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Good morning. My name is Henry, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Second Quarter 2023 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Wayne Wasechek, Interim Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Good morning, and welcome to PotlatchDeltic's second quarter 2023 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic'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 will turn the call over to Eric for some comments, and then I will review our second quarter results and outlook.

Thank you, Wayne Looking at our second quarter, we reported total adjusted EBITDDA of $46 million after the market closed yesterday. Our Wood Products segment adjusted EBITDDA was $12 million in the second quarter compared to breakeven results in the first quarter. Higher lumber prices were the primary driver of the improved results. We have seen a steady uptick in the composite lumber price since mid-June, driven by several factors, including favorable housing data, wildfires in Canada, falling European lumber imports and additional capacity constraints from mill closures and curtailments, particularly in British Columbia. We continue to expect that lumber prices will remain above long-term averages. We shipped 280 million board feet of lumber in the second quarter, which was 18 million feet more than we shipped in Q1 and 26 million feet more than we shipped in Q2 of last year. In June of 2022, we announced a $131 million project to modernize and expand our Waldo, Arkansas sawmill. Project activity is currently focused on site prep and engineering and the project remains on track to be completed by the end of 2024. The project will increase the mill's annual capacity by 85 million board feet and significantly reduce the mill's cash costs. The existing mill will continue to operate during the project with approximately three weeks of downtime expected in 2024 to tie in the new equipment. Our Timberlands segment generated adjusted EBITDDA of $29 million in the second quarter. We harvested 1.6 million tons in the quarter, which includes the impact of Idaho harvest volumes being at their seasonal low point due to the typical pause for Spring breakup. Our Southern team achieved planned harvest volume in the second quarter despite adverse operating conditions due to significant rainfall across the region. Both our Northern and Southern Timberlands teams did a great job of exceeding our harvest plan in the first half of the year. Our Real Estate segment had a solid quarter with adjusted EBITDDA of $12 million. On the rural side of the business, we sold 900 acres at nearly $5,000 an acre. Additionally, our Real Estate team completed the stratification of the CatchMark timberlands and has now identified approximately 70,000 acres that have the potential to be sold for significantly higher values than core timberlands. The development side of our real estate business remains strong despite the higher interest rate environment. 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. During the second quarter, we sold 42 residential lots at an average price of $107,000 per lot and completed nearly $5 million in commercial land sales, which averaged over $800,000 per acre. As it relates to natural climate solution opportunities, we continue to make great progress in this area. Our team is working on a carbon credit project, which could come to fruition as early as the first half of next year. We are also exploring opportunities to supply mill residuals and pulpwood to pellet manufacturers and biofuel producers. In addition, we continue to see strong interest from solar farm developers to complete solar deals in the South. Our pipeline of potential solar land sales and leases is at nearly $200 million on a net present value basis. And we expect this pipeline to grow. All these natural climate solutions opportunities will increase the demand for rural land likely driving timberland values higher. Shifting to housing, we are seeing signs of improvement. Sales and net orders for large homebuilders have recently improved. There is a record low level of existing homes for sale in the U.S., forcing prospective homebuyers to look at purchasing a new home versus an existing home. This has translated into higher single-family housing starts as June was the second month in a row where single-family starts were above 900,000 units. This is important as the single-family unit uses approximately three times the lumber as a multifamily unit. Also homebuilder sentiment has increased seven months in a row and is at the highest level since June of 2022. We continue to believe there are strong positive tailwinds to the housing market. Our view is based on a fundamental shortage of housing stock due largely to the combination of under-building after the great financial crisis and favorable demographics in the form of millennials who have reached prime homebuying ages. In our view, the final element needed for housing construction to fully rebound is lower interest rates. Acknowledging, it will take time, we continue to expect that U.S. housing starts will return to levels above the long-term average of 1.5 million units per year once mortgage rates ease making homes more affordable. Turning to the Repair and Remodel segment, which represents about 40% of lumber demand, the underlying fundamentals remain favorable for several reasons. Existing U.S. housing stock remains the oldest in history in the statistic of 42 years on average. This is important because older homes are significantly smaller than new homes on average. Remote work means more people need more space and older homes typically need more repairs. Remodeling is a very attractive option for homeowners given strong levels of home equity across the U.S., robust job market and the fact that consumer balance sheets are generally in good shape. Also with higher mortgage rates, prospective homebuyers are more likely to stay in their existing home and remodel versus move up. As one indicator of continued strength of the Repair and Remodel segment, our volumes sold to big box home center retailers is up 17% year-to-date over last year. Moving to capital allocation. We repurchased 9,000 shares for $400,000 during the quarter at $45 per share under our 10b5-1 plan. We continually evaluate all of our capital allocation opportunities to grow shareholder value over time and we will not act hastily towards any one of these options. Far too many companies indiscriminately buyback shares destroying shareholder value. We remain committed to repurchasing shares, but only when they trade at a significant discount to our estimated net asset value. Analysts on average peg our NAV at around $63 per share. As a reminder, we have $150 million remaining on our $200 million repurchase authorization. At the end of the quarter, we had $331 million in cash on the balance sheet and liquidity of $630 million. Our strong balance sheet with low leverage and significant liquidity provides us with the flexibility and a solid platform to continue growing shareholder value. Regarding environmental, social and governance, we published our fourth ESG report in May. Our ESG report formally links our ESG strategy to four pillars Forests, Planet, People, and Performance, and advances our ESG strategic initiatives through short and long-term goals. PotlatchDeltic is committed to social and environmental responsibility and strong governance practices and we are proud of our progress in the initiatives we have underway in these areas. To wrap up my comments, PotlatchDeltic remains very well positioned with an investment-grade balance sheet and a portfolio of high-quality assets. Our strategy is well aligned with industry fundamentals and emerging opportunities, and we remain a disciplined and opportunistic capital allocation approach. These attributes demonstrate our strong commitment to increasing shareholder value over the long term. I'll now turn it over to Wayne to discuss our second quarter results and our outlook.

Thank you, Eric. Starting with Page 4 of the slides, adjusted EBITDDA was $46 million in the second quarter compared to $58 million in the first quarter. EBITDDA decreased quarter-over-quarter as the effect of higher lumber prices in the second quarter was more than offset by lower seasonal harvest volumes and the sale of fewer rural acres. I will now review each of our operating segments and provide more color on our second quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDDA decreased from $47 million in the first quarter to $29 million in the second quarter. Our team leveraged good logging conditions to harvest 319,000 tons of sawlogs in Idaho in the second quarter. This volume is seasonally lower than the 471,000 tons that we harvested in the first quarter, due to typical spring breakup. Our Idaho sawlog prices increased 2% on a per ton basis in the second quarter compared to the first quarter. The higher sawlog prices were a result of the positive effect of a normal seasonal decrease in the density of sawlogs. In the South, we harvested 1.3 million tons in the second quarter compared to 1.6 million tons in the first quarter. Our second quarter harvest volume was impacted by challenging operating conditions due to unusually wet weather and softer log demand. Our Southern sawlog prices in the second quarter were flat compared to the first quarter. Moving to Wood Products on Slides 8, 9, adjusted EBITDDA increased to $12 million in the second quarter from breakeven in the first quarter. On average, our average lumber price realizations increased 9% from $435 per thousand board feet in the first quarter to $476 per thousand board feet in the second quarter. By comparison, the random lengths framing lumber composite price was 1% 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. Furthermore, there is a timing difference between our sales in the composite. 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. Lumber shipments increased 7% to 280 million board feet in the second quarter. Our shipments were higher in the second quarter as a result of increased production at our Ola sawmill, higher cut rates in our Northern mills due to warmer weather and planned maintenance at our Warren mill that impacted production in the first quarter. Shifting to Real Estate on Slides 10 in 11. The segment's adjusted EBITDDA was $12 million in the second quarter compared to $19 million in the first quarter. EBITDDA generated by rural sales declined sequentially due to the mix and timing of transactions. However, EBITDDA generated by our Chenal Valley master plan community was higher in the second quarter compared to the first quarter due to an increase in residential lot sales along with two commercial real estate sales for a total of six acres, with prices that averaged over $800,000 per acre. During the second quarter, we closed on the sale of 42 residential lots at a lower average price than in the first quarter due to a different mix of lot price points. Turning to capital structure, which is summarized on Slide 12. Our total liquidity at the end of June was $630 million. This amount includes $330 million of cash, as well as availability on our undrawn revolver. We have $40 million of debt that is scheduled to mature in December. We are currently evaluating our options of whether to pay off or refinance this debt. We still have $250 million of forward-starting interest rate swaps on our balance sheet that we can utilize to refinance debt at well below market rates. We repurchased 9,000 shares at $45 per share for a total of $400,000 in the second quarter. As a reminder, we have a 10b5-1 share repurchase plan in place with $150 million remaining on our $200 million repurchase authorization. This reflects our ability and commitment to repurchase our shares at attractive prices as part of our broader capital allocation strategy focused on increasing shareholder value over the long term. Capital expenditures were $12 million in the second quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement and excludes timberland acquisitions. For the full year, we are planning to spend $135 million to $145 million, excluding any potential acquisitions. Our capital expenditure estimate includes $74 million for the Waldo, Arkansas sawmill modernization and expansion project. We received $23 million of insurance recoveries in the second quarter for property damage and business interruption related to the Ola sawmill fire. Since our claim was filed in 2021, we have received $73 million of insurance recoveries and expect to finalize our claim before the end of the year. I will now provide some high level outlook comments. The details are presented on Slide 13. Harvest volumes in the North are planned to be seasonally higher in the third quarter, but lower than a typical for a third quarter as our team was able to pull forward a portion of our planned third quarter harvest volumes into the first half of the year. We expect Northern sawlog prices to rise about 8% in the third quarter compared to the second quarter. In the South, we plan to harvest 1.6 million tons in the third quarter. We expect our Southern sawlog prices in the third quarter to be flat to the second quarter. We plan to ship 270 million to 280 million board feet of lumber in the third quarter. Our average lumber price thus far in the third quarter is approximately 2% higher than our second quarter average lumber price. This is based on shipments of approximately 120 million board feet of lumber. Our lumber prices have been increasing recently and our spot price is currently about 6% higher than our second quarter average lumber price. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDDA for us on an annual basis. Shifting to Real Estate, we expect to sell approximately 2,600 acres of rural land, and 35 Chenal Valley residential lots in the third quarter. We are also still expected to sell approximately 18,000 acres of rural land in 2023. Additional Real Estate details are provided on the slide. Overall, we anticipate our total adjusted EBITDDA will be higher in the third quarter compared to the second quarter. This is based on the expectations for higher lumber prices and a seasonal increase in harvest volumes. We are encouraged by the resiliency of new home demand and the steady improvement in homebuilder sentiment. We remain bullish on long-term housing fundamentals and believe we are well-positioned to continue growing shareholder value over the long term. That concludes our prepared remarks. Henry, I'd like to now turn the call over to Q&A.

[Operator Instructions] Our first question comes from George Staphos from Bank of America. Please go ahead.

Thanks, everyone. Good morning. Good morning, Eric. Thanks for the details. Couple of questions. So first of all, is there a way to quantify what the effect of the weather was particularly in the South in Timberlands, what that might have cost you either in terms of volume or EBITDDA from what a normal 2Q would be? Recognizing the weather always is something that you need to contend with.

Yes. Thanks, George. Yes, as it relates to the impacts from weather, we talked about in Q1, the team did a great job of really exceeding the plan in the first quarter and we - going into the second quarter, we knew the adverse weather conditions and we knew that we were going to kind of end up with our planned volume for year-to-date. So Q2, while there was adverse weather, we really met our plan given what we had done in the first quarter of the year. So I think the key takeaway is, we'll be there, our planned harvest volume for the full year is what we would expect. So --

On the pricing side, George, I would say that mills never got so low on volume that there was price pressure. Sometimes when mills get low on logs, you see a run in pricing. We didn't really see that in Q2. It was just a really challenging quarter and the team had to work around that weather.

Yes. Actually that was going to be one of my next question there, so thank you for that. In terms of the pull forward on volume into 2Q from 3Q, what do you estimate? That is again rough - recognizing that your on plan for your volume and your harvest profile for the year. But anyway to quantify that? If you didn't, and I - perhaps I missed it.

Yes. Well, I mean to look at two things. One, if you look at our Northern volume, so for year-to-date, we're probably 100,000 ahead, and so that will impact Q2 and - our Q3 and Q4, probably half in each of Q3 and Q4. And then for the South, we're on track. So we're kind of normal volumes for the back half of the year in the kind of the 1.6 million range in the South for each quarter.

Okay. Two last ones for me and I'll turn it over. One, to the extent that you have any view on this, what are you seeing in the fiber markets in terms of timber right now? Are you seeing customers coming back to the market and buying? Obviously, there's been a little bit of - through the first half reduction in demand from the paper mills. What are you seeing there to the extent that you can offer any commentary? And then part of the story on Wood Products and housing this year has been driven significantly by the fact that rates are high, you're seeing not as much in the way of existing home sales because people who have a home are locked in at a lower rate and so that's propelling more new home construction. With rates starting to come down, what are your contacts telling you in terms of what that might mean for the pace of existing home sales, and then in turn, what that might mean for new construction? Thanks guys.

Yes. So, George, I'll take the first one on pricing. So I think for the - going from Q2 to Q3, I think we're looking for Southern prices to be relatively flat I think from a demand standpoint. Certainly, we saw mills take some economic downtime, some quotas and you know, this is all market dependent. So probably where we see more tension on the coastal side, our legacy CatchMark we've seen more quotas and downtime taken. But I think we're encouraged by - we're seeing that start to loosen up here going into Q3. So I think demand - we're seeing a little bit of pickup in demand there, and like I said pricing, relatively flat we're expecting from Q2 to Q3.

And I'll take the second half of your question, George, regarding rates rollover, what I think is going to happen to existing. I do think existing home sales will start to pick back up again if rates come down and the reason existing will pick back up again is because people won't feel like they are trapped in their existing home. Hopefully, that means, they're looking to buy a new home in a different location, perhaps. So I don't think - if rates come down, I don't see new home sales necessarily rolling over. And I think that's really driven by the fact that the U.S. is just flat out under-built somewhere between 2 million and 4 million units. Number one. And number two, you've got this age cohort. It's in the low-30s that's anxious to buy a home. So rates rolling over, yet, existing home sales will pick up, but I don't envision that impacting new home sales.

Sounds good. Thanks, Eric. I'll turn it over.

Thanks.

Our next question comes from Ketan Mamtora from BMO. Please go ahead.

Thank you, and thanks for taking my question. First question coming back to U.S. South, I'm more curious about Southern pulpwood prices, there is a pretty big drop reported by TimberMart-South. I'm just curious as you think about your wood basket, do you see any impact in your kind of regions as you move into sort of Q3 and the back half in terms of pressure on pulpwood prices?

Yes, Ketan, this is Wayne. Yes, it's difficult or a bit challenging to compare. Certainly, our prices aren't as down as much as TimberMart-South. I think when you look at TimberMart-South data, a couple of factors: one, it's pretty thin on the data; and two, I think my understanding is they use a simple average versus a weighted average. So that information really can cause some volatility in pricing. So, especially when you compare it to ours. So I think as it relates to pulpwood, we're probably still a little bit flat to maybe slightly down we expect, going from Q2 to Q3. Still, like I said, we see some quotas and downtime on the pulp and paper business. So, yes, that's reflective of where we see pricing kind of into Q3 and maybe the latter half of the year.

I think it's interesting Ketan if you step back and look at it from a long-term perspective, this renewable energy that's taking off across the United States right now, solar, wind, there's a lot of biofuel work and sustainable jet fuel work and bioplastics work that's going on right now. And I think I read the other day, there's something like $70 billion worth of new capital investment that's going into the U.S. South announced projects that, by and large, are going to use pulpwood and/or mill residuals to provide the raw material feedstock for those mills. So you could look at it and say, well, prices are going to be down quarter-over-quarter, but I think long term, especially in the weaker pulpwood markets across the South, and I would include, Mississippi, Louisiana, Arkansas and that region. I think the long-term outlook is actually quite bright given all the work that's underway.

Got it. No, that's helpful color, Eric. Other question that I had was around European lumber. I know that the amount of lumber that's coming in has come down. I'm just curious in terms of the inventory that's sitting out along the East Coast, do you have a sense of kind of where it stands just qualitatively? Have we worked through most of that or is there still some inventory that's sitting out on the port?

I don't know specifically, Ketan. I mean, I can only get my information from our sales team, which - this is all anecdotal information. But I think those volumes have come down quite a bit. We're not - it seems like, it feels like we're not running into European wood. In places like Houston, for example, I think we ran into some European wood. And I mean, I think it all makes sense that European imports into the U.S. would be coming down. Lumber prices have really collapsed over the past 12 months or so. The dollar has gotten weaker here since year-end. It's just a whole bunch of reasons why Europe would not find the U.S. quite so attractive. And so you're right, we are seeing - we are seeing those imports start to roll over. And I think that trend is going to continue as we move through the year.

Got it. And one final question from my side. In terms of the solar deals, Eric, I thought I heard you say about $200 million of - kind of opportunity. Can you talk about, at least for us, how should we think about sort of cadence, not trying to pin you down with a specific number and a year, but in terms of timeline of this opportunity, how should we think about that?

Well, that's a good question, Ketan. What I'd tell you right now is that what we have under option is five different deals, and of those five different deals, it's roughly 16,000 acres, that's roughly two-thirds of those are sale transactions and roughly one-third is a lease type of a transaction. Now the options that are in place for these deals, they run anywhere from two to five years, so the developer has the option to pull the trigger and proceed with the deal for anywhere from two to five years. I think these guys, they're all scurrying about trying to line up their equipment, trying to line up who they're going to sell the power to, all the engineering work that needs to be done, and they won't - they won't pull the trigger on exercising option for the land until the very last minute. But I would tell you, we've seen a couple of solar deals close now. One closed on CatchMark ground and one closed on Potlatch ground. We've got five deals that are under option. We've got another four deals that we're negotiating right now that we think are going to be done by the end of the year. And then we're having conversations with a bunch of more folks that I'm not even really talking about here today. So the momentum is only building for this solar opportunity. And I think it's remarkable when you think about what's under option and what we're negotiating, there's roughly $200 million of NPV, it's roughly 20,000 acres of our land that we're talking about transacting for a solar outcome. So 20,000 acres, roughly 1% of our land, we had $200 million out of our enterprise value of, who knows, call it, $5 billion, 1% of our land for, call it, 4% of our enterprise value, that's a pretty good trade. And again, it feels to me like the momentum in this business is only picking up and that IRA legislation that was passed provided a lot of incentives for renewable energy, and that's really what's behind all this momentum.

Got it. No, that's very helpful. I'll jump back in the queue. Good luck in the back half.

Thanks, Ketan.

Thanks.

Our next question comes from Anthony Pettinari from Citi. Please go ahead.

Good morning, Mr. Cremers, Mr. Wasechek. This is Greg on for Anthony.

Hi, Greg.

Hi, Greg.

Right. Just a quick question from me on real estate. So I think you mentioned 70,000 acres in the acquired CatchMark portfolio can be sold at higher values than Timberlands. It seems like a pretty large amount to me. I'm just hoping you could provide some color on the types of opportunities you've identified and what premium you expect you can capture on the HBU lands? And just as a point of clarification, how many of those 70,000 acres are included in the $200 million for solar land sales and leases?

Yes. Greg, so when it comes to the CatchMark stratification that we just completed, yes, we about - we acquired 350,000 acres. And so, we identified almost 20% of those acres of about 70,000 acres - 20% of those acres of about 70,000 acres is higher premiums to timber values and that's driven off of recreation, potential conservation, adjacent, landowners even solar potentials. But - and the reason I think for that higher percentages were near some large population areas. So just that increases the - has increased the potential for premiums on those values. So - and I think the next thing is when we look at what CatchMark has historically done, they were selling timberland for a premium at timber values, but our approach is we're - selling HBU for a higher premium and we're providing a little bit different product to the market than what CatchMark did - historically had done. So, we're looking at more tracks, but a higher value per acre. So and again that's driven off of these opportunities around recreation, conservation, adjacent landowners and so forth. So and we've already started lifting some of these properties and we're really seeing some - we're pleased with the activity that we've seen so far. And then as it relates to your question on the solar. No, none of those - none of this stratification is included in the $200 million that Eric referred to.

Okay, that's very helpful. Thank you. And then just a quick one on the lumber sales - lumber volumes, excuse me, the big box retailers, you mentioned, they're are up 17% year-over-year. Can you speak - if possible, could you speak to how much of that may have been driven by an inventory rebuild? Inventories reached very low levels in the first half. So how much of that was driven by a rebuild? And I guess where are, inventories now at these big box retailers in August, and what level of fall demand do you think they are preparing for?

Yes, Greg, I don't think I can answer your question. All I would say is, we've seen pretty steady takeaway at the end of the day from the home centers. I don't think this was driven by an inventory rebuild. I also don't know that their lumber volumes are necessarily up 17% year-to-date. I think it may have something to do with the specific product that we're selling them which are studs, which tend to be used in a wide variety of applications. So, I wouldn't read into this that their lumber business is up 17%. I would just reiterate that our sales through those channels have been very, very steady, which indicates to me that the repair and remodel business is also very steady. It's not going through some catastrophic decline here. It's hanging in there pretty good, that's what I would read into it.

Okay. Great. Thank you very much.

Our next question comes from Michael Roxland from Truist Securities. Please go ahead, Michael.

Thank you, Eric and Wayne for taking my questions. Just one, with respect to the housing - the improvement in housing, what are you seeing regarding lumber curtailments? Have you seen any mills – trial mills jump back into the fray to try to capitalize on better demand and higher prices?

No. Michael, we've seen - roughly 3 billion board feet of curtailments now, roughly half of that has been announced as a permanent closure and roughly half is the temporary curtailment. It's really hard to get good data on what individual mills are doing. So, I don't know that I've heard of any mills that are starting back up again just to - just for home center or R&R demand. Prices have come up. That could compel people to restart their mills. But I have not heard of any at this point.

Got it. Thanks, Eric. And just one quick one as well. In terms of what's happened with housing, and obviously, improved housing market. Have you seen any increased tension resulting for - in certain timber markets, and wood baskets from an improvement in demand for wood products or it's too early?

Yes, I would say, it's too early. I mean, we've - prices are down slightly, but - compared to last year. But I think they've held up quite well than what we've expected. So, I think that's - we're encouraged by that. But, I think those will kind of hold steady. And we - I think on the long-term, we expect those markets to continue, the tension and we would expect those Southern prices to continue to increase.

Thanks, Wayne. And just one last one. I mean, is there typically lag that you see six months to nine months where if you have housing improving and wood products improving, is it - what type of lag do you have between when you start to see the tension in wood baskets versus the wood products side?

Yes, I don't know if we've - I think there's a lot of factors that go into the prices around not only the demand, but there can be some volatility weather-related and other factors. So, I think yes, I don't know if there's a specific timetable on what that lag looks like.

I think, one of the biggest drivers, Mike, was just going to be lumber inventory, that's in the system. The dealers, they feel compelled like they have to buy the lumber or do they look at their existing inventories, and say, I've got enough now to meet demand. So, I think, to Wayne's point, there's just a whole host of factors that weigh into how long that process takes.

Got you. Thanks guys. Good luck in the second half.

Thanks.

Our next question comes from Kurt Yinger from D.A. Davidson. Please go ahead, Kurt.

Great, thanks, and good morning, Eric and Wayne.

Hi, Kurt.

See, I just wanted to start out on wood products. Could you just talk about how you're thinking about log and unit manufacturing costs kind of heading into Q3? And also just give us an update on the industrial plywood business. I mean, it looks like that was a decent drag in Q2, and curious if that's tied to the weakness in the RV market at all?

Yes, Kurt. So, the first thing is going into Q3, I do think that processing costs, and log costs are going to be lower in Q3 versus Q2. We'll continue to get benefits out of our Ola mill. Our cost per thousand at Ola is going to continue to decline. Similarly some of our mills in the South, like Warren, for example, lost some shifts in Q2 to a power outage and that cost us some volume in Q2. So, we'll get better absorption of overhead costs in Q3 versus Q2. Fiber costs at St. Maries have been coming down. So, I think we are going to see lower cost per thousand in Q3 versus Q2 to answer your first question.

Your second question regarding, yes, plywood and residuals, they were a drag, nearly $4 million comparing Q2 to Q1. And our industrial grade plywood business - and we've talked about this before, but we're really producing high-quality plywood for use on things like boats and RVs and truck panels, things that are typically financed by consumers. And as we've seen interest rates increase, of course, demand for these items has dropped. And so as demand has dropped, pricing has dropped. And so, the plywood business has been under pressure. Now, we do think that's going to turn around as we get into Q3. We do think demand is starting to come back. Some of our dealers really brought their inventory levels to rock bottom levels in Q3 and we think they're going to start rebuilding and - excuse me, in Q2, they're going to start rebuilding inventories in Q3. And so, we think demand is starting to come back to that business. And on the residual side, yes, we had some outages from some customers in the second quarter, in particular, Packaging Corp's Wallula Containerboard Mill in Washington State, they're taking downtime. I don't think they're going to start back up until, I don't know, fourth quarter perhaps. Out in Michigan, Billerud has got, I think a paper mill that took three weeks of downtime. You may recall they had some kind of a fungus that was running through their mill. They took three weeks of downtime in Q2 due to some fungus outbreak. So frankly, I think the way I would characterize it is that Q2 was the low point. And I think when you look at our results for Q3, you'll see that variance - you'll see that flip back to a positive variance again.

Got it. Fungus outbreak. That's a new one. I guess, turning to the forest carbon project, could you maybe talk about where that's located and any more color that I guess you're willing to provide at this stage around that?

Yes, Kurt. So it is in the U.S. South. It is in some hardwood bottomlands. It's roughly 50,000 acres in size. I think, we're going to get it done across the goal line sometime in the first half of next year. We think that our project is going to involve the highest quality carbon credits that are possible. So consequently, we expect pricing for our carbon credits to be quite high. So, I'm really quite optimistic about this piece of our business. When you think about all the net zero pledges that are being made out there by companies around the world, and I read something the other day, it's like 9,000 international companies have pledged to get to net zero. You got to get there somehow. And even Delta Airlines was just written up as buying flaky credits, not too long ago. So increasingly companies that have made net zero pledges, they want high-quality credits, and that's the type that we're going to - that we're going to offer them. And the other thing that I would highlight, is that there's a lot of private capital that's now flowing into the carbon credit space in forestry, think about Oak Hill, Manulife, JPMorgan. So we think our -- I think I heard Weyerhaeuser say something about, I don't know, $20 a ton or something like that. I think that our carbon prices we - it's early to say, but they could be $20 to $40 a ton, somewhere in that range and it could be roughly 100,000 tons of credits a year or roughly $3 million a year of EBITDA more or less. We got a long ways to go to get from here to there, to get good high quality credits issued. It's a lot of work. But the team is working very hard to get it done. So, we'll give you - we'll give you progress updates on this every quarter, but to wrap it up on this, I really am quite optimistic about it.

Got it, okay. Yes, that's super helpful color, Eric. I appreciate it. And then just lastly, I guess, talking broadly what are you seeing out there in terms of timberland transaction activity and the opportunity set for PotlatchDeltic at this stage?

Yes, well, the timberland M&A market, it's relatively quiet right now and we think people are holding off with their properties. I don't know if they're waiting for lumber prices to improve or they are waiting for interest rates to come down, or if they're waiting for some carbon deals to get accomplished, so people have more faith in that value stream. So, the market is kind of kind of quiet right now and the stuff that is getting brought to market is going for a very high price. I think, we've competed over the past year or so, in seven different M&A transactions and we've been in the bottom half on virtually every single - bottom half of bidders in every one of those transactions. We're sticking to our traditional valuation metrics. Our cost of capital has gone up yet, it seems as though the value of timberland has only gone up. So what that's forcing us to do is to - and we've always done this, and I think we're actually particularly good at it, we're proceeding with deals that are off the auction market. So, there are one-off deals where we think we can get a particular - particularly good deal at the end of the day. It's hard to create value when you've got - well, there's one deal that we did where there were 48 bidders, if you can imagine that. So, you're not going to create shareholder value, winning an auction where you're competing against 47 other bidders. So, we're going to try to go find those one-off deals where the auction intensity is not quite so high, and we think we can get a good deal on an off-market property.

Okay, makes sense. Well, good luck here in the second half, guys. Thank you.

Great. Thanks, Kurt.

Thanks, Kurt.

Our next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead.

Thank you. A few follow-ups. First just on the CatchMark stratification, I think you've been selling order of magnitude 15,000 to 20,000 rural acres the last couple of years, I think that's sort of what you view as trend line, correct me if I'm wrong there. But with the CatchMark stratification, might that bump up a bit in the next couple of years? And by how much perhaps, if indeed that's the case? Or does it sort of get folded in and you just keep going at a most likely similar rate?

Yes, there's a couple of things there, Mark. One, when we look at - when we think about our rural sales program, we really target - and based on our history, and what we've been able to accomplish, probably about - looking to sell about 1% of our portfolio. So our run rate would be around 20,000 acres a year. And I think with the stratification, that still maintains that level. I think one reminder, if you look back for even, for example, 2022 we sold around 20,000 acres. Well, half of those acres were tied into Minnesota. So we had about 10,000 acres of Minnesota. And now we've liquidated our portfolio in Minnesota and now that shifted to the South. So really I think where you're - where we've seen - because of liquidation in Minnesota, that's being made up by what we see in our program in the South.

Okay. And on the carbon credits, Eric, you threw out kind of 100,000 tons per year. Is that specific to the 50,000 acres where you're working or is that a kind of more - is that number perhaps based on something beyond the 50,000? And did I hear you right that you would expect that to be a recurring number as opposed to having to go out and create new projects to keep that number in the 100,000 tons per year range?

Yes, we think the property that we're looking at, it will generate roughly 100,000 tons or excuse me, 100,000 credits per year for the life of the project. So we're not done finalizing the project, but it could be a 30-year kind of a project where we sell these credits every year at roughly - if we pick the midpoint $20 to $40 a ton range, we pick the midpoint $30, that would be roughly $3 million a year of carbon credit sales.

Okay. That would be pretty good. And let's just see. One last question, lumber markets, it kind of feels like pricing is a little bit wobbly again. I guess, seasonality could be part of the explanation, but we talked about housing being strong, you talked about repair and remodel still being pretty stable. What are your thoughts? What's going on? And what does your crystal ball tell you as to how things might play out through the rest of this year, if you're willing to share?

Yes, Mark. I wouldn't say they're wobbly necessarily. I would say, they feel like they're kind of plateauing here. You're right. We've had several weeks of random lengths, just every week, it was higher, higher and higher and higher and that was driven by a whole bunch of things, fires up in Canada, European imports rolling over and better housing data. And now I think about those factors, for example. Well, fires are starting to impact the U.S. West. We've seen some pop up out here in the West, no impact to our ground, by the way, but we've seen fire activity start to pick up. But the fire activity up in Canada, I feel like it's kind of going to roll over a little bit. I heard Weyerhaeuser talk about, they've restarted their two mills in Alberta that were impacted, for example. We've also seen European imports roll over. And we've also - the latest housing print was not quite as strong as the prior ones. So when you're also getting into the time of the year where you do get into a little bit of seasonal weakness as we get out into those winter months. So I don't anticipate a collapse in prices. Clearly, the first quarter was a low point in my mind for the year. We've had a nice run here. And I expect these prices to kind of stay where they're at, or maybe drift slightly lower as we move into Q4.

Okay. Appreciate the color. Thanks, Eric.

Thanks, Mark.

Our next question comes from Paul Quinn from RBC Capital Markets. Please go ahead.

Yes, thanks very much. Good morning, guys.

Good morning.

Just following up on this carbon capture, just wondering if you could help us understand the 50,000 acre projects you've got, what are the timberlands like in that area? Is that marginal timberlands and are you planning any kind of projects for, say, some of the stuff that you've got in Northern areas like Idaho?

Yes, so this is our first deal that we're looking at getting done, Paul. It's very - again to issue good credits, high-quality credits, which is where the money is. It's a painstaking process. This is not high quality industrial grade plantation forestry in the South. This is hardwood bottomlands that can be harvested, but it may not be harvested year round. It may be difficult to harvest tracks but yet, it's still - it's still property that we would look to harvest if we didn't put it into a carbon program. So carbon values are not yet to the point where they impact plantation forestry. But we'll see with demand being what it is for carbon credits and supply being where it is, demand is just far outpacing supply. So there - assuming companies stick to their net zero commitments, there's upward price pressure on carbon credits. And as it relates to Idaho, yes, once we get this first deal done, I think we're going to - we're going to learn a lot from this deal and we'll apply that knowledge to all of our acreage. Just like we always do, we're out to maximize the value of each and every acre that we own and I'm sure we'll look at acreage in Idaho to see if carbon makes sense in Idaho.

Okay, thanks for that. So given that it's a bottomland hardwood, I suspect that the harvesting impact --long-term harvesting impact by setting this up in a carbon project is not going to be material.

Yes, I wouldn't expect it to be material at the end of the day.

Okay. And then on the carbon storage front, any opportunities there for you guys?

We're still looking at it. We've got great geological formations in Southern Arkansas where we can store carbon. The key is to have your geologic formation being close to where the emitters are and so that way you don't have to pipe it and there's not a lot of capital cost to get the carbon to the formation. So we're exploring, and this is going to take time. We're also having conversations with folks that want to build biofuel plants of one form or another in Arkansas, and then immediately carbon capture and store the carbon that comes off the process. So it's definitely an opportunity for us. It's just - it's several years out.

All right, that's all I had. Best of luck, guys.

All right. Thanks, Paul.

Thanks, Paul.

Our next question comes from Buck Horne from Raymond James. Please go ahead.

Thanks, guys. Most of my questions have been answered. I've just got one quick one for you on the commercial land sales in Chenal Valley. Just - can you just give a little color on that particular acreage and how you were able to achieve such a high price point? And what else do you have? Any other crown jewels at Chenal Valley similar to that that we could factor into the portfolio?

Yes, Buck, this is Wayne. Yes, a couple of things. I think the two properties that we sold this quarter, one was for, believe, a bank and the other one was a medical office. And - but those were - they were at prime locations. So depending on the location that really drives the price per acre. I think we have just under 300 acres of commercial land available at Chenal. And I think as we continue to develop the pipeline, as you know, that can be lumpy and it's a little bit challenging to predict when those commercial sales will close. But I think as we continue to increase with residential being positive, and that's continuing to go strong, I think as that continues to grow, rooftop density increases - continues to increase, and then I think that will only benefit commercial. So --

Okay. That's helpful. That's all I got. Thank you, guys.

Thanks, Buck.

Thanks, Buck.

At this time, I'm showing that there are no more questions. I will now turn the call over back to Wayne Wasechek.

Yes. Thank you for your questions and your interest in PotlatchDeltic. That concludes our call.