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spk00: Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch-Deltic first quarter 2022 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 star one. 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.
spk06: Thank you, Emma. Good morning, everyone, and welcome to Potlatch Deltics' first quarter 2022 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 regarding the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll now turn the call over to Eric for some comments, and then I will cover our first quarter results and our outlook.
spk07: Thank you, Jerry. 2022 is off to a phenomenal start, as all three of our businesses delivered exceptional financial results in the first quarter. Total adjusted EBITDA of $246 million is the highest Potlatch Deltic has ever reported in a first quarter, and it is the second highest quarterly EBITDA in the company's history. Continuing with that theme, Wood Products' $150 million of adjusted EBITDA in the first quarter is the segment's second highest quarterly level ever. It is also the second time our lumber prices have averaged over $1,000 per 1,000 board feet for a quarter. We shipped 233 million board feet of lumber in the quarter, which was 10 million feet less than we shipped in Q4. As we discussed on last quarter's earnings call, production was negatively affected early in the quarter by COVID absenteeism. In addition, transportation, both rail and trucks, became more and more of a challenge as the quarter progressed. More broadly, these supply constraints made tight lumber markets even tighter, particularly given we are in a peak seasonal demand window. Our wood products team went above and beyond to minimize the effect of the operational challenges, and I am particularly pleased that they maintained their focus on working safely. Restarting the large log line at our OLA Arkansas sawmill in the third quarter remains the top company priority and the project is on track. The foundation for the new saw line is complete, structural steel and equipment installation has begun and delivery of the new saw line is on schedule. We expect to wrap up the project on schedule in the third quarter and our target is to complete the startup phase by the end of the year. As a reminder, OLA's rebuild will significantly lower cash processing costs, improve recovery, and increase production volume after it completes the startup phase. Our Timberlands segment generated adjusted EBITDA of $76 million in the first quarter. This nearly beat the quarterly record the segment set just last year. Our Timberlands team took advantage of favorable logging conditions to generate harvest volumes that exceeded our expectations in both the north and the south. Log prices were strong in both regions. In fact, our southern pine saw log prices increased 5% quarter over quarter, which is notable because weather was favorable and there was decent log availability. Our real estate segment is firing on all cylinders and had a strong quarter with the justity bedav $30 million. On the rural side of the business, we closed our first solar-related transaction in the first quarter. The sales price was $7,500 per acre, and the transaction generated EBITDA of $13 million. Our team has identified other solar opportunities that could reach $50 to $100 million of value in the aggregate over the next few years. We also continue to see strong demand in the development side of our real estate business. Residential lot inventory in our Chennault Valley Master Plan community is at rock bottom levels, and we continue to sell residential lots as fast as our team can create them. In fact, we have sold or put under contract all 261 lots we have developed in the last two years. In the first quarter, we sold 64 residential lots for over $100,000 per lot. We also completed two commercial real estate sales during the quarter for $3 million, or over $900,000 per acre in each transaction. Turning to factors that drive our business results, it appears that lumber prices have started to firm after declining for six weeks. Prices are currently at very attractive levels, as the last framing lumber composite price of $933 per thousand board feet is well above historical averages. Lumber market dynamics were different over the last six weeks than what occurred last summer. Last year, prices peaked in May after the key spring selling season was over. This year, lumber prices declined during the peak seasonal demand window when buyers needed lumber for projects. As a result, takeaway remained decent even as prices declined. That point was reinforced by strong March U.S. housing starts of 1.79 million units on a seasonally adjusted basis. Furthermore, U.S. lumber imports from the EU may also be under pressure this year due to the Ukraine war, and that was not the case last year. We believe that demand for new homes will remain strong despite higher mortgage rates. As a reminder, multifamily competes with single family for shelter, And multifamily rents have been going up some 15% to 20% year over year in much of the country. So it is not just single family homes that have gotten more expensive. The high level of home price appreciation, along with significant home builder sales backlogs, point to housing demand exceeding supply by a wide margin. In other words, there appears to be ample room for mortgage rates to increase, housing demand to decline, and for the housing market to remain healthy. This view is shared by industry pundits such as Forest Economic Advisors, and it was echoed by Freddie Mac in the most recent quarterly forecast report. In addition, homebuyers and builders have levers to offset affordability issues caused by higher mortgage rates. Migration to less costly housing markets given the durability of remote work, builder concessions, Smaller houses are examples of factors that may mitigate the effect of higher mortgage rates. Shifting to R&R, we think lumber demand will continue to be healthy in the repair and remodel segment as well. The underlying fundamentals remain favorable, and higher interest rates usually have less of an effect on repair and remodel demand than other factors. Importantly, home equity is at record levels across the U.S. The job market is very healthy. Consumer balance sheets are in great shape. And if you cannot afford to trade up to a new or existing house, remodeling becomes a very attractive option for homeowners. The last point is particularly true given the average age of homes is over 42 years. Further bolstering our views on the R&R markets is the fact that on average, equity analysts covering the home center stocks still expect positive same store sales growth each quarter throughout 2022. Our home center takeaway remains solid. We continue to believe average lumber prices for the full year will be structurally higher than long-term averages due to exceptional lumber demand and tight supply. This has a meaningful effect on our bottom line given our leverage to lumber strategy. Now turning to capital allocation, we remain committed to growing the regular dividend sustainably. We typically review the regular dividend with our board in the fourth quarter and we just increased the dividend 7.3% last December. We may pay another special dividend this year given the amount of cash we generated in the first quarter and our outlook for the remainder of the year. We will provide updates as the year progresses and we have a better line of sight. Growing the company through high return investments in our existing mills, and M&A remain high capital allocation priorities. We see attractive opportunities to deploy capital to grow and create additional shareholder value through M&A. At the end of Q1, we had $471 million of cash on the balance sheet and liquidity of $770 million. Our leverage remains the lowest of the timber REITs. Our financial strength provides a solid platform for continued growth as we consider additional accretive acquisitions and investments in our existing mills. Regarding environmental, social and governance reporting, our team is putting the final touches on our third annual ESG report and we are on track to publish the report in May. We are also developing a full ESG section of our website and we plan to publish a carbon and climate report in the fall. Potlatch Deltic has a strong ESG story, and we are committed to do our part to mitigate climate change and continue our legacy of responsibility across the ESG spectrum. To wrap up my comments, Potlatch Deltic is very well positioned to take advantage of favorable industry fundamentals, and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value. I will turn it over to Jerry to discuss first quarter results and our outlook.
spk06: Thank you, Eric. Starting with page four of the slides, adjusted EBITDA more than tripled from $76 million in the fourth quarter to $246 million in the first quarter. As Eric mentioned, this was the most profitable first quarter in the company's history. The increase in EBITDA was primarily driven by higher prices for both lumber and indexed Idaho saw locks. I'll now review each of our operating segments and provide more color on our first quarter results. Information for our Tiberland segment is displayed on slides five through seven. The segment's adjusted EBITDA increased from $42 million in the fourth quarter to $76 million in the first quarter. We harvested 385,000 tons of saw logs in the north in the first quarter compared to 349,000 tons in the fourth quarter. Our team took advantage of favorable logging conditions and exceeded the harvest plan for the quarter. Northern saw log prices were 54% higher on a per ton basis in the first quarter compared to the fourth quarter. The increase in saw log prices reflects higher prices for index saw logs, partially offset by the effect of seasonally heavier logs. Our index prices reset on a one month lag, which means the first quarter index prices were based on lumber prices from December through February. In the south, we harvested just under 1.1 million tons in the first quarter. Seamless integration of our recent timberland acquisitions, dry conditions early in the quarter, and solid execution by our southern timberlands team allowed us to take advantage of strong saw log demand. Our southern saw log prices were 2% higher in the first quarter compared to the fourth quarter. Excluding a seasonally lower mix of hardwood saw logs, our southern pine saw log prices were approximately 5% higher in the first quarter. we are beginning to see signs of tensioning in some of our wood baskets. We think it's too soon to say this is a structural shift, but it is very encouraging. Turning to wood products on slides 8 and 9, adjusted EBITDA quadrupled from $37 million in the fourth quarter to $150 million in the first quarter. Our average lumber price realization increased 91% from $563 per thousand board feet in the fourth quarter to $1,075 per thousand board feet in the first quarter. By comparison, the Random Links Framing Lumber Composite price increased 83% in the first quarter compared to the fourth quarter. As a reminder, we sell a different mix of lumber than is included in the composite. Our lumber prices increased each month during the quarter. Our average lumber price realizations per thousand board feet were $916 in January, $1,110 in February, and $1,173 in March. Lumber shipments declined 10 million board feet from 243 million board feet in the fourth quarter to 233 million board feet in the first quarter. COVID absenteeism was a drag on production, and transportation issues delayed shipments in the first quarter. Our plywood business performed exceptionally well in the first quarter. the team shifted the mix of production to take advantage of strong commodity sheathing prices in the first quarter. Moving to real estate on slides 10 and 11, the segments adjusted EBITDA was $30 million in the first quarter compared to $10 million in the fourth quarter. As Eric mentioned, we closed a sale of over 1,700 acres for $7,500 per acre to an energy provider for a planned commercial solar farm in the first quarter. In our Chenal Valley master plan community in Little Rock, Arkansas, we also had strong residential lot sales, along with two commercial real estate sales with prices over $900,000 per acre. Shifting to financial items, which are summarized on slide 12, our total liquidity increased to $770 million. This amount includes $471 million of cash, as well as availability on our undrawn revolver. We repaid the final $3 million of our median from notes of maturity in January, and we plan to refinance the $40 million of debt scheduled to mature in December of 2022. We have locked the refinance rate, which will reduce our annual interest expense approximately $500,000. As announced in March, we transferred $70 million of pension obligations to America General Life. The transaction was funded with pension plan assets, maintains financially secure benefits for our pension plan participants, and it reduces potlatch Deltics pension funding risk. We recognized a non-cash pension settlement charge of $11 million after taxes. We did not repurchase any shares during the first quarter. As a reminder, we have a 10 plan in place. This reflects our ability and commitment to repurchase our shares at attractive prices. Capital expenditures were $19 million in the first quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement. I will now provide some high-level outlook comments. The details are presented on slide 13. We expect to harvest 1.1 to 1.3 million tons in our timberland segment in the second quarter. Harvest volumes in the north are planned to be seasonally lower due to spring breakup. We expect northern saw log prices to decrease modestly in the second quarter due primarily to lower index saw log prices. In the south, we expect harvest volumes to be seasonally lower and log prices to be comparable to the first quarter. We plan to ship 250 to 260 million board feet of lumber in the second quarter. This assumes we can work through a myriad of transportation challenges that we and the rest of the industry currently face in both trucking and rail. Our average lumber price thus far in the second quarter is approximately 7% lower than our first quarter average lumber price. This is based on approximately 100 million board feet of lumber. The combination of low field inventories, steady demand, and transportation bottlenecks have triggered what appears to be a firming trend in lumber prices. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. Shifting to real estate, we expect to sell approximately 12,000 acres of rural land in the second quarter, and we have raised our annual sales outlook to 20,000 acres. We also expect to sell approximately 40 Chenille Valley residential lots in the second quarter. Additional real estate details are provided on the slide. Our total capital expenditures are planned to be in the range of $70 to $75 million in 2022, excluding acquisitions. That estimate includes approximately $15 million to rebuild OLA, which we expect will be reimbursed by insurance. Overall, we anticipate adjusted EBITDA will be lower in the second quarter in all three of our business segments. This is based on expectations for lower lumber and index saw log prices, a seasonal decline in harvest volumes, and lower real estate activity, all relative to an extraordinary first quarter. We continue to be bullish on industry fundamentals. Lumber prices remain at very attractive levels, and our second quarter expectations could prove to be conservative. We expect to report a strong second quarter, and we are well positioned to continue growing shareholder value over the long term. So that concludes our prepared remarks. Emma, I'd now like to open the call up to Q&A.
spk00: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Your first question today comes from the line of Mark Weintraub with Seaport Research. Your line is now open.
spk03: Thank you. Just a quick clarification. You just said right at the end there, Jerry, that your forecast for the second quarter could be conservative. I guess I was not quite sure what that was a reference to because the only thing I really heard was that you thought your EBITDA would be lower. than in the first quarter? And then I guess you gave some other specifics. I wouldn't have thought so, but is there a scenario where you could see your EBITDA be approaching the first quarter levels?
spk06: Yeah, it's a great question, Mark. And just to add more color on what I meant by the phrase or the word conservative, we've seen obviously some really volatile lumber prices and you know, lumber prices that, you know, quite frankly, more recently have surprised us to the upside. And when we saw the six-week price decline, you know, our forecast was showing, you know, prices that would drop to a lower level than where things have kind of bottomed out. We've seen a firming trend. So, you know, who's to say that, you know, some transportation issue bottleneck or some other supply chain challenge doesn't cause lumber prices to go on another run. So it's really just an acknowledgment that lumber price in particular could outperform our expectations.
spk03: Okay, thank you. And then just to get a little bit more color into this, I think you mentioned that to date, lumber prices are down 7% on that $100 million. Where would they be currently? So if prices were to stay where they are today, just for kind of a framework perspective, where would the lumber prices end up? relative to the prior quarter, recognizing that we can be sure they'll end up back anywhere but where they are today.
spk07: Yeah, so Mark, this is Eric. You know, what I tell you is that our spot prices, which is kind of like an average of a couple days of activity, prices are down about 10%, 11% from first quarter levels. So when you start saying, well, what does that mean for the quarter? You know, what we also said was that prices quarter to date are down 7%. So you've got roughly half the quarter down 7%, and then you'd have the rest of the quarter down 10%, 11%. So I would guess you'd be looking at down 8% or 9%, something like that percent.
spk03: Okay. So order of magnitude 100 bucks relative to the first quarter.
spk06: Correct.
spk03: Okay. All right. Thank you very much. I'll stop there for now, and I'll get back in queue. Okay. Thank you.
spk00: Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now open.
spk05: Yeah, thanks very much. Morning, guys. Sounds like you're pretty bullish on lumber, which I share that sentiment. And Eric, you brought up the Russia-Ukraine war and European imports last year. That was $1.65 billion. What do you think that's going to be in 2022?
spk07: Wow, that is such a good question, Paul. You know, I do a lot of reading on this stuff. Some analysts say none of that lumber is going to find its way to the U.S. with the 4 billion board feet shortfall coming out of Russia, Ukraine, Belarus, into Europe. Some people say zero, and some say the war is not going to have any impact and that volume is going to keep flowing. I'd guess it's probably somewhere in the middle. I'd guess we lose about a billion board feet of imports. We're not big in that business. We don't have line of sight into producing lumber in Europe and exporting it. But I'd guess there's about a billion board feet of shortfall from the war.
spk05: Okay, thanks for that. And then you made the comment that interest rates or R&R is less sensitive to interest rates. What's the data behind that?
spk07: Well, I can't point to any particular data set. I just know that when people go to buy a new house, Obviously, it's a much bigger check that they're writing than it is for an R&R project. And people have got really high levels of home equity. And if you've got a house that you're looking at that's appreciated considerably in value, it's your largest investment for many, many people. I think they look at it and they say, yeah, I'm willing to take out a home equity loan to further increase the value of my house since it's my largest asset. So I don't know that there's any one data source I've got for you. It would stand to reason to me that R&R projects are less interest rate sensitive than buying a new home is.
spk05: Okay. And then just on guidance, yeah, I saw that increase in the area of land sales up to $20,000, but the average sale price came down. Is that a mixed issue or, you know, because you described the real estate activity is very strong?
spk06: Yeah, you know, this is Jerry Paul. You are absolutely correct. It's a mix is what's driving that average price. And, you know, when we ended 2021, we had about 10,000 acres or so left in Minnesota. And that's, you know, that's some of our, you know, it sells for a lower price point than some of what we're doing in the south or in Idaho. So, you know, we actually have a contract to sell largely, you know, the bulk of that remaining Minnesota land. And that's going to pull the average price down.
spk05: I got it. All right. Looks great. Thanks, guys. Best of luck. Thank you.
spk00: Your next question comes from the line of Kurt Yinger with DA Davidson. Your line is now open.
spk04: Great. Thanks, and good morning, everyone. Good morning. I just wanted to start off on log costs. You know, just looking at the move in northern saw log prices, the drag on Q1 was still a bit less than I would have expected yesterday. Is it fair to think that as we get into Q2, you're going to see more of a hit, I guess, at the Idaho sawmill on logs than in Q1, even as your own log prices perhaps moderate?
spk06: Yeah, so when I think about the high-cost Idaho logs that are in our Idaho mill complex, Kirk, You know, part of it is seasonality, so we build log inventories, you know, starting in September, and then they peak, you know, kind of at the, you know, before, you know, the snow hits. So, you know, we shut off deliveries in Idaho, you know, typically early to mid-December. So, I think largely what you're seeing is a lag effect. And then through the winter, you know, when there's not as much logging activity or spring breakup, you know, we're drawing those log inventories down. You know, I would expect, you know, you'll continue to see high log cost in that business, but I'm not sure there's a real big delta just because of, you know, that pattern of the buying and the use.
spk04: Gotcha. So, I mean, just looking at Q1 specifically, you know, your own Idaho saw log realizations, you know, aren't necessarily going to be that impactful for the wood products business. Is that fair? That's fair. Okay. Perfect. And then last quarter, you highlighted how kind of the home centers were looking for more than contract volumes. There's been a lot of commentary around how that has kind of reversed in the last couple weeks. But Eric, I think you made a comment around R&R remaining strong. Just hoping you could talk about what you're seeing on the demand side from some of those different customer cohorts and how you would characterize kind of channel inventories at this stage.
spk07: Yeah, well, I did make a comment that our takeaway is still relatively strong. We had a really rock-solid first quarter. Volumes were higher than our expectations for R&R. It slowed a little bit in Q2 to home centers, and I would differentiate the home centers here. On the one side, you know, it's a stud business for us. There's the other side of the home center business, which is retreated product, particularly in the south for, like, decking. And we sell to treaters who in turn sell to the home centers. We have seen a little bit of a slowdown in that treater business, and I think that has to do with the nature of the product that you might or the project that we might be talking about. So a lot of treated product goes to home centers that winds up in decks. To build a new deck is largely, the cost is largely going to be for materials, so for that treated lumber. And if that treated lumber has caused the deck to go from a $5,000 cost to a $15,000 cost, you know, that might cause somebody to hit the pause button. But on the other side, if somebody wants to finish a basement and they're going to hire a contractor to do the work, you know, the dollar value of the lumber involved in that project is going to be relatively small in the grand scheme of things. So I guess I'd kind of characterize it as a home center business remains really solid um the treated side of the home center business um is is probably a little bit on the weak side right now um that's we sell to treaters but we don't we're not selling directly you know treated product to the home centers but our stud sales to the home centers is is is really good um and they've told us to keep keep the product flowing that they're seeing good demand so um it still feels like we're in a pretty good environment right now okay all right that's helpful
spk04: And then just for my last question, kind of a higher level one, would love to hear how you all think about just the change and potential kind of intrinsic value of your lumber assets and Idaho timberlands related to the lumber pricing environment we've seen over the last two years. And understandably, investors are wary of extrapolating current prices into the future, but you can't just pretend it hasn't happened either and ignore the potential that it could reoccur. So a little bit of a long-winded question, but would just be interested if you have any thoughts there.
spk07: Yeah, it's a good question, Kurt. You know, I'd start by saying, if you want to think about valuation of our sawmilling assets, you know, you're seeing companies routinely spend a thousand bucks, a thousand of capacity to build new capacity. And I'd reference the you know, the Angelina Forest product sale to West Fraser that was done at over $1,000. I would also reference, I think CAMFOR just announced they're going to do a remodel, expand their Urbana, Arkansas mill, and that's $130 million for 115 million board feet, if I'm not mistaken. So, again, over $1,000, $1,000. So, you know, I kind of feel like that's fair value for lumber capacity in the industry. you know, and that's new capacity, so that's going to be super low cost. But it's also mill capacity that is going to take time to get up and running, get the kinks worked out, and they're going to need to find, you know, adequate workforce to make that happen. So I think about $1,000 a thousand to me seems like fair valuation for our mills. And, you know, we have over a billion board feet of lumber capacity, so that feels to me like it's a rough numbers of $1 billion to $1.1 billion would be a reasonable valuation for our sawmilling assets. Now there's carryover to our Idaho timberlands business. Obviously, our log prices are indexed to lumber prices there. And we've shown time and again that the EBITDA that we can produce in Idaho is comparable to Westside values. I'd probably say it's $3,000 an acre, $3,500 an acre. It feels like fair value to me. And so times 600,000 acres, that gets you to roughly, I don't know, $2 billion.
spk04: Got it. Okay. Well, appreciate all the color, and I'll turn it over. Thank you. Thanks.
spk00: Your next question comes from the line of John Babcock with Bank of America. Your line is now open.
spk02: Thank you, guys, for taking my questions. I guess I just want to quickly take a step back and just talk about the special dividend a bit. I was wondering generally what considerations we should keep in mind just as it pertains to the timing and potential amount of that dividend, assuming you decide to move forward with it.
spk07: Yeah, John. So it is very early in the year. We've got line of sight probably through our P&L through kind of the mid-May kind of timeframe. So we've still got almost two-thirds of the year left to go. Lumber prices can be volatile. They are surprising us to the upside right now. We've had great results to start the year. If this continues, we're almost certain to be forced to paying a special dividend just to maintain REIT status. I don't want to get out in front of my board on this issue because there's a lot of math involved. But, you know, I think it's a pretty fair bet right now that we'll need to have another special dividend.
spk02: Gotcha. Thanks for that. Another question I had, this actually, I guess, goes back to kind of the logging and trucking side. But I guess just overall, you know, as it pertains to trucking, I was wondering what you're seeing there, particularly around the rate side and especially for spot markets. You know, some of our contacts have realized that prices are dropping there. So wondering about the extent to which, you know, that's impactful for you, you know, if you're also seeing that. you know, and any color on, you know, the extent to which that could ultimately serve as a benefit to the business over the coming year.
spk06: When you think about, you know, our log and haul costs, John, we certainly have, it's probably the biggest inflationary pressure that we're feeling right now. And it comes, you know, in the form of diesel pricing is the biggest variance that we're seeing. And Mike Nygren, As a reminder, we generally use probably about 10 and a half million tons or gallons sorry of diesel, you know per year as we harvest the timber and we call the logs and. Mike Nygren, To mills and you know, at the end of the day, when you look at the delta versus our budget, you know costs are probably up 12 million bucks you know so certainly we're seeing that that inflationary pressure but. You know, as far as getting capacity and seeing other, you know, price increases or pressures, you know, that certainly pales in comparison to the effect of diesel price.
spk07: Yeah, and I would just add to the second part of your question, John, about are we seeing trucking rates come down? I asked our sales and transportation department that question this morning because I've read articles about spot truck rates coming down, too, and they're like, are you kidding? No, prices have not come down. And maybe that's because we're using flatbed trucks and not container-type truck trailers. So maybe there's a little bit of a mixed issue there, but we're not seeing pressures come off at all.
spk02: Okay, interesting. And now as it pertains to the OWA sawmill, any chance you guys could give some sense as to what amount of production you expect out of that mill this year, recognizing it's still in the startup stage?
spk07: Yeah, and, John, we are running that mill today. It's got two lines. It's got a small line and a large line, and the small line produces, I don't know, six, seven million feet a quarter. As we get out into Q3, we're going to be starting the mill back up, the large line, and we'll turn the small line off at that stage. We do expect it to be a gradual ramp up. Getting the kinks out of machinery like this is never an overnight kind of a switch thing. You know, our rough guess is we get more or less 50 million feet out of OLA for the full year this year. So maybe ramping up from 6, 7 million feet a quarter to maybe 10 in the third quarter up to maybe 30 in the fourth quarter. And our expectation, our plan is to be at full capacity by early next year or 150 million feet per year, which is about its limitation from a resource and an environmental standpoint. So hopefully it plays out that way.
spk02: All right, that's helpful. And then just last question before I turn it over. Just, you know, it does seem like you're seeing pretty good momentum on the pricing front for Southern Saw Logs. I was wondering if you might, you know, elaborate a little bit on the tension you're seeing there, you know, maybe why you're not fully comfortable at this point thinking that this might actually be, you know, an indication of a structural shift. You know, any additional detail there would be great.
spk06: That's a great question, John, and I might start with the back end. You know, tongue in cheek, I think we have a tendency to be a bit conservative and we certainly have been, you know, the voice that's been saying lower for longer. So we're just we're cautious, but very optimistic. You know, as much our sense is something something very likely has shifted. You know, I just think we're you know, we think it's premature to kind of call it, if you will, in terms of, you know, getting on a different trajectory in terms of southern solid pricing. I mean, what we are, what we have seen is, you know, a nice lift, you know, three to four percent, you know, year on year, you know, 20, you know, 2021 versus 2022 in terms of southern soil pricing. But we also saw various points in the year with the extreme winter weather early in 21, wet weather in the summer, you know, that, you know, that felt like that might have been the factor that tensioned log prices and Now, having said that, as we got into Q1, really favorable logging conditions, and we didn't see log prices retreat. They actually continued to increase about 5% quarter on quarter. So everything feels good. We're very optimistic. I think just at the end of the day, our comments are probably couched more in our tendency to be a little cautious in terms of calling a new trend.
spk02: All right. Understood. Thanks for all the detail.
spk00: Your next question comes from the line of Keaton Mamtora with BMO Capital Markets. Your line is now open.
spk01: Thank you and good afternoon. Jerry or Eric, maybe you can talk a little bit more about the alternative kind of revenue opportunities in sort of both timberlands and from a real estate standpoint, whether it's sort of solar or wind or carbon credits. And how do you see that revenue stream evolving over the next two, three, four years?
spk07: Well, yeah, Keaton, we're extraordinarily pleased with our solar deal that we just announced was in Mississippi at $7,500 an acre. The great thing is they let us cut all the trees off at first, too. And, you know, we're in discussions with a number of other parties about these solar farms. And, you know, as I mentioned earlier in the prepared remarks, you know, it's hard to know where we wind up at the end of the day, but our gut is telling us somewhere between $50 and $100 million of solar deals going forward. I honestly think that's very doable. That's not going to happen all in one year. I'm not sure we're going to have another one yet this year. I think it's probably fair to assume that we get something next year and probably each of the next two years after that. So, you know, this is a real opportunity for us going forward. So, on the carbon capture and storage side of things, I saw Weyerhaeuser's announcement, obviously. And, you know, our ownership in the south, you know, clearly has the potential to participate in those carbon capture and storage markets as well. Our surface ownership overlaps geological formations that have been mapped by USGS as favorable to CO2 storage. And in fact, our ownership is in close proximity to large point source CO2 emitters. Of course, the beauty of CCS is that it's compatible with forestry. So we're in the really early innings of carbon capture and storage as a market opportunity. But, you know, certainly this could be another meaningful source of revenue for us down the road. You know, we continue to be really impressed with our rural sales program. You know, I go back to the Deltic deal. that we did back in 2018. We've now completed nearly 90 different deals off that ground, roughly 14,000 acres for some, I don't know, $55 million more or less in value. And it just shows you how important the real estate stream is for the timber REITs when you can generate revenues and earnings off rural land like that. So I don't know if that answers your question, but certainly we're optimistic about the you know, the solar farm outlook and the carbon capture storage opportunity.
spk01: No, that's very helpful. Appreciate the perspective. And then switching to sort of on the M&A side, you know, curious how the pipeline is looking. And I was wondering, you know, sort of if any of these kind of alternative streams are starting to have an impact on valuation, but also kind of, you know, inflation and rates rising. Is there any sort of, you know, change in thought around discount rates?
spk07: So, you know, what I would say is the Timberland M&A market, it began showing signs of life, you know, late in 2020, kind of after pause caused by COVID. 2021 last year exhibited strong demand for timberland, roughly one and a half million acres traded hands at the end of the day. However, things have slowed markedly at this point, and there's only a handful of deals coming to market. I don't know what's going on, but we suspect sellers are delaying deals because they've got a view that stumpage prices are going to be moving higher, improving timberland values, or they're holding off selling you know, waiting to see how these carbon markets are going to play out. There's no doubt there's plenty of capital on the sidelines, both TMOs and REITs that are looking to pick up timberlands. There's no shortage of capital. And I would guess that discount rates stay still at awfully low levels. Maybe they've moved up just a skosh due to, you know, due to the debt financing markets, interest rates having moved up a little bit. But, you know, it's not like that's going to heavily influence the discount rate that people use for Timberland, given the view that Timberland can be a nice inflation hedge. We are not, at this point, putting much credence into valuing Timberland M&A with solar and carbon capture storage, things like that. Those revenue streams can be a bit elusive, and generally we're buying smaller tracts of land that are bolt-on deals. And so it's harder to get your arms around is there a solar deal or is there a carbon capture storage opportunity with a small tract to land like that. It's hard to value it. So I don't know if that answers your question, but the Timberland M&A market has really slowed down.
spk01: Got it. That's helpful. I'll turn it over. Good luck. Thank you.
spk00: Your next question, again, comes from the line of Mark Weintraub. Mark Weintraub with Seaport Research. Your line is now open.
spk03: Thank you. Just one quick observation or question. The tax rate, I saw you raised that a little bit for this year. Is that primarily to reflect that you think you're going to make more money in wood products than you did three months ago?
spk06: Yeah, you're absolutely correct, Mark. I mean, at the end of the day, that rate can move around based on the mix of earnings between our taxable REIT subsidiary, which is largely the wood products and our real estate businesses and the REIT, and you know, our expectation for profitability in wood products certainly has gone up. And that's why the guide went up.
spk03: Okay, thank you. And then I'm looking at, and I see consensus estimates have EBITDA less than half of what you made in the first quarter. And I'm trying to foot that with what I heard in terms of the indications that you have. And I guess it's, and I realize that lumber prices could fall off from where they are. As you say, they seem to have stabilized. But if I understand correctly, if those are down $100 and you're making an order of magnitude of 250 million board feet, that would be $25 million. I don't know if you make more because you're actually producing more as well. But if we just use that and then take some haircuts to the resources and to the real estate business, it still seems to me that it would be – significantly higher than that $120 million on consensus. I mean, do you think it's fair to say that the consensus numbers look very conservative from your perspective for the second quarter?
spk06: Yeah, that's a good observation, Mark. And, you know, I think I read multiple notes, preview notes based on us releasing earnings yesterday that, you know, our estimates were under revision. And, you know, certainly we heard, you know, you know, lumber prices, you know, bottomed at a much higher level than we anticipated. And I think everybody's catching up, you know, to how strong lumber prices are and how much, you know, how much this firming is going to benefit our bottom line. So I think it's fair to say that, you know, consensus right now looks really conservative, at least when I compare it to our internal model. And my expectation is we should see some healthy increases in estimates, you know, coming out, you know, based on the information we've shared on this call and coming out of this window.
spk03: Okay, great. And lastly, I really appreciate, Eric, kind of some of the color you provided on assessments on the manufacturing asset values, one way to look at it, and also the Idaho Timberlands. And even if I use very conservative numbers on your southern Timberland assets and put some credit on Chanel, which I think is an interesting question too, given the strength we're seeing, what type of additional upside? you see in that asset versus historically. And we think about the cash generation that you've achieved in the short term are going to. And I think it's pretty hard not to come up with, I'll throw something out here, it's not your number, but something certainly north of $70 on a kind of net asset value approach. And so far, you've got a 10B51 in place. but you haven't bought back any shares. Just any sort of color on how to think about at what type of discounts or levels you think it does make sense to do share repurchase, recognizing you've got other potentially very attractive alternatives.
spk07: Yeah, that's a good question, Mark. Yeah, we have bought back shares, none recently. You know, my view, I think our board's view, is that most companies get share repurchases wrong. They're very bullish when conditions are just fantastic. They go out and they buy back stock, and then conditions change, their stock price drops, and they've made share repurchases that were uneconomical compared to where, you know, future prices might be. So I think the way we look at it is we're very opportunistic. We want to be deep discount buyers. I would tell you as our view of NAV for the company has moved up and the discount off that NAV at which we want to buy has moved up. And we're going to keep back cash on our balance sheet waiting for a market dislocation that sends our stock price lower. And that's when we're going to be really opportunistic and buy back a lot of stock. So, you know, in some ways I'm waiting for that market dislocation to happen so that I can put capital work buying back stock. But at the same time, we have plenty of opportunities to invest that capital back into the business, and we are actively chasing some things that hopefully will use up some of that capital.
spk03: Okay, but it would be fair to surmise that your not having bought back stock is not an indication that you don't think the stock is trading at a fairly wide discount to your assessment of NAV at this point?
spk07: Yeah, no, I don't see that.
spk06: I would just add to that, Mark. It's really, I want to emphasize the opportunistic. You know, there's alternative uses of capital that have attractive return opportunities that we're looking at. And also, we're willing to be patient when it comes to deploying that cash as well. You know, we'd rather do something more meaningful in terms of share repurchases. You know, back to Eric's point on the dislocation, the opportunistic approach. So, you know, we're perfectly happy to be patient in deploying.
spk08: Understood. Appreciate it.
spk00: At this time, I am showing there are no more questions. I'll now turn the call back over to Jerry Richards.
spk06: All right. Thank you, Emma. Well, and thank you, everybody, for your questions and for your interest in potlatch Deltic. As we said on the call, 2022 is off to a really good start. We're looking forward to providing additional updates on the performance of our leverage to lumber strategy, as well as our progress in increasing shareholder value.
spk00: Thank you. This concludes today's conference call. Thank you for attending. You may now disconnect.
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