PotlatchDeltic Corporation

conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mr. Wayne Wacecheck, Vice President and Chief Financial Officer for Opening Remarks. Sir, you may proceed.

Good morning, and welcome to Potlatch Deltics second quarter 2024 earnings conference call. Joining me on the call is Eric Cremers, 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. Please note that a reconciliation of non-GAAP measures can be found in the appendix to the presentation slides and on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our second quarter results and our outlook.

Well, thank you, and good morning, everyone. Thank you for joining us. Yesterday, after the market closed, we reported second quarter total adjusted EBITDA of $103 million. This is a $73 million increase from the first quarter and was largely driven by strong real estate performance. Overall, we had solid operational execution across each of our business segments despite the current economic environment and languishing lumber markets. Turning to our second quarter results, starting with our Timberlands division, This segment generated adjusted EBITDA of $34 million in the second quarter. We harvested 1.9 million tons, exceeding our Q2 harvest plan, as better-than-expected weather conditions in both our northern and our southern regions provided favorable logging and hauling conditions. Saw log prices in Idaho increased due to our indexed agreements, coupled with higher cedar prices. For the south, our average southern log price realizations were comparable to the first quarter despite challenging lumber market conditions. Moving to our wood products segment results. Adjusted EBITDA was a loss of $7 million in the second quarter compared to breakeven in the first quarter. During the second quarter, lumber markets remained challenging as seasonal home building activity did not result in tightening lumber markets. While there is weakness across all lumber markets, It has been most notable for our southern yellow pine. Southern yellow pine prices are at historically low levels, which stem from pronounced weakness in multifamily construction, declining demand from treaters, and ample supply of product. While depressed lumber markets continue to weigh on our wood products results, we continue to focus on the areas we can control, including optimizing our product mix, efficiently running our mills, and effectively managing costs. As we look towards Q3, we believe lumber prices are at or near the bottom as we have seen recent signs of a modest upward trend in lumber prices. Entering the back half of the year, we have reached several significant milestones with our $131 million Waldo, Arkansas sawmill modernization and expansion project. The project continues to progress well with completion in Q3 remaining on track and within budget. In the early part of the third quarter, the mill will undertake a limited period of downtime to tie in the new equipment. This downtime is expected to reduce our wood products division lumber production by approximately 10% or 25 million board feet in the third quarter. Following completion, we anticipate a ramp up in production through Q4 and into next year. Based on other brownfield additions in the industry that we have seen, We expect it will take 6 to 12 months to reach the mill's new capacity of 275 million board feet per year. As a reminder, the project will increase the mill's annual capacity by 85 million board feet, will improve recovery by approximately 6%, and reduce cash processing costs by about 30%. Once the ramp-up phase is completed, we expect the mill to generate approximately 25% million of incremental EBITDA annually under a mid-cycle sales environment with this project. Shifting to our real estate segment, this business generated $90 million in adjusted EBITDA in the second quarter. Our rural real estate side of the business produced very strong financial results as we successfully completed this sale of 43,000 acres at an average of $2,000 per acre during Q2. The highlight of our second quarter rural real estate activity was a closing of the previously announced 34,000 acre young timberland transaction for $57 million. As discussed on the last call, the timberland was sold at a significant premium as it was just four years old and had no meaningful cash flows for the next 20 years. The quarter also included other value-added transactions at significant premiums to timberland value, including a 2,000 acre conservation land sale in Arkansas $4,700 per acre. Demand for rural real estate continues to remain quite strong. The development side of our real estate business remains steady in this higher interest rate environment. During the second quarter, we completed a $6 million commercial land sale and sold 13 residential lots at an average price of about $113,000 per lot in our Chenal Valley Master Plan community in Little Rock. While we fell short of our residential lot sales outlook in the second quarter, we remain optimistic about our residential sales the remainder of this year, based on strong take-up from regional builders on our latest residential lot offerings just this past week. Regarding our emerging natural climate solutions business, it continues to evolve and grow. Starting with solar opportunities, our portfolio of option contracts with solar developers continues to expand, with four new contracts added since the last quarter ended. Our inventory of solar option contracts now represents 27,000 acres, or over 1% of our entire timberland holdings, with an estimated value of approximately $300 million on a net present value basis. Given the appetite the utility sector continues to demonstrate for solar energy, we anticipate further growth of our pipeline. By year's end, we expect our solar option contracts portfolio to include over 30,000 acres with an estimated net present value of roughly $340 million. We're also actively pursuing an NCS opportunity focusing on subsurface leases for lithium deposits crucial for battery production. Notably, certain areas of our timberlands in southern Arkansas feature geological formations that offer promising prospects for lithium. Currently, we are engaged in discussions with selected counterparties regarding the initial leasing of a portion of our subsurface rights. Shifting to forced carbon credit opportunities. The voluntary carbon credit market for high quality credits continues to grow. Carbon registries that support voluntary markets continue to evolve in order to ensure high quality credits are being brought to market. In fact, the leading carbon registries are shifting their methodologies to have projects adhere to the relatively new Core Carbon Principles, or CCP, established by the Integrity Council for the Voluntary Carbon Market. These relatively new Core Carbon Principles are quickly becoming widely recognized as establishing a global benchmark for the highest integrity carbon credits found in the voluntary marketplace. Consequently, we believe that forced carbon credits that are labeled CCP will garner the highest demand and therefore will obtain premium pricing. With this in mind, we are shifting our approach and redesigning our 50,000 acre southern Timberland carbon project to meet these new CCP standards. We believe this will ensure our project or any future projects that we identify will be globally recognized as having real and verifiable climate impact under a transparent methodology using best practices, along with creating strong demand and premium pricing. Once we further assess the redesign of our carbon project, which is expected by the end of this year, we will have a clearer picture of the type and time horizon of bringing a CCP-labeled carbon project to market. We have also identified potentially valuable prospects in carbon capture and storage, as well as bioenergy and biofuels. While these ventures are not expected to materialize immediately, they hold the potential for substantial value in the long run. We continue to believe that all of these natural climate solutions opportunities will increase demand for rural land, likely driving timberland values higher due to increasing and diverse cash flows. Moving to capital allocation, we remain committed to our disciplined and opportunistic approach, and we constantly evaluate all of our capital allocation opportunities to grow shareholder value over time. In the current economic environment, capital allocation is dynamic and can change from quarter to quarter. Aside from our dividend, share repurchases were a very attractive option in Q2, as we were trading considerably below our estimated net asset value. In the second quarter, we returned $25 million to shareholders through share repurchase activity. Approximately 610,000 shares were repurchased at an average price of $41 per share. We have now utilized half of our current share repurchase authorization with $100 million remaining under the program. Now, turning attention to the U.S. housing market, the overall market continues to be weighed down by elevated mortgage rates and affordability challenges. Despite these factors, new single-family residential construction continues to demonstrate a fair level of resilience as starts have exceeded 1 million units in seven out of the last eight months. This has contributed to some level of stability in the market. This level of activity has been supported by large home builders continuing to use incentives such as mortgage rate buy-downs to address affordability. As for the multifamily segment of new residential construction, it has experienced a pullback due to an influx of supply entering the market and the excessive cost of financing construction. There are some positive macroeconomic indicators, including inflation data, showing signs of easing. If this trend in inflation continues, it is anticipated that the Federal Reserve will start to pivot from its restrictive rate policy and begin to lower rates, possibly as early as September. Consequently, we would expect the housing market to see renewed momentum once mortgage rates drop. Not only would new homes become more affordable, but existing home sales would improve as well, as existing homeowners are not as locked into a low mortgage rate. Longer term, we remain optimistic on new residential housing fundamentals. This is supported by an underlying shortage of housing stock, which some pundits estimated 4 million units and a strong demographic tailwind. Now, moving to the repair and remodel segment, which in fact is the largest demand driver for lumber, demand in this market has softened, especially in the do-it-yourself segment. The near-term headwinds on repair and remodel appear to be driven by elevated interest rates, thus raising the cost of discretionary projects, coupled with the low turnover of existing homes, which typically spurs R&R activity. Looking forward, Favorable longer-term fundamentals continue to remain with an aging housing stock at over 40 years on average, continued work-from-home policies, and elevated home equity levels. Back in May, we released our 2023 Corporate Responsibility Report, highlighting the continued momentum we are generating around our corporate responsibility goals and initiatives. Looking ahead, we continue to be diligently focused on completing our strategic modernization and expansion project at the Waldo Sawmill on schedule, within budget, and with the utmost safety for our employees and our contractors. Additionally, we remain committed to enhancing operational and financial performance across all of our business segments, and in light of tough market conditions, have implemented additional cost controls across all of our mills. Our investment-grade balance sheet, ample liquidity, and disciplined capital allocation strategy position us to deliver long-term value for our shareholders. I will now turn it over to Wayne to discuss our current second quarter results and our outlook.

Thank you, Eric. Starting with page four of the slides, adjusted EBITDA was $103 million in the second quarter compared to $30 million in the first quarter. The sequential quarter-over-quarter $73 million increase in EBITDA was driven by strong rural real estate sales. I will now review each of our operating segments and provide more color on our second quarter results. Information for our Timberland segment is displayed on slides five through seven. The segment contributed $34 million in EBITDA to our second quarter results, which was comparable to the first quarter. Second quarter EBITDA benefited from higher solid log prices in Idaho, which were offset by seasonally higher forest management and road costs across our regions. Our sarlacc harvest in Idaho was 365,000 tons in the second quarter compared to 329,000 tons in the first quarter. Our team leveraged good hauling conditions coming out of spring breakup, which led to exceeding our planned harvest volume for the second quarter. Our Idaho sarlacc prices increased from $103 per ton in the first quarter to $113 per ton in the second quarter. or 9%. The favorable per ton increase reflects higher lumber indexed and cedar saw log prices and the positive effect of a normal seasonal decrease in the density of the saw logs. Turning to the south, we harvested 1.5 million tons in the second quarter compared to 1.6 million tons in the first quarter. Slide 7 shows our saw log prices down 2%, which is on a rounded basis, but actual southern saw log prices were 1 percent lower in the second quarter compared to the first quarter. The moderate decline can be treated to a higher mix of smaller diameter pine saw logs, along with the market factors affected by civil log inventories at or nil capacity across the region. Moving to wood products on slides eight and nine, adjusted EBITDA decreased from break-even in the first quarter to a loss of $7 million in the second quarter. Lower average lumber prices, combined with higher per-unit cash processing costs, primarily associated with our Waldo, Arkansas sawmill, with its ongoing modernization and expansion project drove the decline. Our average lumber price realizations decreased 2 percent from $430 per thousand board feet in the first quarter to $423 per thousand board feet in the second quarter. By comparison, the random-lengths framing lumber composite price was 5 percent lower in the second quarter compared to the first quarter. Note that our regional mix and product mix is not the same as the composite. There's also a timing difference between our sales and the composite. Lumber shipments increased by 15 million board feet from 271 million board feet in the first quarter to 286 million board feet in the second quarter. shifting to real estate on slides 10 and 11. The segments adjusted EBITDA was $90 million in the second quarter compared to $6 million in the first quarter. EBITDA generated by rural sales was considerably higher in the second quarter, led by the closing of the previously announced $57 million Southern Timberland transaction. Our rural real estate business remains robust as we closed on a total of 47 transactions aggregating to 43,000 acres. EBITDA generated by our Chenault Valley Master Plan community increased in the second quarter by nearly $5 million compared to the first quarter due to a 12-acre commercial real estate sale for $500,000 per acre. During the second quarter, we also closed on the sale of 13 residential lots at a lower average price than in the first quarter due to a different product mix of lots. Turning to capital structure, which is summarized on slide 12, our total liquidity was just under $500 million. This amount includes $200 million of cash on our balance sheet, as well as availability on our undrawn revolver. We repurchased 610,000 shares at $41 per share for a total of $25 million in the second quarter. We have $100 million remaining on our $200 million repurchase authorization. We intend to refinance $176 million of debt that is due for maturity in October, November of this year. On our balance sheet, we currently hold notional forward starting swaps of $200 million, valued at approximately $38 million. Our strategy will be to optimize the use of these swaps, either partially or in full, to refinance this debt at interest rates below the prevailing market rates. Capital expenditures were $28 million in the second quarter, That amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement. Our full year capital expenditures remain in the range of $100 to $110 million, not accounting for any possible Timberland acquisitions. This estimate includes approximately $44 million for the final installments on the modernization and expansion project at the Waldo Arkansas Sawmill, of which approximately $27 million remains to be spent for the rest of the year. Furthermore, we anticipate that our annual cap backs will drop significantly and return to a more normalized level next year, as we do not plan to undertake any major projects comparable to the Waldo initiative. And we'll now provide some high-level outlook comments. The details are presented on slide 13. We expect to harvest 1.9 to 2 million tons in our Timberlands segment in the third quarter, with nearly 80% of the volume in the south. Harvest volumes in the north are planned to be at their seasonal peak, as the third quarter typically has the best logging and hauling conditions of any quarter during the year. We anticipate a decline in northern saw log prices in the third quarter due to lower prices for index saw logs. In the south, we plan to harvest approximately 1.5 million tons in the third quarter. We expect our southern saw log prices in the third quarter to be comparable to the second quarter. We plan to ship 250 million to 260 million board feet of lumber in the third quarter. This forecasted shipment volume takes into account a reduced production level in the third quarter for scheduled downtime at our Waldo, Arkansas sawmill. This pause in operations is necessary to complete the installation of new equipment as part of the expansion and modernization project. Our full-year projected shipment volume remains at approximately 1.1 million board feet. Our average lumber price thus far in the third quarter is 9 percent lower compared to our second quarter average lumber price. This is based on approximately 135 million board feet of lumber. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. Shifting to real estate, we expect to sell approximately 6,600 acres of rural land in the third quarter. Additionally, because of notable strong demand for rural real estate thus far this year, we anticipate the sale of roughly 55,000 acres of rural land in 2024. For real estate development, we expect to sell approximately 45 Chenault Valley residential lots in the third quarter. Additional real estate details are provided on the slide. Overall, we anticipate our total adjusted EBITDA will be lower in the third quarter compared to the second quarter. This expectation is based on the decline in rural and real estate activity. That concludes our prepared remarks. Greg, I would like to open the call to Q&A.

Great. Thanks, Wayne. And at this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. Once again, star 1. And we will pause just a moment to compile the Q&A roster. Okay, looks like our first question comes from the line of Anthony Pettinari with Citi. Anthony, please go ahead.

Good morning. Your full-year lumber, hey, the full-year lumber shipment guidance is unchanged from the beginning of the year, I think at 1.1 billion board feet. And some of your competitors are taking curtailments or maybe sharper actions on capacity. And I'm just wondering if you would consider similar actions, given profitability has been challenged for maybe longer than we expected, or just generally how you think about that.

Yeah, Anthony, this is Eric. And I guess as a starter, we mentioned in the prepared remarks that Waldo is going to be down for a portion of Q3, which is going to lower our shipments you know, 25 to 30 million feet in the quarter. So in some ways we are taking downtime here. But, you know, as we do the – and everybody's financial situation, you know, where their mills sit on the cost curve, everybody's situation is a little bit different from, you know, the next competitors. For us, we are more than covering our cash variable costs at all of our mills. So for us, taking out volume, effectively what that does is it hurts the P&L even more. So the math for us is to keep running as hard as we can. Now, the math is going to be different for other competitors, and that's why you're starting to see others, you know, close mills and, you know, take out shifts and take out overtime and whatnot. So that's kind of our posture in this current market environment.

Got it. Got it. And you referenced, you know, we've seen kind of an uptick in lumber, I guess, in recent weeks. Is there anything specifically that you'd attribute that to? And are you seeing curtailments or closures by competitors maybe accelerate or maybe start to be felt in the market a little bit more? Do you think the Canadian tariffs could be meaningful? Just kind of to the extent you can, how you kind of think about lumber in July and August and the trends we're seeing.

Yeah, that's a good question. I think July will be the low point for lumber prices for the year. I mean, I get the forecasting lumber prices a bit of a fool's errand, as you know, in commodity markets like this. But our sense of it is that July is going to be the low point for the year. In the past couple of weeks, in fact, if you go all the way back to the start of the year, we've seen, I don't know, two and a half to three billion board feet of capacity come out of the markets. You know, we saw a couple mills, you know, Warehouser just announced they're closing a mill. Malheur over in John Day, Oregon just announced they're closing a mill. Stimson just down the road here in Plummer, Idaho announced they're closing their mill. If you combine it with curtailments that we're seeing from, well, West Frazier, Camphor, and Warehouser all announced meaningful capacity cuts in just the past week. In total, that amounts to about 2.5 to 3 billion board feet coming out of the market. Meanwhile, I think demand is kind of bottoming here. And as I look out into next year with interest rates coming down, I can see housing starts being up, I don't know, 150,000 units to maybe 1.5 million next year. I can see R&R markets coming back as we get out into next year with lower financing costs. I can see multifamily coming back as we get out into next year with all this new supply that's come on the market as it gets absorbed. I see European imports rolling over. So I think the market is setting up for a decent run in lumber prices. Now, is it going to happen in Q3 or Q4? Probably not because we are going into a seasonally slow period of the year with construction activity slowing. But I think as you get out into next year, I think things are looking a lot better.

Okay, that's very helpful. I'll turn it over.

Thanks.

Great. Thanks, Anthony. And our next question comes from the line of Michael Roxland with Truist Securities.

Michael, please go ahead. Yeah, thank you, Eric and Wayne, for taking my questions. How much of the weakness that we're seeing in Housing Start do you think relates to small builders who don't have the wherewithal of the larger builders to offer meaningful incentives?

Yeah, I think that's a lot of the weakness in the market, Michael. I mean, you know, you look at the big builders with their big balance sheets. You know, they continue to take market share from small builders. And I think the public builder is now up over 50% of the market. And with their ability to buy down rates, you know, I compare and contrast that with what I'm seeing in our own master plan community in Chennault where you've got builders that might do, you know, one to five homes a year more or less that don't have the big balance sheet. It's their own personal equity that's on the line. I think that's driving a lot of the market right now.

Gotcha. And so I guess to your point, Eric, it's really a matter of rates coming in a bit, which will give these regional builders a little bit of breathing room.

Yeah, and I am encouraged. I mean, yeah, if you listen, I mean, on our repair remarks, we talked about a very successful lot draw that we had just last week in Schnell. Now, those were higher-end homes, golf course lot homes, so to speak. But we have really good uptake in that draw. So demand is there. It looks to us like demand appears to be a lot firmer on the high end of the market than it does the low end of the market. But with rates coming off, we've already seen 30-year mortgage rates. I mean, last year they peaked at around 7.8, and today they're around 6.7, 6.8. So they've already come down 100 basis points. We get a few interest rate cuts from the Fed, and we get the spread between treasuries and mortgage rates. If we get that to compress a little bit, which that spread is pretty wide right now, I think we could see a lot of – we could easily see home building get back up to, I think, 1.5 next year is my base case forecast. And then I think into 26, it could be 1.6, 1.7. There's just a ton of pent-up demand out there. It's just that people can't afford it.

Got it. Makes sense. Just one quick final question. In terms of lumber, you mentioned in your opening remarks as well, it's focusing on cost, focusing on things that you're in your control. Given the persistent weakness in lumber, can you just provide any color on initiatives that you're pursuing in your mills to improve profitability?

Well, yeah, we've got a strict edict out to the mills now that you need to make sure what you're buying is what you absolutely need to be buying to keep your mill running. Now, we're not going to do stupid things like defer maintenance that's just going to bite us down the road But it's really making sure that everything that they're buying is something that they need to keep their mill running successfully. But that's not the only thing that we're doing, too. You know, we're shifting our product mix. We don't produce a lot of 2x4, but if you've been watching 2x4 Southern Yale pine prices, they've been at just rock-bottom levels. So with some of our mills, we're able to flex our product mix to capture premium prices. But, you know, generally that's somewhat limited.

Got it. Thank you. Great.

Thank you, Michael. And our next question comes from the line of George Staffos with Bank of America. George, please go ahead.

Hey, George, we can barely hear you.

Let's try that. How's that? Is that better? Much better.

Yeah, it's much better. Thank you.

There you go. Appreciate that. So good performance, tough operating quarter, macro quarter, I should say. Can we go to slide eight and look at the waterfall? And just as we sort of think about third quarter, recognizing there are no guarantees on pricing, you know, with Waldo going through its last ages, that's going to cost you some volume. So volume is probably a negative in 3Q versus 2Q. Can you give us a sense on how that manufacturing cost plays portion of the waterfall might look sequentially 3Q versus 2Q? Will it be maybe better because 2Q was so tough, or might it still be a little bit lower just because you're going through those last stages? How should we think about those two boxes, if you will, or two bars?

Yeah, George, this is Wayne. When we think about, I think when we look to move from Q2 into Q3, especially as it relates to Waldo, we believe we absorb most of those costs, you know, higher costs with the modernization project and its effect on manufacturing. So, you know, we had that negative impact in Q2, but we think that'll reverse itself over the back half of the year. So that $3 million will kind of roll out in Q3 and Q4 with both, you know, improved costs, better fixed COPS absorption, throughout the remainder of the year. So I think we'll be more favorable as we trend the rest of the year.

Okay. So we should see some green bars on manufacturing costs in the third quarter without getting into the pennies and dollars here. That should be a positive. And are there any other things that might help you in terms of your overall wood products EBITDA, again, recognizing you're at cash cost or better in terms of profitability. What about the cost reduction opportunities that you see? Is there a way to put a dollar amount on that, the things that you're doing right now, just given where we are in the cycle?

Well, yeah. So I think, George, a way to think of it is that we're pushing both processing costs and fiber costs down at all of the mills. In total, we think our cash processing costs, you know, are going to come down maybe 2% full year over full year. We think our fiber costs, especially at St. Mary's and at our Gwynn, Michigan mill, are going to come down, who knows, 6% more or less. So we think our total cash costs at our mills are going to decline roughly 4% full year over full year. So there will be a benefit here. it's not going to be gargantuan. It's tough to move the needle because we're always, you know, theoretically, we're always working as hard as we can to get log costs down and to get, you know, operating costs down. But there will be a modest pickup from these efforts.

Okay. No, I appreciate that, Eric. Appreciate that, Wayne. A couple more questions for me, and I'll turn it over and come back. Can you talk a little bit more about the CCP registry and kind of what's different about how they evaluate credits to what you had been using and ultimately what it can mean in terms of value for a credit. And then just maybe back to wood, you know, you talked about two and a half to three billion board feet of capacity, you know, being taken out of the market either permanently or temporarily. To the extent that you have a purview on this, what do you think in the South in particular the amount of remaining excess capacity is, if in fact you think there's any remaining excess capacity. Thank you.

Yeah, I'll let Wayne take the first one, and I'll take the second one.

Yeah, so George, on the carbon credits, certainly, you know, the project that we're developing, you know, we believe would certainly achieve additionality and produce high-quality credits. I think, you know, the market, the voluntary market, though, continues to evolve and develop certainly buyers continue to demand greater governance and transparency. And I think the market's really searching for greater alignment of standards for these type of projects. And, you know, as Eric mentioned, you know, this integrity council for voluntary credit markets, you know, developing these core principles, which are becoming globally recognized. I think it establishes a common standard. And we think that These principles will stabilize the carbon trading markets, you know, really once they become mainstream. And so we believe that these standards, these labeled projects will attract the highest demand and achieve higher premium pricing. We think, you know, potentially upwards of 50% premium pricing. And, you know, keep in mind, these type of projects, they're not a one- to two-year project. These are, you know, tend to be multi-decade projects. So we're really thinking about the long-term value here. And that's why we are pivoting to implement these new standards on a project.

Yeah, George, you may have seen, I mean, there's been a few articles out just in the past couple of weeks about dubious credits being issued. And one was in the Wall Street Journal. There was another big article in the Guardian. So we think buyers are getting a little bit suspicious about forestry carbon credits. Now, a lot of those dubious credits are coming out of third world countries, right? But nonetheless, ICBCM has decided that there needs to be a global framework for capturing carbon credits out of forestry. So like Wayne said, we expect pricing to be – this is going to really clear up the marketplace, and we think prices are going to be upwards of 50% or more compared to where they are today. So we think about, okay, if we defer, delay our project, you know, a year, two years, whatever it takes – to get 50% higher pricing, it's just the right thing to do for our shareholders. So that's kind of how we're thinking about it. Now, your second question with regard to how many more mills in the South can close, you know, honestly, I cannot answer that question. All I know is what our mills, what our P&Ls look like. And, you know, I'm sure... There are a lot of other mills, especially the smaller private ones, where people have got to make really tough decisions about do they want to keep running in this kind of an environment. It's really hard to know. All I can tell you is I've seen cost curve for the south, and at least half of the mills in the south are losing a lot of money right now.

Yes, thanks for that, Eric. It was less about cost curve, more about just overall excess supply, recognizing they're somewhat joined at the hip. But if you had a view on excess supply, great. If not, I'll turn it over.

Okay.

Thank you.

Okay. Thanks, George. And our next question comes from the line of Matthew McKellar with RBC Capital Markets. Matthew, please go ahead.

Hi, good morning. Thanks for taking my questions. Morning. You called out a potential opportunity around lithium on a couple of the recent calls. Could you provide just a bit more color on the potential size of the opportunity here and maybe what kind of timeline you're thinking about for something to come to fruition?

Yeah, I think as far as the size of the opportunity, I think we're still working through that potential. It's a little bit early to give any sort of guidance on where we think that could end up, but We certainly think that's an attractive opportunity. You know, on the spectrum of NCS opportunities, that's more near term than, say, for example, where we think carbon capture and storage is for us. That's a little bit longer tail to that. But lithium, we believe, has, you know, in the next, you know, couple years, we think that that opportunity could come to fruition.

Thanks. That's helpful. And then you called out European lumber imports rolling over as part of how you're thinking about the outlook. Can you give us a sense of what you're seeing on that front today?

Yeah, so year to date, U.S. offshore imports down 14%. Most of that is from Europe. And I think the fact of the matter is markets are very weak in Europe right now. So European producers have been looking for a home for their lumber. They've been beneficiaries of this spruce bark beetle that has made fiber really cheap for their mills. You know, fortunately, that's coming to an end here. The U.S. markets being where pricing is at today is not nearly as attractive to European producers as it was a year or two ago, which is why you're seeing imports drop, you know, that 14% number. We think imports are going to continue to roll over as we move forward. And I think probably the biggest factor behind that is going to be a European recovery. We're now starting to see Europe lower interest rates. ECB, I think, just cut rates 25 basis points a month or so ago. And so we expect more lumber to stay within Europe and less of it to get exported to the U.S. So we see a softening in those imports going forward.

All right. Thanks so much for the help. I'll turn it back.

Thanks.

Thank you, Matthew. And our next question comes from the line of Kurt Yinger with DA Davidson. Kurt, please go ahead.

Great, thanks, and good morning, everyone. Wayne, I'm sorry if I missed this, but in terms of northern saw log pricing, how are you thinking about, I guess, the degree about which of those could be lower, Q3 versus Q2?

Yeah, for northern saw logs, probably we're looking, our estimate's probably kind of mid-single digits down from the second quarter, so maybe around 5%. And I think that there's a mix there, so a couple things driving that. I believe certainly indexing, the index saw logs are down. Keep in mind there's one lag there, so that's pricing from June to August. But on the flip side, offsetting some of that weakness is We have more cedar in the mix, plus, you know, cedar pricing for us is actually quite strong, you know, compared to historical averages. And, you know, we have pretty tight supply in the Idaho region, and that's really driving some strong pricing. So, kind of those two factors combined, you know, we're looking to be down around 5%.

Got it. Okay. That's helpful. And then on the solar side... How are you guys thinking about kind of the timeline in terms of when we could start to see, I guess, a couple or a handful or a meaningful total of some of these options really starting to convert to leases?

Yeah, we've talked about this on prior calls, how challenging it is, the backlog of projects that these utilities, these developers have got waiting to get clearance from regulators and FERC and whatnot. So the timing of these things is really hard to predict. We have actually closed one. We closed one back in Q1 of 2022. It was a sale in Catchmark. Of course, we own Catchmark now, but it had one that closed in Q1 of 2018. So two have actually already closed. Now, that was before the IRA. So now that the IRA is in place, there's been just a tremendous amount of activity. And, you know, we think next year there's a potential for one, maybe two, of our projects to get executed. And so we'll see. We're in discussions now with that partner, but we'll see. But I think starting next year, you'll see some of these options get exercised.

Okay. That's great. And then just last one for me on CapEx levels. Makes sense that they would come down next year. I guess if I were to just kind of take the current outlook and then take off kind of the remainder spending related to Waldo this year. Is that a reasonable kind of starting point for thinking about 2025, maybe in that 60 million zip code?

Yeah, I think at this point we're, you know, we'll see how markets continue to progress the remainder of the year. I mean, we have a number of, we're always looking at projects in our wood products business, you know, or higher return and, you know, have a higher RR. So, yeah, I think it's a bit early for us to give guidance on CapEx for next year. Okay.

Fair enough. Well, thanks for the color, guys, and good luck here in Q3.

Thanks.

Thanks, Kurt. And our final question today comes from the line of Mark Weintraub with Seaport Research Partners. Mark, please go ahead.

Thank you. First, we're just following up on the solar, because as you've highlighted, it can be a real dial mover when thinking about the degree of value it can represent of the existing enterprise. But we are, it seems, running into maybe delays isn't the right word, but it's been hard to realize these money starts to see them flow through. Is there something you can kind of communicate to give us more Confidence, give the market more confidence that it's coming, when it's coming, why it's coming?

Well, yeah, Mark. So, you know, there's been an enormous amount of renewable energy work that's been done in the past year or two in the U.S. I think something like 23 was a record year, 32 gigawatts, which was up considerably from prior year. Market's supposed to be up threefold by 2030, solar power. So there is just a flurry of activity here. And, you know, one of the first things a developer has to do to really get their project rolling is identify a piece of property that they can use for their solar farm. And so we happen to be at the very front end of that whole project. You know, I think as we get into next year and we start having more conversations with these developers that have got these projects, by the way, they're paying us all along the way here. And they've got no revenue right now from these farms. So it is in their very best interest to accelerate their projects as much as they possibly can. But I think as we get out into next year and we perhaps get one or two of these over the goal line, I think we'll have a lot better feel for what the runway looks like for the ramping up of these projects. But right now, most of those option agreements are four or five years in length. A lot of them have been signed just in the last 12 to 24 months. So it's really a bit soon to say when they're going to start hitting, except that the first option term is coming to an end in the next two to three years for a lot of these contracts. So hopefully we'll see activity contracts executed over that two to three-year time frame.

And is it really not until you get over the goal line where you can have a very high level of confidence on an individual project Or are there milestones where you can be able to point to why you have a higher degree of confidence today on some of them than you had and which are getting closer than, say, three months ago? Or is it really going to be that call at the end of the day, whether it goes forward or not?

Yeah, I think as we get closer and closer to when the contract expires, we'll have more conversations with the developer about where they're at with their project. Ironically, we had one, I think it was last year, that did not get executed. We were very happy that the option did not get executed because we turned around and we leased it to another developer at an even higher rate. So sometimes these things falling apart can be a good thing, but I think we won't really have much visibility into what each and every one of these projects projects looks like until we get closer to having them come to fruition. Now, I do know that for next year, we are having conversations with one or two of them. And I'm optimistic about those. But we're not there yet either.

Right. And so if I understand correctly, so the carbon credits, I think you thought maybe you would have some by the end of this year. And I think that that's now being pushed back as you change tack. I mean, is there any sort of, some of your competitors have kind of put out targets in timelines. In fact, both of your Timber Week competitors. Is there anything, maybe not right now, but is that something you'd be ready to share with us at some point soon, or if there's color you can give us now?

Yeah, I think, Mark, you know, over the next few quarters, I think it's reasonable to assume that we might come up with a forecast. I mean, you can just see You know, I'm sure you read that greenwashing article in the Wall Street Journal just a couple weeks ago. There's a lot of cross-currents in the carbon credit market right now. And we have been a bit reluctant to give guidance knowing that there's all this turbulence. As the dust settles and we get greater clarity, I mean, you know, Wayne talked about our lithium deposits in Arkansas. Well, the state of Arkansas hasn't even set the royalty rate yet on what we're going to get paid for our lithium deposits. And so, you know, I can't tell you if that's a $1 million opportunity a year or a $20 million opportunity. We just don't know. So I'm reluctant to give detailed guidance, but I think as we move further along the path here and we get more clarity on where these markets are headed, you know, I think we'll be in a good position to give guidance.

Super. Appreciate it. Thanks, guys.

Thanks, Mark.

Thank you, Mark. And at this time, I'm showing there are no more questions, so I will now turn the call back over to Wayne Wacecheck. Wayne?

Thank you, everyone, for joining us this morning and for your continued interest in Potlight Delta. Have a good day. Thanks.

And, ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.