline in saw log prices. We're very bullish on industry fundamentals, and we continue to expect lumber prices to remain above long-term averages. We're well positioned with our integrated operating model to continue growing shareholder value over the long term. That concludes our prepared remarks. Paula would now like to open the call to Q&A.
spk00: Thank you. As a reminder, I'd like to remind everyone to ask a question, please press star 1 on your telephone keypad. Again, to ask a question, please press star 1. Your first question comes from Kurt Yanger at VA Davidson.
spk08: Great. Thanks, and good morning, Eric and Jerry. Morning. just starting off on the real estate segment could you remind us where you stand in terms of remaining lot sales pipeline in chanel valley um and kind of the runway you have there in terms of uh i guess estimated lot sales over the next couple years yeah so so um good morning kurt and and in terms of remaining lots um you know i'll step back and provide some overall background i mean it's a 4 800 acre master plan community
spk07: It was started in 1989 by Deltic. You know, originally it had overall about 5,100 total residential lots, and there's about, you know, just under 1,700 that are left. And at the current sales rate, that's probably about 10 years of supply, you know, if we kept it at the same rate that we're selling at currently.
spk08: Got it. Okay. Thanks for that. And then on the harvest, you know, Sounded like some weather issues, and obviously the Ola Mill isn't taking the same tonnage as before. Are there any other challenges there in terms of flexing harvest levels up with still a pretty good pricing environment? And as you look ahead, any thoughts around how you might be able to ramp that in 2022?
spk07: Yeah, it's a great, great question, Kurt. You know, and they're really, you know, when you think about the factors that are constraining harvest and causing us to fall a bit short this year, I mean, they're really the, you know, the items I just laid out in the prepared comments. You know, the only other, you know, other product line I would talk about that I didn't mention was Southern Pulpwood. And certainly in Arkansas, you know, if you go back to 2019, you know, we had a bleach board mill that GP closed. And certainly that's, you know, that's made a, you know, a well-supplied market even more well-supplied. So, you know, If you were to ask our team down there, what is their biggest challenge? It's continuing to move pulpwood. Now, we do benefit from some supply contracts as well as some FSC-certified wood that helps us in that aspect. And our team's able to move that volume, but certainly that's the other thing that we think about. But there's no doubt in our mind. I would expect we're in the process of planning now, but I'd expect that our plan is 6 million tons next year. That's about our sustainable level. And Our team, absent these weather issues and an old sawmill fire, does a pretty good job of usually meeting that plan. Got it. Okay. That's helpful. Thanks, Jerry.
spk08: And then it looked like there were a couple of discrete items that kind of weighed down wood products in the quarter. And I'm wondering first how much lag there is in terms of elevated Idaho saw log prices from Q2 and Q3 kind of flowing through on the cost side. And then outside of fiber, can you just talk a bit about some of the other cost pressures you're seeing on the manufacturing side?
spk07: Yeah, I'll take the first one of those in terms of the lag. And, you know, it's a dynamic where certainly, you know, our mill complex in St. Mary's, Idaho is purchasing logs on an indexed, you know, to lumber basis, you know, which means, you know, when you have a run in saw log pricing in Idaho like we did earlier this year, that's going to be sitting in inventories. And it's not uncommon, especially when you have a pretty precipitous drop in lumber price to see, you know, to see a charge like we had. It was 6.4 million, you know, which is in the materials. So it's not unusual to see that. And the lag really depends on the time of the year. I mean, when you think about, you know, what we're doing right now is we're building a log pile to take us through spring breakup next year. So, you know, log inventories are building to their high point for the year. They're at their low point coming out of spring breakup on the other end. So, you know, when you think about, you know, this particular inventory charge, you know, I would say inventories were probably more at a normal level through the summer, you know, just to give some context there. And then I'll turn to Eric for the other question.
spk06: Yeah, so, Kurt, your question about where are we seeing kind of cost inflation in wood products, you know, and I would tell you undoubtedly across the entire company, costs are moving up meaningfully just about everywhere we turn. Just to give you a few examples in wood products compared to a year ago, you know, our saw blade costs are up 20%. Lube oil is up 18%. Strapping is up 13%. Plywood resin is up 45%. And tires are up 100%. And I could give you examples in our other business units as well. In total, across the entire company, we estimate costs are running about 10 to 15 million per year higher than they were a year ago, which is well above kind of normal 3% inflation. And of that 10 to 15 million, I'd tell you probably 2 to 3 million of that is in our wood products business.
spk08: Okay, yeah, that's super helpful of quantification. Thanks for that. And then just last one, you know, even after the special dividend, it looks like the balance sheet will have, I think, a couple hundred million dollars of cash. How are you thinking about the ability to deploy that to M&A? And how long would you be willing to kind of carry an elevated cash balance if some sizable transactions weren't to materialize?
spk06: Yeah, so we will have a sizable cash balance at the end of the year, even after paying our anticipated special dividend. You know, I guess the way we think about all the capital allocation levers that we have, you know, we like to increase the dividend. Of course, you know, it's got to be increased on a sustainable basis. That's largely going to be driven by our Timberland cash flows. And, of course, the board is going to look at that when we get out to December for what the dividend should be in the following year. We still love spending money in our mills. That's where the highest return projects can be found. We're still vetting our potential projects for next year, but I expect – an aggressive capital spending plan for wood products for next year. And then the heartier question, really, M&A. Yeah, we are chasing lots of M&A opportunities right now. I would tell you it's primarily on the timberland side. We're pretty far down the path with a couple conversations. I'm optimistic that we'll get one or more of these to close in the next quarter or two. But I think one thing about M&A is that you never want to rush a process. You want to let the process play its normal course. If you try to rush the process, especially from a buyer perspective, you'll tend to overpay. And our goal with M&A is to create shareholder value. And the only way you do that is if you do it thoughtfully, judiciously, and let it take its time. So we're in no hurry to spend that remaining cash that we have on our balance sheet. We'll let it come out of the balance sheet and into projects as needed or, you know, proposed, you know, slow and thoughtful manner. But we'll take our time with it.
spk08: Right, right. Okay, that all makes sense. We'll appreciate the color and good luck here in Q4, guys. Thank you.
spk00: Your next question comes from Mark Weintraub of Seaport Research Partners.
spk03: Thank you. First, Jerry, you mentioned some of the price trajectories on lumber and 500 quarter date. If a random lens pricing were to stay where it is, could you ballpark where the average price for the quarter would be or where the average price today is?
spk06: Mark, let me take a stab at that. You know, our Q4 lumber prices to date, you know, as we mentioned, they're running about 5% lower than Q3, you know, based on shipments and prices that were included in our order files, you know, that stretch into early to mid-November. But as a reminder, you know, our Q3 prices included shipments in July for orders that were actually taken in June at much, much higher prices than the full quarterly average. As Jerry mentioned, our July lumber shipped at $719 per thousand versus September 433. And we also had backed up inventories at the end of Q2. If you recall, there were transportation challenges, and the home centers really pushed back on us. So a lot of that expensive lumber got shipped early into Q3, and that pulled up our Q3 average. Now as we get into Q4, We're down 5%, as I mentioned, kind of quarter to date. But if you look at it from a spot price standpoint, we're currently running about 2% higher than our Q3 averages. So it's really a question of what happens as we move from now to the end of the year. And our thought is we're in a rising price environment right now, but on the counter side to that is that you're starting to get into the winter months when the building season slows. There's a lot of macro factors that are going to support lumber prices going forward, whether it's, you know, lumber demand for new home construction or, you know, relatively strong R&R markets or supply struggling to keep up with demand here. But our sense is prices are going to be, you know, flat to maybe down slightly at the end of the year comparing Q4 to Q3. And I think that assumption is that random lengths kind of follows that same trajectory of kind of flattish from here to the end of the quarter.
spk07: Sam, I'll jump in, Mark, with another piece of data that will help you as you think about modeling Q4 pricing. That $500 per 1,000 board price quarter to date, you know, that includes shipped and order file priced inventory, that represents about 100 million feet out of the 240 to 250 that we're estimating we ship for the quarter.
spk03: Okay, great. That's all very clear and helpful. Second, I'm curious, we have had lumber prices starting to go back up again, and I would think that if I'm a home builder or somebody in the inventory chain, after what happened earlier this year, didn't have lumber available, I would want to make sure I'm going to have lumber. Are you seeing inventory build in the channel at this point? Is that one of the things that might be going on or not?
spk06: no i don't i don't think there's inventory build going on in the in the in the channel mark i mean i would i i think you're you're kind of on to something here if i was a home builder or dealer i might be thinking about building inventories right now because what's happening is if you compare year-over-year lumber demand uh you know reese expects it to go up three billion board feet next year versus this year but then you look at housing starts data housing starts are expected to be the most almost every major you know econometric forecasting firm thinks housing starts are going to be flat year over year so you say huh starts are going to be flat year over year but lumber demand is going to be up 3 billion board feet year over year what's driving that demand increase well it's not r r What's really happening is the water backlogs at the builders is going through the roof. And those homes have got to be built, and they've got to be built with lumber. And that's what's driving that extra 3 billion board feet. And if you... Interestingly, if you look at the supply-sided equation, what we're starting to hear is that production, lumber production in 21 is turning out to be very comparable to lumber production in 2020. And you'd say, well, how could that possibly be? Think of all the new mills that have been built. And think of early 2020 when COVID first hit and 40% of North American mills went on curtailment. How can lumber production be flat year over year? And it's because there's a whole host of supply chain, labor, and trucking issues that are impacting the industry and making it challenging to boost lumber production. So with demand going up and with supply relatively flat, I think the backdrop here is for a pretty strong pricing environment next year.
spk03: Okay, great. Thank you. And then two other quick ones. One, you mentioned cost. up $10 to $15 million. You mentioned that was more than the typical 3%. What does $10 to $15 million on a percent basis order magnitude translate it to? It might be 5%, 6%. Okay, great. And then lastly, on the regular way dividend, the ongoing dividend, you talked about Timber profitability is a critical driver to how you think about that. At the same time, I think you've argued a compelling case on why lumber has done so well and is well-positioned. What does that potentially feed into your willingness to set the dividend potentially at a higher level? if you think that there's legs to it, or is that something that is more likely to translate into either one-time returns of capital to shareholders?
spk06: No, I think it definitely weighs into our thinking. It may not be a mathematical exercise, but it points to, you know, industry conditions. If we have strong results from our wood products business, you know, we're likely to have strong results from our timberlands business as well. So I think it just reinforces kind of what our view might be about how positive we are in terms of our outlook.
spk03: And have you contemplated having a more
spk07: um mathematical approach that you share with investors um as some of your your peers do now in terms of the uh the distribution yeah that that's a question we've gotten at times over the years mark and and really not looking at it is a pure mathematical exercise um you know certainly a large competitor has moved towards a low base dividend with a variable component You know, as it turns out, this year we have a special dividend. I certainly wouldn't advertise that as we're moving to a similar model. It's really more a statement that, you know, it's the right thing to do to make sure that we stay well within our REIT test rules, as well as it's the right thing to do from a capital allocation standpoint to get that cash back. But, you know, we look at it, and as Eric, you know, and we've reinforced over the years, as Eric said this morning, you know, is really we look at the regular way dividend as it needs to be sustainable and we want to grow it over time. and it's really pinned to the stable part of our cash flow stream. And then certainly the more volatile cash streams have been where we've been opportunistic in buying shares, special dividend this year, investing in mills, M&A, those types of things. So we're not sure that it makes sense to put a marker out there. Coincidentally, we're on the map, and we do look at our payout ratio over time. If you took the range of the special dividend and looked at it near term, within the last 12 months, as well as over a longer period of time, you know, we are distributing about 75% of our cash, you know, to shareholders. That's not because that's the math and that's a target, but that's kind of where we're at, which is really not off the mark with others that do publish a benchmark. Thank you. Appreciate it.
spk00: Your next question comes from Keisan Mentora of BMO Capital Markets.
spk01: Thank you. Good morning. I just want to come to, you know, southern timber prices. And I recognize that, you know, prices kind of don't, you know, move around too much quarter to quarter. But I'm just curious if you're seeing kind of any real signs of, you know, kind of uptick in southern timber prices. I mean, Q3 obviously was up, you know, quite nicely. But are you seeing sort of structurally, you know, kind of better demand supply and prices going higher?
spk07: Yeah, it certainly has been an ongoing part of the conversation in terms of, you know, when are southern sulag prices going to tip up, given they've been relatively flat since the great financial crisis. But, you know, as we covered in the prepared comments, you know, we did see pine sulag prices actually were up about 5%, quarter of a quarter. And certainly the other reason, you know, sulag prices were up in the south were a seasonally higher mix of hardwood. But You know, our view to this point has been it's really log shortages caused by the extraordinarily wet weather. You know, to this point, you know, we do see a bit of life or a bit of increase in saw log pricing, pine saw log pricing in the south. You know, when there are shortages, you know, when there's a major new capacity addition in a wood basket. But so far, that's been fairly fleeting. You know, when we look at the data, I mean, there still certainly is an excess of standing timber relative to what's being harvested each year in our wood baskets. So I think it's too early in our view to call that a structural shift, although there's a lot of positive signs there, and we certainly have our eye on that as well, Caden. So, you know, I think we need more time under our belt before, you know, we start calling a victory in terms of the structural increase in solid pricing. Now, having said that, we think we're closer to getting to balance in the south than we have been. And, you know, our comments here over the last summer as we've been meeting with shareholders have certainly been constructive in that way. So, you know, is it 2025? Is it out there a little bit farther? But, you know, we think we certainly are getting closer to that day when we finally do see a structural shift if it's not starting at this point.
spk01: Understood. That's helpful. You know, with that kind of, you know, backdrop, do you think, you know, sort of growing the timber side of the, you know, business, especially in the U.S. South, uh kind of you know becomes more attractive as you look out next two three five years you know given kind of you know timber getting into sort of better supply demand balance yeah yeah keaton absolutely we think the place to go to to to grow our business from an a stamp from an m a standpoint is clearly the u.s south
spk06: markets are very deep in the south. They're very liquid. There's a lot of transaction activity. And we do have a favorable outlook longer term. Near term, as Jerry said, the next couple of years, we still think we're in a flattish kind of price environment. But you get out there year four, year five, we do think eventually prices are going to turn. But don't forget, sellers expect that to happen as well. So it tends to get priced into a deal.
spk07: I guess the other thing I'll jump in, Kate, and then add to that, you know, is we're also seeing, you know, obviously with dialogue around carbon credits, you know, we'll see how that plays out. But, you know, more currently, we're looking at opportunities in solar and wind and, you know, kind of other alternative cash flow streams that we've not seen related to timberlands. And certainly that's part of what gives us, you know, some confidence as we underwrite deals as well.
spk01: Got it. That's very helpful. I'll turn it over. Good luck.
spk05: Thank you. Thank you.
spk00: Your next question comes from John Beck, House of Bank of America.
spk02: Hey, good morning to this afternoon. You know, I guess just a first question. You know, the dividend, you know, range for the special dividend rather seems to be relatively wide. I was just wondering what's going to drive that to the high and the low end.
spk06: Well, yeah, John, I think it really depends upon, you know, the board is going to meet in early December, and it's going to look at how are we doing in Q4, and it's going to look at, you know, what's our outlook for next year. That's really what's going to drive, whether it's at the low end or at the high end. And you can recall, you know, we saw lumber prices just completely collapse going from Q2 to Q3. We expected that to happen at some point during the year. We just didn't know when it was going to happen. But when the board last met, there was a lot of uncertainty as to what the outlook was going to be. So we came up with this range at the last board meeting, and that's what we agreed to convey to investors and to analysts. We have better visibility into how the quarter is going to play out now, and we also have better visibility into next year. But this won't get formalized until we meet with the board in early December.
spk02: Okay. And how much do you still have under the 10B51 for share purchases?
spk07: Yeah, so we really haven't disclosed the parameters of the 10B51, but in terms of share repurchase authorization, we have just under $60 million available.
spk04: Okay.
spk02: And as far as the OS sawmill, with the new equipment, are you going to get any sort of capacity, you know, additional capacity associated with that? You know, what sort of efficiencies, you know, might we, you know, be able to expect? And then also, if you can just –
spk06: um you know generally talk about like how you're thinking about you know your ability to kind of grow uh capacity going forward i know in the past we've talked about some of the high return uh projects that you guys have but uh any more car you could provide on that would be useful yeah uh the the ola um sawmill rebuild is is is going to be really good when it's done um we expect cash processing costs to come down about 10 per thousand at the mill We expect 15 fewer employees because we're going to be purchasing equipment that is more productive, more streamlined than what we had previously. And saw log recovery is going to improve about 10% compared to the pre-fire hole, if you will. Capacity, from a growth standpoint, is going to be about 160 million board feet with net down to, I don't know, 150 million board feet more or less. So the Ola sawmill prior to the fire had a stated capacity of 150 million board feet. We had been challenged to get to that 150 level. You may recall we were kind of running around the 130 level for the past couple of years since the merger. We were slowly chipping away at getting volume up at the mill. We put in a new debarger, put in a new stacker. et cetera, et cetera. And so we were working on getting volumes up, but we were still kind of stuck around the 130, 135 level. Well, with the rebuild, we expect to be right up at the 150 level. And that's going to push up against our kiln constraints as well as our environmental permit. So that's a really good place to be. So longer term, going forward, I expect that we'll continue to invest in our mills to grow production. You know, we've got a really good track record of growing volumes anywhere from, you know, at the low end, 1% per year to the high end, maybe 4% per year. And I would imagine going forward, that's going to be the, you know, continue to be the run rate for volume increases out of our mills.
spk02: Okay, gotcha. And maybe this is kind of too early to say, I think you, you know, mentioned rather the costs, I guess, are up. you know, 10 to 15 million this year. How are you kind of thinking about inflation over the next year or so, and are you seeing anything on the labor front in terms of inflation?
spk06: Well, we're not. I'm seeing inflation on the labor front in terms of what's going on around the country. It's challenging to get people to come to work when we have a job opening. You know, we put out an ad, and, you know, historically we might get 30 people apply. Now we're getting three people to apply, and they may not be that qualified. I'm reading about potential strikes at the large companies around the country. I'm reading about how Walmart and McDonald's and all these other companies are raising wages significantly to track labor. We haven't formalized our plans next year, but I am very concerned about what's happening on the labor front. In addition to all these other items that we purchased to run our business, just an example, fertilizer. Fertilizer cost is up 30% year over year. It's going to make it really challenging for us to justify fertilizing our young timber to improve growth when costs are up 30%. So it's kind of happening all across the business. All three business units are experiencing it. And I would expect it's going to find its way into wage inflation as well. Okay. Thank you. Thanks.
spk00: Your next question comes from Paul Quinn of RBC Capital Markets.
spk04: Yeah, thanks very much. Good morning, guys. Just a question on the Ola sawmill rebuild. Of the $70 million CapEx budget, how much is Ola?
spk06: So of the $70 million, roughly an extra $10 million is going to OLA. And of that $10 million, Paul, we expect insurance to reimburse us, who knows, $7 million, $8 million perhaps.
spk04: So insurance to date is $13 million plus the $7 million to $8 million, so insurance will be $21 million basically.
spk07: Yeah, so I wouldn't add those, Paul. So, you know, the insurance – claim process, you know, will take, you know, probably the better part of the next 12 months to sort through when you think about business interruption and everything. So, so far, we have received $13 million in cash, you know, as reimbursement from the insurers. That's a combination of BI and equipment that's not been, you know, allocated, if you will, to those two buckets. And then, you know, separately of the $70 million, you know, that, you know, you asked about $10 million Zola and you know, seven to eight millions of that has already been covered by the 13 million we've received.
spk04: Okay. And then just on your criteria around increasing your sustainable dividend from the current 164 level, is the board looking at just Timberland or, I mean, I just, you know, it seems like your real estate business is pretty stable as well. Are they considering real estate contribution as well?
spk06: yeah i think i mean the board looks at the entire the entire roll up for the for the company which which does include you know real estate cash flows um but at the end of the day what matters most is is timberlands and then i would say secondarily it's it's uh it's wood products and then real estate okay
spk04: And then just lastly, I mean, I probably asked this in the last decade, but just that stumpage amount seems very, you know, that dollar per ton seems very whippy. And just wondering why it's so low compared to just about every benchmark out there on stumpage. I mean, it was $21 in Q3. It was $6 in Q2. Just wondering why it's low.
spk07: Well, that's a number that will move around, you know, significantly, Paul. And You know, in this time, you know, one, as you know, stumpage doesn't include logging and hauling. So, you know, there's, you know, in the south, that's another, you know, call it $22, $23 a ton. But also, you know, it depends on the mix of what's available. And it's heavy to pulpwood, which is much lower margin, you know, sales than certainly saw log stumpage would be.
spk08: Okay, that's all I have. Best of luck, guys.
spk07: Great, thanks. Thanks.
spk00: Your next question comes from Buckhorn of Raymond James.
spk05: Hey, thanks for the time. Going back to the cost inflation question and what you're seeing across the industry and the economy at large here, just the logistics challenges and hurdles out there, I'm just kind of curious your thoughts on do you think this is going to further curtail marginal lumber production capacity, whether that's either British Columbia capacity or how do you think it might play out in Idaho as well? Do you think it might shake out some marginal producers faster? Or how do you think about the supply outlook given the cost inflation industry is dealing with?
spk06: Yeah, that's a really good question or observation, Buck. I do think that these inflationary items, these supply chain issues, these trucking issues, labor issues, it's all going to mean it's harder and harder to build a new greenfield mill in North America. And, you know, as I reflect back on what's happened here, a couple of M&A transactions, you may have noticed that, you know, Wes Frazier bought the Angelina Mill. They paid $1,000 per 1,000 board feet of capacity. Well, construction, new greenfield mills are roughly $600 to $700 per 1,000. Yet here, Wes Frazier was willing to spend $1,000 a thousand. And I think it's because they're looking at it saying it's really hard to build a new mill these days. The other observation I'd have is, you know, look at GP. They sold four mills to Interfor, and I recall the transaction price was up over $500 per thousand of capacity. Well, I don't know, but I would bet that GP wasn't selling its best mills when it sold those four mills to Interfor. And Interfor probably looked at it and said, do we want to go the greenfield route with this capital that we have, or do we want to go buy these other four mills that GP is selling? And they opted to buy the four mills. And I think it's because people are starting to recognize just how hard it really truly is to build new greenfield capacity in this country and, well, I'm sure in North America. So in terms of is it going to shake competitors out of the market, I don't know that I see that. What I see are structurally higher prices because supply is going to struggle to keep up with demand. And so I think that means even if you've got a fourth quartile mill in a strong pricing environment, you're probably going to be competitive.
spk05: Great. That's great, Colin. I appreciate those thoughts. Thank you. And also just curious, you know, you guys are engaged in the M&A market now. It seems like you're pretty far down the line on some discussions. There seems to be a lot more capital that's kind of being introduced into the timber market. Just kind of curious, maybe pricing-wise, kind of what you're seeing in terms of per acre values in your regions recently and kind of what new capital is offering out there and just how competitive is it getting?
spk06: Yeah, I think it's, you know, Timberland has always been a really competitive asset class. It seems like every deal has got a pretty full price in it. You know, I would tell you is that the world is starved for yield right now. You know, central banks around the world have kept rates down to where their real rates are negative in many places, including the U.S. right now. If you think about where the 10-year Treasury is at, you know, relative to where inflation is running. So where do investors go to get yield? Well, they tend to turn to real assets. And timber is a great real asset for lots of different reasons. So I would tell you there's more capital chasing timber probably than I've ever seen before. And I would tell you that that has pushed down the discount rate. I don't know exactly where we're at right this moment, but I guess probably 20 to 30 basis points lower than where we might have been a year ago. So call it, say, in the high fours from a real discount rate standpoint. Gotcha. Gotcha.
spk05: Okay. That's helpful. All right. Thanks, guys. Good luck. Thank you. Thank you.
spk00: At this time, I'm showing there are no more questions. I'll now turn the call back over to Jerry Richards.
spk07: All right. Thank you, Paula. And thank you, everybody, for your interest in Potlatch Delta. It's certainly available, you know, for the regular quarterly follow-up calls. I'll talk to you soon. Have a good day and window, and we'll talk to you next quarter.
spk00: Ladies and gentlemen, this concludes today's event. Thank you for your participation. You may now disconnect.
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