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spk11: Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Celtic third 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 pound key. Press star 1 again. Thank you. I would 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, Lisa. Good morning and welcome to Potlatch Deltic's third quarter 2022 earnings conference call. Joining me on the call is Eric Kramers, Potlatch Deltic's 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 turn the call over to Eric for some comments, and then I will review our third quarter results and our outlook.
spk07: Thank you, Jerry. We reported third quarter total adjusted EBITDA of $101 million after the market closed yesterday. That makes eight out of the last nine quarters that our quarterly EBITDA has exceeded $100 million. We are having another really strong year with EBITDA of $522 million through the first three quarters. Our financial results reflect the strength of our leverage to lumber strategy. Our wood product segment's adjusted EBITDA was $31 million in the third quarter. Lumber prices were lower than last quarter as expected, but they are still at attractive levels. The composite price has stabilized over the last couple of weeks and has increased modestly to $494 per thousand board feet after declining 12 weeks in a row. Lumber futures are also back above $500 per thousand board feet. We continue to expect that lumber prices will remain above long-term averages. We shipped 265 million board feet of lumber in the third quarter, which was 11 million feet more than we shipped in Q2. Transportation was a significant risk when we entered the third quarter, but availability of rail cars and trucks has improved considerably. We successfully completed the rebuild of our OLA Arkansas sawmill and restarted the large log line on schedule in the third quarter. The startup phase is underway and the mill is expected to reach its 150 million board feet annual capacity on a run rate basis by the end of 2022 as planned. As a reminder, OLA's rebuild also significantly lowers the mill's cash processing costs and improves its log recovery. Our timberland segment generated adjusted EBITDA of $65 million in the third quarter. Our southern timberlands team continued to take advantage of favorable logging conditions and strong log demand, resulting in harvest volumes that exceeded our expectations. Notably, our team set a quarterly harvest record for our southern timberlands business. The addition of Keshmark's timberlands will provide another boost in the fourth quarter. Idaho harvest volumes were seasonally higher this quarter but fell short of our plan primarily due to contractor availability issues. Our Idaho team is working hard to address the issues and they have a plan in place to reduce the harvest shortfall in the fourth quarter. Our real estate segment had another solid quarter with adjusted EBITDA of $14 million. On the rural side of the business, we sold 1,600 acres at nearly $4,000 an acre. The development side of our real estate business remains strong. Residential lot inventory in our Chenal Valley Master Plan community remains at low levels, and we continue to have good take-up on our lot offerings. We also completed over $6 million of commercial land sales in the quarter, which averaged $183,000 per acre. That is three quarters in a row that we have closed commercial sales in Chennault, resulting in total revenue $11 million thus far this year. Turning to housing, we continue to believe that the backdrop is favorable over the long term. There is a fundamental shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of millennials, who are the largest demographic cohort in U.S. history. While the rapid increase in mortgage rates has played a key role in slowing housing demand, the Fed's aggressive pace could turn into an easing cycle beginning as soon as mid 2023. Lower demand should also result in home prices declining. Acknowledging that it will take time, we expect demand to increase and U.S. housing starts to return to levels above the long-term average of 1.5 million units per year once homes become more affordable. In the meantime, the number of housing units under construction in the U.S. remains elevated at 1.7 million units in September. The elevated level of housing units under construction supports lumber demand in the near term. In addition, home buyers and builders have ways to respond to affordability issues. For example, remote work opened the possibility to move to less costly parts of the country for a lot of people. Builder concessions or a shift in product mix to smaller homes or fewer amenities are other examples. Shifting to repair and remodel, the largest market segment for lumber demand, the underlying fundamentals continue to be favorable for a variety of reasons. Existing U.S. housing stock remains the oldest in the history of the statistic at 42 years on average. This is important because older homes are significantly smaller than new homes on average and the older homes typically need more repairs. Higher mortgage rates mean that people are much more likely to stay in their existing homes. Remodeling is a very attractive option for homeowners given record levels of home equity across the U.S., a strong job market, and the fact that consumer balance sheets remain in great shape. In addition, higher interest rates usually have less of an effect on repair and remodel demand than other factors. Pundits expect repair and remodel spending to continue to grow. The National Association of Home Builders is forecasting a 7% increase in R&R spending in 2022, a 6% increase in 2023, and a 4% increase in 2024. Harvard's leading indicator of remodeling activity report forecasts R&R spending will be 6.5% higher year over year in Q4 of next year. Both forecasts imply healthy lumber volume growth in the R&R segment given much lower, but still attractive, lumber prices. Our home center customer takeaway remains strong, and we remain optimistic about lumber demand in the repair and remodel market segment. Turning to Catchmark, the merger closed on the 14th of September. We continue to be excited about the strategic and financial benefits provided by the transaction. While we only operated the Timberlands for two weeks in the quarter, we were very pleased with log price realizations and harvest volumes. Integration of the two companies is going faster than anticipated as we have already achieved CAD synergies of $15 million. Also, we now expect to achieve CAD synergies of $21 million versus the $16 million target that we communicated when we announced the transaction at the end of May due to higher interest savings than planned. The sharp rise in interest rates led to a significant increase in the value of our interest rate swaps, which allowed us to reduce the combined company's interest run rate by $8.5 million annually. Jerry will provide more color on the interest savings. As discussed on last quarter's earnings call, we were the successful bidder on three Bolton Timberland transactions earlier this year, aggregating $101 million in totals. In total, these transactions add approximately 46,000 acres to our ownership in Mississippi and Arkansas in the last of the three transactions closed earlier this month. Given our strong results in the first half of the year, we expect to pay another special dividend this year. While the amount depends on our performance for the remainder of the year, we expect the amount will be much lower than the $4 special dividend we paid last year. We will review the special dividend with our board in December. On the theme of returning cash to shareholders, our board approved a new $200 million share repurchase program in August. We believe repurchasing stock at the current price level is very attractive, and we look forward to our trading window opening in early November, one week from today. Finally, we remain committed to growing our regular dividend sustainably, increasing our stable cash flows with the catch mark merger and the bolt-on Timberland transactions provides the opportunity to continue doing so. Now that said, the relative attractiveness of deploying capital to repurchase shares given the current steep discount to our estimated NAV will factor into our analysis. We typically review the regular dividend in the fourth quarter. At the end of Q3, we have $484 million of cash on the balance sheet and liquidity of nearly $800 million. Our leverage remains low and our financial strength provides a solid platform for continued growth. Regarding environmental, social, and governance reporting, we published our third annual ESG report in May and our first carbon and climate report in September. Our team is currently working on developing a full ESG section of our website. Potlatch Delta 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 Delta remains very well positioned and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value. While there is no doubt that new residential construction is weakening given affordability issues, Our view is that R&R spending will remain relatively strong over the next couple of years. In addition, the housing construction downturn may prove to be relatively short-lived. We'll now turn it over to Jerry to discuss our third quarter results and our outlook.
spk06: Thank you, Eric. Starting with page five of the slides, adjusted EBITDA was up $101 million in the third quarter. The quarter-over-quarter decline in EBITDA was primarily due to lower lumber prices. I'll now review each of our operating segments and provide more color in our third quarter results. Information for our Timberland segment is displayed on slides six through eight. The segments adjusted EBITDA increased from $58 million in the second quarter to $65 million in the third quarter. Our saw log harvest in the north increased from 276,000 tons in the second quarter to 459,000 tons in the third quarter. Our second quarter harvest was constrained by spring breakup and unseasonably wet weather in June. Our quarterly harvest volume is typically the highest in the third quarter, as dry weather results in more favorable logging conditions. Having said that, our harvest fell short of plan in the third quarter, primarily due to log and haul contractor availability issues. Our northern team is working through those issues, and they have a plan to make up as much of the harvest shortfall as possible in the fourth quarter. Northern saw log prices were 25% lower on a per ton basis in the third quarter compared to the second quarter. The decline in saw log prices primarily reflects lower prices for indexed saw logs. Our index prices reset on a one-month lag, which means the second quarter index prices reflect much higher lumber prices in April and May. In the south, we harvested 1.4 million tons in the third quarter compared to 1 million tons in the second quarter. Relatively dry conditions and solid execution by our southern timberlands team allowed us to continue to take advantage of strong saw log demand. While it's not apparent from the rounded results on slide 8, our southern saw log prices were 1% higher in the third quarter compared to the second quarter. The increase was driven by two weeks of volume in catchmark stronger southern markets and a seasonally higher mix of hardwood saw logs. As discussed on last quarter's earnings call, we expected southern yellow pine saw log prices to decline modestly in our legacy operations in the third quarter due to increased log availability. The decline proved to be milder than we anticipated, and pine saw log prices in our legacy wood baskets remain higher on a year-over-year basis. Moving to wood products on slides 9 and 10, adjusted EBITDA declined from $107 million in the second quarter to $31 million in the third quarter. Our average lumber price realization decreased 34% from $865 per thousand board feet in the second quarter to $572 per thousand board feet in the third quarter. By comparison, the Random Links framing lumber composite price was 28% lower in the third quarter than the second quarter. As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite, which is closer to a real-time indication of price. Our lumber prices were flat for much of the third quarter before declining about 10% in September. Our average lumber price realizations per thousand board feet were $590 in July, $593 in August, and $534 in September. Lumber shipments increased 11 million board feet from 254 million board feet in the second quarter to 265 million board feet in the third quarter. our team worked hard to mitigate transportation issues to achieve that result. Shifting to real estate on slides 11 and 12, the segments adjusted EBITDA was $14 million in the third quarter compared to $22 million in the second quarter. EBITDA generated by rural sales declined sequentially due to the mix and timing of transactions. For example, second quarter results included a 10,700-acre Minnesota conservation transaction at just over $800 per acre while the third quarter consisted of the sale of only 1,600 acres in total. As a reminder, the Minnesota sale I referenced is the last meaningful sale in that state as it culminated a long-term strategy that created approximately $300 million of value for shareholders. Business remained solid in our Chanel Valley master plan community in Little Rock, Arkansas, as we generated $9 million of EBITDA in the third quarter. Residential lot sales remained strong with 48 lots sold in the third quarter. and we closed the sale of two more commercial real estate lots for an average price of $183,000 per acre in the third quarter. We have closed at least one commercial sale every quarter this year for an average price of $275,000 per acre. Turning to financial items, which are summarized on slide 13, our total liquidity was $773 million. This amount includes $484 million of cash as well as availability on our undrawn revolver. We plan to refinance the $40 million of debt scheduled to mature in December 2022. We have locked the refinance rate, which will reduce our interest rate approximately 100 basis points on this debt, resulting in lower annual interest expense of approximately $400,000. Catchmark had $300 million of debt when the merger closed in September. We used about half of our forward-starting interest rate swaps to refinance $277.5 million of Catchmark's debt at a fixed rate of 1.8% net of patronage, and we used cash to pay off the remaining $22.5 million of Catchmark's debt. We also applied Catchmark's interest rate swaps to reduce the interest rate on a $150 million Potlatch-Deltic term loan by over 200 basis points. Overall, the refinance and the use of catchmark swaps reduce the combined company's annual interest run rate by $8.5 million. That amount is significantly higher than the amount of interest savings that we expected when we communicated our CAD synergy target last May. In aggregate, the interest savings reduce our weighted average cost of our outstanding debt from 3.1% to 2.4%. We've largely been precluded from discretionary share repurchases since our first quarter earnings call due to the catchmark merger and SEC rules. We were required to suspend our 10b-5-1 plan in August when a registration statement was declared effective. We remain committed to repurchasing our shares at attractive prices, and we look forward to our trading window reopening in early November. We expect to pay another special dividend in December. While the actual amount is dependent upon our financial performance for the rest of the year, we believe that this year's special dividend will be much lower than the $4 per share we paid in 2021. Capital expenditures were $13 million in the third quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement, and it excludes Timberland acquisitions. As Eric mentioned, we were the successful bidders on three bolt-on timberland acquisitions in Mississippi and Arkansas earlier this year for $101 million in the aggregate. We used cash to close all three transactions, including $16 million to close the last of the three transactions in October. I'll now provide some high-level outlook comments. The details are presented on slide 14. We expect to harvest 1.8 to 1.9 million tons in our timberland segment in the fourth quarter. Harvest volumes in the north are planned to be comparable to the third quarter. This is higher than typical for the fourth quarter as our team is working to reduce the third quarter harvest shortfall. We expect northern saw log prices to decline about 25% in the fourth quarter. In the south, we plan to harvest 1.4 million tons in total in the fourth quarter. This volume includes approximately 400,000 tons of saw logs and pulpwood from the Ketchmark acres. We expect our southern saw log prices to increase modestly due primarily to a higher mix of catch marks stronger southern markets. We plan to ship 265 to 275 million board feet of lumber in the fourth quarter. This assumes that the Ola Arkansas sawmill startup remains on track. Our average lumber price thus far in the fourth quarter is approximately 10% lower than our third quarter average lumber price. This is based on approximately 100 million board feet of lumber. Our lumber spot price is approximately 11% lower than our third quarter average lumber price, and our prices started firming recently. 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 1,500 acres of rural land and 23 Chenal Valley residential lots in the fourth quarter. Additional real estate details are provided on the slide. Our total capital expenditures are planned to be in the range of $85 to $90 million in 2022, excluding acquisitions. This estimate includes approximately $18 million for the OLA rebuild, which we expect will be reimbursed by insurance. The estimate also includes $12 million deposit for the Waldo modernization expansion project that we announced in June. Overall, we expect our total adjusted EBITDA will be lower in the fourth quarter, due to lower lumber and index saw log prices. Having said that, lumber prices remain at attractive levels. We're well positioned to continue growing shareholder value over the long term. So that concludes our prepared remarks. Lisa would now like to open the call up to Q&A.
spk11: At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Your first question comes from the line of Mark Weintraub with Seaport Global.
spk01: As you're thinking about capital deployment, you talked about you're going to have a special dividend. You talked about an appetite for share repurchase with the stock where it's at. You've done a number of acquisitions. Are you still on the lookout, is that still part of likely capital deployment in the next six, 12 months? And then tying it all together, what type of balance sheet or other metrics should we focus on in understanding what your comfortability and target type ranges are?
spk07: So, hey, Mark. Mark, this is Eric. Yeah, you know, our Our appetite is we want to continue to try to grow the company through Timberland acquisitions. And you're right, we've been successful this year, not just with Catchmark, but also with 46,000 acres and $101 million or so that we spent on the bolt-ons. What I'd tell you is that the Timberland market is getting, in our opinion, a little bit overheated. For example, we competed here recently in two different tracks. We lost these deals. One of them was a tract in Georgia. We went to nearly 22 and a half times EBITDA. And the other one was in Alabama. We lost this one as well. We went to 23 and a half times EBITDA. Both those transactions, we went to the low end of our discount rate range. We lost both of them. And we were told we were in the middle of the pack of bidders. So that means people are paying north of 22, 23, 24 times EBITDA for Timberland. And, you know, that's the max that we're going to go given our current discount rate range. So while we'd like to continue to grow and we will continue to compete and we'll try to take down Timberland M&A because we think it's a very attractive asset class, there is a point at which it no longer creates shareholder value. And so in our mind, we're going to have to pivot here with our strong balance sheet, with our cash that we have on the balance sheet. We're going to have to pivot into other capital allocation priorities. And coincidentally, our average analyst estimated NAV is up around $63 a share. And as we sit here today, we're at, I don't know, $44 a share. We're trading dramatically below what people believe our NAV is. And so it seems to us like it presents just a fantastic time. Honestly, we've been waiting for this opportunity to step in and buy shares for some time. We've said all along we want to buy stock when it's depressed, not when it's at fair value. And, well, guess what? Today it's depressed, and it's time for us to step in and put our money where our mouth is. And that's going to start happening about a week from today. So I'm going to let Jerry answer the second question on balance sheet. But does that answer your question on the first half?
spk06: Yeah, that's super. Thank you. So Mark, picking up on the kind of the balance sheet part of that question, you know, I would say overall, really no shift or change, you know, given our posture and our metrics in terms of how we manage that balance sheet. I mean, at a high level, having strength and flexibility has served us well in the past. And, you know, we plan to maintain that going forward. And, you know, as a reminder, our EBITDA leverage, which is a key metric that you know, we monitor and talk to our credit rating agencies with is EBITDA leverage and, you know, continue to expect to maintain that in the three and a half to four times range. You know, today we find ourselves under one, so a lot of flexibility there. But the long-term goal through a cycle, which I should emphasize here, really remains in that three and a half to four times range. And we'd like to have a bit of cash, again, to be opportunistic and have some flexibility. And, you know, in the past we've talked about having a minimum of $100 million of cash on the balance sheet. So, No change there.
spk01: Okay, super. That's very helpful. And obviously, when you're talking about three and a half to four times, that's kind of over the cycle. So we can't necessarily look at the current EBITDA, which is presumably, you know, you have been at extremely high level. So you're presumably using different numbers internally when you think about what that translates into in terms of a gross number. Is that fair?
spk06: That is spot on, Mark. We typically, you know, when I look at that three and a half to four times target, you know, we're really modeling and stress testing a low point in the cycle kind of perspective because we want to maintain, you know, debt levels kind of under that range even at a low point.
spk10: Okay. Thank you.
spk02: Your next question comes from the line of Kurt Dingle with DA Davidson.
spk05: Great. Thanks, and good morning, everyone.
spk07: Morning.
spk05: I just wanted to start out on the special dividend, and Eric, you touched on it a bit in the prepared remarks. But, I mean, with three-quarters in the books and some stability here in the lumber markets, is there any way you could maybe help us quantify a range of what that might look like, as well as how you're thinking about any discretionary component versus share repurchases or other capital deployment opportunities?
spk06: Yeah, so I'll actually take that one, Kurt. This is Jerry. You know, in terms of, you know, stepping back, you know, as a reminder for the group, we mentioned this in the prepared comments, but we paid a $4 per share special dividend last year. And I think we've had a position at least the last couple of quarters, it feels like, where we said this year's special dividend is going to be significantly lower. And there's a number of factors that play in. And first and foremost, it's really important. I think we must have mentioned between Eric and I four times in the prepared comments, the you know, the priority that share repurchases and the attractiveness of share repurchases at the current discount that we trade. And, you know, deviating a little bit here, and I'll get back to the point of the question, you know, we just put a new $200 million share repurchase authorization in place. Our window reopens November 1. So to the degree we can shift capital to share repurchases from a special, to the degree we have that discretion, you know, that makes all the sense in the world to us, again, given the discount that we trade at today. When you go back to that $4 per share special dividend that we paid in December 2021, I mentioned this on last quarter's call, but there was a 40% discretionary component to that. Overall, the special dividend is primarily to protect our REIT status by purging excess cash from the taxable REIT subsidiary, but we also included a 40% discretionary component on top. You know, as a reminder, we're trading around $60 a share last year versus the $44 that Eric talks about today. So clearly that, you know, that capital allocation set of priorities have shifted. And when you think about other moving parts, you know, Idaho solid prices, when you step back for the full year, are probably down about 30% year over year. So that's going to reduce you know, kind of the amount that's needed for a special dividend. Lumber prices are down as well. Again, that, you know, really goes into the amount of cash that we have to purge out of that taxable REIT subsidiary. And we've also grown the regular dividend. Payout, for example, just with the shares we issued in the Ketchmark merger is up 20 million year over year. And that effectively shifts, you know, what potentially would have been special dividend dollars over into the regular dividend bucket. So, For all those reasons, it's hard to pin down the number exactly this year. We'll sit down with the board in early December when we review it, but it feels like it's probably in the $1 per share range, maybe just a bit under $1 per share, just to give some benchmarks.
spk05: Got it. Okay. That's all very helpful. And then I guess in terms of Northern Saw Log prices, you know, for the Waldo project, you've used $500, and we're about there now, so maybe we'll just use that. But, I mean, there's some variability with the timing of indexing and log density, but I guess if you were to kind of use that $500 per thousand assumption, is something in the $130 a ton zip code for Northern Saw Logs kind of a reasonable starting point?
spk06: Yeah, and I guess to clarify, Kurt, I'm assuming you're talking 2023 in its entirety, and if that's the case, that is a reasonable proxy.
spk05: Okay, got it. And then lastly, log costs were a slight sequential benefit in wood products in Q3, but maybe a bit less than I expected given the decline in your own Idaho realizations. Is that just a timing factor around... when inventories were built at the mill, and any thoughts around the benefits on the wood product side from at least the lower saw log costs in Idaho in Q4 and maybe even the early part of next year?
spk06: Yeah, I would say, Kurt, you know, the premise behind your question is spot on. It's really all about timing. I mean, you think about it, you know, there's seasonality around, you know, the log deck and when it gets built and when it gets torn down. And, you know, a lot of the high price logs, you know, that the mill has been, you know, the complex has been processing even in the third quarter, you know, really purchased earlier in the year when lumber prices and index log prices were much higher. You know, certainly a bit of relief, you know, as that averaging kind of takes place and that log deck is kind of torn down. You know, we'll start building that log deck in preparation for spring breakup here. In fact, that's already in the works and well down the road. So, you're averaging lower price logs into that log deck. So expectations, you'll see a little bit more price relief from a log cost standpoint in Idaho and Q4, and then you'll probably get to a new run rate as you think about your model when you move into 2023.
spk05: Got it. Okay. That's super helpful. Well, appreciate the color, and I'll turn it over. Thank you. Thanks.
spk11: Your next question comes from the line of George Stafford with Bank of America Security.
spk04: Thanks very much. Hey, Jerry. Hey, Eric. How are you? Good quarter here. Quick question for you. On Northern Harvest and contractor availability, what are your plans? How do you expect to be able to get more contractors and more production in the fourth quarter? If you could give a bit more color, that would be great.
spk06: You bet. You know, it feels, so this is Jerry, George. You know, it feels a lot like what we experienced, you know, in the South a year or two ago when we had contractor availability issues. And, you know, it really starts with, there isn't really much in the way of surge capacity when you think about log and haul contractors. I mean, over time, you know, we hear about tight labor markets and, you know, it also feels like there's been, you know, a bit of migration as, you know, as the contractor workforce ages out. So I think there's a challenge in, kind of replenishing, you know, the folks that are working, you know, in that space. So you start with, you know, pretty tight surge capacity. Your team does a really good job over time managing in that tight environment. But when you layer on top of it things like equipment breakdowns the contractors have, and then all of a sudden, you know, supply chain issues and getting critical spare parts and delays, you know, it starts to have a kind of a ripple effect. And then once you get behind without that surge capacity, it's really hard and, quite frankly, it's impossible to get caught up. So that's a bit of what the team was wrestling and came to the forefront in Q3. Now, in terms of what do you do to manage through that, as a large player in Idaho, that certainly helps because we have deep and long-term relationships with some good quality contractors. So just really effectively managing and leveraging those relationships to make sure we get the focus that we need and You know, when I think about just in terms of some color on where do we think we'll land in the harvest in Idaho for the year, you know, we're about 200,000 tons short against our plan, you know, year to date in Q3. You know, the team, if, you know, things, weather holds, and having said that, it's gotten a little wet here, so it either needs to dry out or freeze up. You know, it can't be in this middle ground. But if weather holds, we'll probably make up about half of that shortfall and end up about 100,000 tons short. Now, the flip side is we're obviously running well ahead in the south. So overall, from a harvest volume standpoint, we're actually up, you know, versus what we'd expect at the start of the year.
spk04: But aside from leveraging your relationships, I mean, does it mean that the incremental margin on those harvests when they do come in on the production will be maybe a little bit lower in terms of other incentives that you might be needing to offer to get more availability? I wouldn't imagine there's much, but is there any sort of capital involved in doing that as well? You know, just a couple quick thoughts on that as well.
spk06: So in terms of costs, I mean, the big story when you think about log and haul costs this year is really diesel. You know, you step back, certainly our log and haul rates are up, but that probably explains something on the order of 75%, 80% of, you know, the increase in costs. Now, you know, having said that, there is, you know, there's fairness in the premise of your question, which is that, you know, rates have gone up as well because of tightness. And that's true both in the south and in the north.
spk07: And, you know, what I would just add, George, is when you look at the fourth quarter, you know, we're targeting 450 to... 500,000 tons of saw logs, more or less, and maybe a little bit of pulpwood. All we really need to do in Q4 is to do what we did in Q3. And Q3 was a challenge for us, no doubt. But we still got nearly 500,000 tons in Q3. So all we got to do in Q4 is do the same thing. It's just that we typically build our log decks earlier in the year. We typically build them in Q3. And this year, some of that slipped into Q4.
spk04: Now, that's great, Art. That makes sense. One sort of quick question, kind of a bigger picture one, though. So we tend to think about the fourth quartile being roughly $500,000 per thousand board feet, and we tend to look at British Columbia as kind of setting that point. How do you expect the fourth quartile to evolve over the next year or so? recognizing it's hard to project that. Do you think it declines thickly? Do you think it hangs in at that level and why? And then on repair model, we understand, you know, given all your sources that you expect that that'll remain, you know, pretty stout. But intuitively, shouldn't we expect repair model to drop a bit with housing starts since so much of repair model comes from activity that happens once somebody, I shouldn't say how it starts, but home purchases, you know, after the person buys that home and starts remodeling it in that first year. Thanks, guys, and good luck in the quarter.
spk07: Yeah, thanks, George. So your question on fourth quartile, you know, kind of the cost curve, if you will, how's it going to evolve over the next year or two, I frankly don't think it's going to change a whole lot. We know where there are structural issues with the with lumber in North America from a cost standpoint. And that's British Columbia and increasingly the Pacific Northwest. You know, the harvest volumes are coming down over on the west side roughly 10% over the next couple of years. It's not just British Columbia. So frankly, it's going to stress mills for sure. And you're seeing some curtailments right now up in BC in particular. But it's not all these mill closures are not going to happen overnight. If you ask me 10 years from now, where do I think the cost curve is going to be? It'll be maybe 450, not 500 for that fourth quartile segment. But in the next year or two, I think it stays up in that $500 zip code. People are, you know, nobody likes to close a sawmill and let employees go and it disrupts residual streams. And that has implications for bolt mills and pellet mills and lots of things. So I don't think the cost curve changes materially over the next year or two. Now, with regard to repair and remodel, yeah, sure, you're right. As new home sales come down, that is going to have a tendency. That effect alone will tend to push down R&R. But I think more R&R expenditures are for when somebody buys an existing house or is living in a house that they kind of feel trapped in, for lack of a better word, because they can't afford to move into a new house. I don't think people typically go buy a new house and then say, oh, let's remodel this brand new house that we just bought. I think it tends to be more older, more existing kind of houses, if you will. So, yeah, there's no doubt on the one hand, fewer new home sales will put some downward pressure on R&R spending. But I think all the other factors that we laid out between record home equity levels, strong job market, consumer balance sheets are in great shape. I think all those factors outweigh the fact that new residential starts are going to be coming down.
spk04: Yeah, and I really meant to say existing home sales, you know, trending lower, you know, having more of an effect on repair model. But your points about, you know, feeling trapped, the age of the home stock and so on is important as well. I'll turn it over. Thank you, guys. Great. Thanks.
spk11: Your next question comes from the line of catch in Mamatora with BMO Capital Markets.
spk03: Thank you. Eric, can you talk a little bit about channel inventories on the lumber side, both in retail as well as on the pro side?
spk07: Yeah, I can talk about them in general, Keaton. We don't really track them closely. Once they leave our mills and they go to customers, it's just anecdotal evidence that we pick up from talking to folks. Our understanding is that they're at really low levels. And the home center takeaway, it's at or above pre-pandemic levels. So our home center business is rock solid right now. And, you know, our sense is that most of that uptick, that strength, if you will, is coming from the pro-contractor side as opposed to the DIY side. But our view is that inventories throughout the channels are relatively low, and especially in R&R, demand remains very strong.
spk03: Got it. That's helpful. And then maybe switching to the real estate side, Eric, can you talk about the opportunity that you have on the catchmark portfolio in terms of alternative streams of revenue? If you can touch upon solar, that would be helpful as well.
spk06: You bet. So I'll take that one, Caden. This is Jerry. Thank you. In terms of catchmark real estate opportunities, that's, you know, one of, you know, many reasons why we're really excited about, you know, having completed this deal. You know, as we laid out in our kind of announcement slides back in May, a lot of catchmark's land is proximate to some large population centers, and that's different than what we've had, you know, in our rest of our southern acres and our legacy holdings. So that by itself, we think, creates a lot of opportunities to You know, the other trend we've seen, and we, you know, we closed to our knowledge is the first solar deal earlier this, you know, this year in the first quarter. And that was very attractive. Certainly, you know, we see those kinds of opportunities and catch marks footprint as well. And the other thing I will share is, you know, once we close a deal, we did the same thing with Deltic, you know, with the same thing with Luter, you know, which would close last December. As we go through and we actually take our team's expertise and knowledge And we go through and we stratify every one of those acres. And that process is underway. It'll take our team probably six to nine months to really kind of go through the whole portfolio. It doesn't mean that we're not going to sell real estate off of Catchmark land before then. We will. In fact, we expect probably just under 1,000 acres in the fourth quarter, for example, here. But that's where we'll really kind of surface and start to gauge what is the magnitude of that opportunity above and beyond what Catchmark was doing historically. Stay tuned, we'll come back and provide an update as we complete that stratification process.
spk03: Okay, that's helpful. And just one other question. What is the right way to think about sustainable harvest with catch mark sort of completion? And if you can break that between the north and the south.
spk06: Yeah, so in terms of sustainable harvest, I mean, one, obviously, we've got a lot of moving parts this year with 101 million of bolt-on Timberland transactions. We've got Catchmark, you know, in the midst. And, you know, we're also in the throes of our budget process. And as part of that, we go back and we recalibrate our harvest plans going forward long-term, not just for next year or so. You know, if I were to step back, and we'll provide, you know, guidance once we finish that process here when we release fourth quarter earnings, but, you know, give or take, it's probably around 8 million tons. You know, again, the actual number will depend upon, you know, probably a bit above 8 million tons, but, you know, but it'll, you know, but it'll be, we'll come back with that information. And then, you know, you've seen the historical run rate in Idaho. We haven't added or subtracted from Idaho, so the delta is going to be in the south.
spk10: Got it. Now that's helpful. I'll turn it over. Good luck. Thanks.
spk02: Your next question comes from a line of Mike Rockman with Truist Securities.
spk08: Thanks, Eric. Jerry, appreciate you taking the questions. First question, this was on Catchmark. Now that you've had some time to digest the acquisition, is there anything that you were not expecting going into the transaction, just from my background with the industry and certainly interactions with the company, catch marks had historically been, I think, somewhat aggressive with their harvesting level. So I'm wondering if there's anything that, as you've had time to now go through and look at things more carefully, whether things really haven't worked out. And it could be just maybe one or two things that are off a little bit, but is there anything that you weren't expecting now that you've closed the transaction?
spk07: You know, Mike, I would say no, to be honest with you. You know, like we mentioned in our prepared remarks, the harvest volumes are coming in spot on. And we talked about this when we announced merger. You know, we'll be in this 1.6, 1.8 million tons for the next, who knows, eight, nine years. It will dip 100,000 tons or so as you get out into the future for a couple of years, and then it comes right back. So we're not disappointed with the timber inventory. pricing has met our expectations. It's kind of hit our merger model, if you will. And frankly, for the next three to four years, as I recall, we really don't have much pricing increase in catch marks markets. You know, the only real surprise I would say is, and Jerry talked about this, is our refinance opportunities have only gone up compared to where they were before. So I would say no, their assets are good. We'll see how the real estate stratification plays out, but I've got to believe with catch Mark's ground being closer to major metropolitan kind of urban areas, um, Atlanta, Columbia, whatnot. Um, I, I would have to believe the real estate opportunity is going to be better than what we initially thought too, but we got to give the real estate team time to go through their stratification, but no, we've been very pleasantly surprised so far. Gotcha. And just, um,
spk08: Last question is on lumber arnophiles. I think last quarter you mentioned they were stretching out a couple of weeks. Have they shorted at all, just given what's happening to housing?
spk07: No, they really haven't, Mike. They're still in the one- to two-week kind of zip code, kind of at traditional levels. I think it goes back to what I said before. Yeah, sure, housing starts are under pressure. We all get that. Affordability is an issue. But the R&R side of the equation we think is hanging in there just fine.
spk09: um so you know i think those two maybe are canceling each other out got it thanks very much thanks your next question comes from the line of paul quinn with rbc capital markets yeah thanks very much morning guys um just question morning timberland markets uh it sounds like you lost a couple deals and It seems like I'm seeing timberland prices remaining strong despite rising interest rates and therefore discount rates. Why is that?
spk07: You know, Paul, I think people love the timber asset class, number one. You know, this notion that it's a hedge against inflation, scarce resource. I honestly think carbon is starting to get priced into some of these valuation models. We haven't explicitly priced it into our model yet. But I'll tell you, we are working on some carbon projects, so I would not be surprised if at some point in time in the future there's a line item in our cash flow statement that says carbon. I think the other thing that's kind of interesting is that non-traditional buyers increasingly are showing up to bid on these tracks. And I'm referring to Apple. I'm referring to IKEA. IKEA now has, you know, this is a furniture retailer. IKEA now has, I don't know, nearly 150,000 acres of southern timberland. So I think the asset class is increasingly attractive, not just from carbon, but also these other non-traditional buyers. And also you look at what's happening up in B.C. and the Pacific Northwest with harvests coming down. The action is in the south, and that's where most of the deals are happening.
spk09: All right. And then specifically on carbon, how are you going to monetize that or what's the frameworks we should be thinking about if we wanted to pencil some value in for carbon?
spk07: Well, I would tell you that it's very early stages, number one. But number two, at this stage of the game, carbon values don't compete with saw log values. They're not even remotely close. But I will tell you there are some tracks that maybe are not super highly attractive you know, plantation-style forestry, maybe like a hardwood stand, for example, where carbon values could outpace what that hardwood value might be. And it's too soon for me to say because we're at the early stages talking to a couple different parties about monetizing some of this ground, but we'll see how it plays out.
spk09: And then just switching over to real estate at a high level, what are your expectations for 2023 in that performance?
spk06: So I appreciate the attempt, Paul, but, you know, like I said, we'll come back in our Q4 release and we'll provide guidance on 2023. I mean, historically, you know, rural land, we've been in that 20,000 acre range. That's certainly going to be lower because, you know, Minnesota, as we've mentioned the last couple of quarters, is essentially done. You know, so I don't know if it's half, a little more than half of that 20,000, you know, is a decent placeholder at this point. And then, you know, our average in all run rate for residential lot sales has been somewhere in the 150, 160 lot range. Now, we're at 180 this year, you know, but obviously, and we still see, you know, some relative strength in that market. But, you know, it'd be a little premature to, you know, look forward to 23 and say, you know, we'll have a repeat at the 180 lot level. Okay, that's helpful.
spk10: Thanks very much, guys. Best of luck. Thank you.
spk11: 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, Lisa. And thanks, everybody, for your questions and your interest in potlatch Celtic. To recap, our year-to-date 2022 results are very strong. We look forward to providing updates on the performance of our leverage to lumber strategy. our integration at Catchmark, and our progress on increasing shareholder value.
spk11: This concludes today's conference.
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