PCH - NASDAQ

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Second Quarter 2025 Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Good morning, and welcome to PotlatchDeltic's Second Quarter 2025 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 cautionary 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 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.

Thank you, Wayne. Good morning, everyone. Thanks for joining us. Yesterday, we announced second quarter total adjusted EBITDDA of $52 million. Despite ongoing macroeconomic and trade policy uncertainty, our overall performance remains solid, primarily driven by our Timberlands and our Real Estate segments. The Wood Products division earned $2 million in adjusted EBITDDA during Q2 as its results were hampered by lower lumber prices and several nonrecurring items, which I will touch on in a bit more detail later. Turning to our business operations. Let's start with a review of our Timberlands division. During the quarter, weather conditions for logging and hauling were favorable, enabling our teams, particularly those in Idaho to surpass planned harvest volumes. Although we have managed to exceed our projected harvest volumes for the first half of the year, our overall annual harvest plan remains unchanged. Log prices across the South remained stable in Q2, while our average Idaho sawlog price was higher due to the seasonal impact of lighter logs as well as cedar pricing, which was driven by strong regional demand. In our Wood Products business, overall lumber market conditions remained soft, primarily due to tepid demand in both repair and remodel as well as new residential construction segments. Also, the market anticipated tariffs on imported lumber going into the quarter and when they failed to materialize, it contributed to a decline in lumber prices, especially for Western SPF. Further, adverse weather conditions in the Southern region negatively impacted construction activity, consequently affecting Southern Yellow Pine pricing. While declining lumber prices added pressure to our second quarter results, several other factors, including certain onetime items totaling approximately $7 million also negatively impacted Wood Products' financial performance compared to Q2. First, freight costs surged during the quarter from constrained supply due to seasonal trucking demand for produce as well as a shortage of commercial truck drivers stemming from a recent executive order and Department of Transportation guidelines mandating English language proficiency in drivers. However, we believe these transportation challenges are temporary as we have begun to see improvement in truck availability in recent weeks. Second, the utility providing electricity to our Waldo sawmill conducted unannounced major maintenance on a substation during the second quarter, resulting in lower-quality power, which caused production and maintenance challenges at the mill. While the substation maintenance has been completed, this temporary disruption had a negative impact on the mill's results in the second quarter. Third, a key capital project undertaken this year involved the replacement and upgrade of the sawbox at the St. Maries sawmill. This $3 million project, which we expect to have a nearly 20% IRR, required a period of downtime and subsequent ramp-up, which temporarily affected production levels at the St. Maries sawmill. This project was originally scheduled for installation in the third quarter, but we accelerated this initiative into the second quarter due to the anticipated tariffs on imported machinery from Canada. Lastly, a significant decline in lumber prices at the end of the second quarter resulted in a noncash inventory impairment charge of $3 million compared to the first quarter. Although these items negatively impacted our second quarter results, we believe that these factors are now largely behind us and expect improved results for Wood Products in the third quarter. Looking ahead, the administrative review on antidumping duties for softwood lumber imported from Canada has been finalized, with the final countervailing duties expected to follow in short order. The average combined duty rate will rise significantly, which will likely result in higher lumber prices across various species. These duties are separate from any potential tariffs that may get announced as the Trump administration completes the Section 232 investigation regarding the impact of imports of lumber and derivative products on national security. If such tariffs are imposed, they are expected to be on top of the duties and could further boost lumber prices. Moving to Real Estate. The division delivered another strong quarter, selling 7,500 acres at an average price of $3,100 per acre in Q2, which included a large conservation sale to the Nature Conservancy. Nearly 1/3 of the acres sold in the first half of the year were associated with conservation sales at significant premiums to timberland value. Our transaction pipeline remains strong as buyers continue to pursue hard assets such as rural land amid considerable volatility across many other asset classes. On the natural climate solutions front, we continue to make steady progress across our various initiatives. Starting with solar, the overall market slowed down as participants digested the adjustments made to green energy incentives as part of the reconciliation bill. Despite these changes to incentives, we continue to see activity and healthy interest from solar developers, especially from the larger players in the space. In fact, we are finalizing negotiations on one option that started after the bill was passed, highlighting the fact that developers remain interested in solar even without the investment tax credits. Once this option is executed, our outstanding solar option portfolio will total approximately 43,000 acres at an estimated net present value of nearly $550 million. Additionally, lithium continues to be another promising NCS opportunity for us. We placed 900 acres under option with the lithium developer in the first quarter and expect to add significantly more acres under option by the end of the year. The Smackover Formation in Southwest Arkansas continues to attract significant interest from lithium developers, including major energy companies such as Exxon Mobil and Chevron. We are also continuing to pursue opportunities related to forest carbon offsets, carbon capture and storage, and emerging markets for biomass, such as bioenergy and sustainable aviation fuel. We are excited about the potential optionality timberland ownership provides and remain focused on growing our natural climate solutions opportunities. Shifting to our capital allocation strategy. Our priorities remained centered on activities that we expect to create long-term value for our shareholders. This includes maintaining our dividend, key capital investments and opportunistic share repurchases, all while preserving flexibility as we navigate challenging market conditions. With our stock trading at a significant discount to our estimated net asset value and now yielding over 4.5%, share repurchases emerged as the top capital allocation opportunity in the second quarter. Consequently, we purchased $56 million of our common stock through our 10b5-1 program at an average price of $39 per share during Q2. Notably, this was the company's largest share repurchase volume within a single quarter or year since becoming a REIT back in 2006. After deploying $60 million in cash for share repurchases in the first half of this year, we continue to maintain a solid financial position, have the flexibility to navigate the current macroeconomic environment and remain opportunistic with capital deployment as we move forward. Now turning to the U.S. housing market. Uncertainty surrounding trade policy and other macroeconomic headwinds continue to weigh on affordability and buyer sentiment. Persistently elevated mortgage interest rates and economic uncertainty have kept many potential buyers on the sidelines. In the second quarter, average total housing starts hovered just above 1.3 million units on a seasonally adjusted basis with average single-family starts around 900,000 units. New residential construction retreated slightly along with a higher proportion of average starts shifting to multifamily during the quarter. However, housing starts remain relatively stable given current market dynamics. To stimulate demand for new home construction, builders continue to adapt by offering smaller homes, price reductions and mortgage rate buy-downs. Nonetheless, the long-term fundamentals of housing demand remain intact. These include a persistent housing shortage, demographic tailwinds for millennial household formation and a growing population of renters transitioning toward ownership. As affordability pressures ease, we expect these structural drivers to reassert themselves, supporting future growth in housing activity and by extension, lumber demand. Moving on to the repair and remodel sector, activity has remained relatively subdued. Ongoing economic uncertainty and elevated borrowing costs continue to weigh on discretionary home improvement spending particularly for larger-scale remodeling projects. However, the latest readings from both the leading indicator of remodeling activity from the Joint Center for Housing Studies of Harvard University and the National Association of Homebuilders still forecast slight gains for expenditures on home improvements and maintenance in 2025, followed by more modest but still positive growth in 2026. For our business, we continue to see steady takeaway from our home center customers. We anticipate this trend will continue through the second half of the year, especially as homeowners complete deferred maintenance and mid-scale renovation projects. Importantly, the long-term fundamentals of the repair and remodel market segment remain unchanged. These include an aging housing stock now with a median age over 44 years, historically high levels of home equity and the continued prevalence of hybrid and remote work arrangements, which drive demand for functional and aesthetic home upgrades. To close out my comments, while uncertainty in near-term headwinds remain in the market, we have a favorable view of long-term fundamentals that drive demand in our industry. Looking forward, we believe lumber prices have bottomed out for the year as we are starting to see prices trend higher. We are optimistic that the increase in Canadian softwood lumber duties and any potential Section 232 tariffs will have a positive effect on domestic lumber prices as we work through the back half of the year. Our strong balance sheet and excellent capital allocation track record, combined with operational execution and cost discipline, positions us to deliver long-term value to our shareholders. I will now turn it over to Wayne to discuss our second quarter results and our outlook.

Thank you, Eric. Starting from Page 4 of the slides. Total adjusted EBITDDA was $52 million in the second quarter compared to $63 million in the first quarter. This sequential quarter-over-quarter decrease in adjusted EBITDDA is primarily attributed to seasonally lower harvest volumes and higher forest management costs in our Timberlands segment, along with an inventory impairment charge and certain onetime costs in Wood Products. I will now review each of our operating segments and provide more color on our second quarter results. Information regarding our Timberlands segment is presented on Slides 5 through 7. The segment's adjusted EBITDDA decreased from $42 million in the first quarter to $40 million in the second quarter. In Idaho, 360,000 tons were harvested in the second quarter, representing a slight decrease from the 368,000 tons harvested in the first quarter. While a seasonally lower harvest volume in the second quarter was anticipated, we capitalized on favorable logging and hauling conditions as well as adequate contractor availability to exceed the planned volume. The favorable conditions we experienced during the first half of the year have allowed us to make great progress on our 2025 planned harvest volume. Sawlog prices in Idaho rose by 9% per ton compared to the first quarter. This increase was driven by higher cedar sawlog prices and seasonally lighter sawlogs. Expenditures on forest management and road maintenance also increased seasonally compared to the first quarter. In the South, we harvested 1.5 million tons in the second quarter, down seasonally compared to 1.6 million tons harvested in the first quarter. Our Southern sawlog prices increased by 2% compared to the first quarter. This rise in price was mainly driven by a higher volume of premium-grade pine sawlogs in our Gulf South region. Now I will turn to Wood Products, which is shown on Slides 8 and 9. Adjusted EBITDDA was $2 million in the second quarter compared to $12 million in the first quarter. The decrease was driven by a combination of factors, including lower average lumber prices, increased processing costs primarily from onetime items and a write-down of lumber inventories to net realizable value. Our average lumber price realization decreased $4 or 1% from $454 per thousand board feet in the first quarter to $450 per thousand board feet in the second quarter. Comparatively, the Random Lengths Framing Lumber Composite average price was also 1% lower in the second quarter compared to the first quarter. Lumber shipments increased by 13 million board feet, rising from 290 million board feet in the first quarter to 303 million board feet in the second quarter, setting a new quarterly record. This increase is attributable to improved seasonal operating conditions and incremental production at the recently upgraded Waldo, Arkansas sawmill. Transitioning to Real Estate on Slides 10 and 11. The segment produced adjusted EBITDDA of $23 million in the second quarter, which matches our first quarter results. During the second quarter, the rural real estate business sold 7,500 acres at an average price of $3,100 per acre, reflecting the significant premium over timberland values. Sales included the conservation land sales in Arkansas, which generated proceeds over $4 million. Demand for rural real estate remains robust as evidenced by achieving the highest level of transaction volume this quarter since 2017. In the Chenal Valley development side of our real estate business, 18 residential lots were sold at an average price of $102,000 per lot in the second quarter. Despite prevailing macroeconomic challenges, we continue to experience steady demand from regional builders in Chenal. Turning to our capital structure, summarized on Slide 12. We finished the second quarter with $395 million in liquidity, including $95 million of cash on our balance sheet as well as availability on our undrawn revolver. Reported cash balance reflects the use of $60 million through the end of the second quarter to repurchase 1.5 million shares at an average of $40 per share under our existing repurchase authorization. We have $30 million remaining on our $200 million repurchase authorization. We have $100 million of debt maturing in August, which we expect to refinance. We also anticipate utilizing our remainder -- remaining forward starting interest rate swaps, that's a $75 million notion of value to lower borrowing costs for this debt refinancing. Capital expenditures were $10 million in the second quarter. This amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement. For the full year, we continue to anticipate CapEx spend of $60 million to $65 million, which excludes the final closeout payment of $6 million for the Waldo sawmill project that we made in Q1 and any potential timberland acquisitions. I will now provide some high-level outlook comments. The details are presented on Slide 13. Within our Timberlands segment, we anticipate harvesting between 1.9 million and 2 million tons during the third quarter with approximately 80% of this volume sourced from the South. Harvest volumes in Idaho are projected to be seasonally higher in the third quarter relative to the second quarter. Additionally, sawlog prices in Idaho are expected to decline approximately 9% in the third quarter primarily due to lower prices on index volume. As a reminder, our index volume is based on a 1-month lag. Consequently, Q3 index pricing is based on June through August lumber prices with both June and July having seen relatively low lumber prices. In the Southern region, we anticipate harvesting approximately 1.5 million tons during the third quarter, and we expect that sawlog prices will remain relatively flat. We plan to ship 310 million to 320 million board feet of lumber in the third quarter, which would establish another quarterly record. Our average lumber price thus far in the third quarter is $410 per thousand board feet, which is roughly 9% lower compared to our average lumber price in the second quarter. This is based on approximately 100 million board feet of lumber. The lumber prices have been weak thus far in Q3. They have recently been improving and we expect them to continue to rise as we move through the back half of the year, driven by higher duties and potential tariffs. Also, our Wood Products division had a couple of challenges in Q2, which we do not expect to repeat and as such, we anticipate results to improve in Q3. Turning to our Real Estate segment. We expect to sell approximately 15,000 acres of rural land at an average price of $3,100 per acre in Q3. Given this level of anticipated third quarter activity, we are increasing our full year guidance to an estimated 31,000 acres, an increase in our average price per acre to $3,100. For our Chenal Valley development, we expect to close on approximately 50 residential lots at $140,000 per lot and 13 acres of commercial land at $530,000 per acre in the third quarter. Further details regarding Real Estate can be found on Slide 13. We anticipate that our total adjusted EBITDDA for the third quarter will be significantly higher than our second quarter results, driven by improved performance in both Real Estate and Wood Products divisions. That concludes our prepared remarks. John, I would now like to open the call to questions.

[Operator Instructions] The first question comes from the line of Ketan Mamtora with BMO.

Maybe to start with, Wayne, you talked about -- and correct me if I'm wrong on this, but what I heard was your lumber prices are down about 9% quarter till date, but you are forecasting kind of flat for the quarter. Can you just walk us through kind of what you're assuming there?

Yes. So Ketan, this is Eric. I'll take that one. Yes, so the duties are just now coming into effect. The anti-dumping duty just got announced a few days ago and countervailing is going to be announced here in just a few days, and there is a potential for tariffs, which I do believe one will be coming. The exact time when that happens is uncertain. But we think we're in a market environment where even though demand is tepid, as we said in our prepared remarks, we do think that these duties are going to force supply adjustments in the marketplace. And we've already seen it from Arbec. We've seen it from Canfor. Both those companies closed mills. We think more is coming. And so we think prices are going to gradually move their way higher as we move through the quarter. And if I had to pick a number on where we're going to be at the end of the quarter, we think July is the low point for the year. We think we'll be potentially $50 higher in September than where we are today. Things have to happen for us to get there, but that's our outlook as we sit here today. And that's what drives us back to flat lumber prices comparing Q2 to Q3.

Got it. No, that's helpful. And then just one more on Wood Products. So the -- is it fair to say that as we move -- as we think about Q3, the lumber inventory charge and the onetime unfavorable cost that you had, that should largely go away in Q3. So call it rough number is about $6 million reversal.

Yes. I mean, Ketan, it was a perfect storm that hit our Wood Products business in Q2. We talked about the St. Maries project that got accelerated from Q3 into Q2, that cost us some earnings. We had the Waldo utility issue that cost us. Log costs are going to be going down in Q3 versus Q2. Freight was a big issue for us in Q2. That's not going to happen in Q3. The LCM hit that we took in Q2, we think that's going away in Q3 as prices rise. And frankly, we haven't also -- we haven't talked about panels, but our plywood business has made a step change for the better in Q2 to Q3. Some of that's driven by potential tariffs on Brazilian plywood coming into U.S., but also some of that imported product our customers are realizing is of low quality and they've come back to us even though we charge more for our plywood, they're willing to pay it, given the low-quality material they've seen coming out of Chile and Brazil. So there's a bunch of things that hit us in Q2 that are going to reverse going into Q3, and I've got pretty good expectations for our earnings in Q3.

Got it. That's helpful. And then just final one from me. On capital allocation, Eric, you talked about share repurchases kind of really picked up here recently. Given an understanding that this is sort of a point in time reference, but this year has been just generally challenged in lumber. As you think about EBITDDA leverage, that's ticked up, how do you think about sort of balancing near-term uncertainty versus what is clearly a pretty attractive discount to NAV as you think about share repurchases?

Yes. I mean one of the things we're always going to do is we're going to protect our dividend and we're going to protect our balance sheet. Those are sacrosanct to us. But once we've taken care of those two, we feel like we've got free cash flow that we can use at our discretion to drive shareholder value. And as we think about what's going to be the best option, we're going to have to look at the landscape, And the landscape is going to be a review of what are our M&A opportunities at the time. And it's also going to be what is our outlook for the business at that point in time. It feels to me like Timberlands' earnings are generally pretty stable kind of all the time. It feels to me like Real Estate, the demand just continues to go higher, almost no matter the environment. So the wildcard really is Wood Products. And as we sit here today and we look at the outlook, not -- and not just for the back half of this year, but also getting into next year, and potentially the year after that, at some point in time, housing starts are going to get better and this lackluster R&R market, it's going to get better, too. We think there are projects that are pent up that are going to get done at some point in time in the future, maybe not when mortgage rates are 6.8% or 7%. But as rates come down, and I do think rate cuts are coming, we think activity is going to pick up, and that's going to drive demand for lumber, and that's going to help move pricing higher. So as we looked at it this quarter, in particular, the stars really aligned for us to be aggressive on share repurchases especially with our stock trading at such a deep discount to net asset value. Demand for timberland, it's never been higher. And as we look at it, our stock is just on massive sale. And with a bright outlook on future earnings, it's hard for us to not be aggressive. But we're always going to protect the balance sheet, and we're always going to protect our dividend first.

Your next question comes from the line of Anthony Pettinari with Citi.

Just following up on the previous question. Eric, I think you talked about expectations for a tariff maybe in addition to the import duties, if I got that right. And I think lumber has generally been exempted by USMCA and we didn't have a lumber tariff around Liberation Day. So I was wondering, are you talking about like 232? Or do you think you could see a tariff on top of the duty? Or what sort of drives that view, if I got that right?

Yes. I guess I just look at Trump's actions to date, his administration, we've now seen tariffs on steel, aluminum, copper. Everything that seems to be under investigation winds up with a tariff on it. I don't have any inside information that a 232 tariff is coming on lumber. I just -- I know the country has got a lot of fiber out there. We don't have the converting, but we do have a lot of fiber. And I think if a tariff was put in place and not a short-term one, but a long-term one, one that lasted perhaps years, I think it would compel the industry to really step up and build more mills, and we could become self-sufficient in lumber. So I guess I'm just kind of reading between the lines here that judging Trump's prior actions, and it seems to me like that's where he's headed with all this. I could be wrong, it's pure speculation, but that's what my gut tells me. It would be on top of the duties.

Got it. Got it. That's very helpful. I guess maybe sticking with kind of the policy side and One Big Beautiful Bill. I guess maybe two questions. I think there's a provision in there to increase the taxable subsidiary that a REIT can hold to 25%. Is that impactful to you? Then second question, is the view that of the -- I think you said over 40,000 acres under solar option, is any of that at risk given some of the changes around solar incentives? Or you feel that those are kind of vetted and rock-solid? Those are my two kind of follow-ups on the One Big Beautiful Bill.

Wayne will take the first, and I'll take the second.

Yes. So Anthony, on your TRS question, increasing that threshold from 20% to 25%. Certainly, the increased threshold provides for us, I would say, modest expansion opportunities for our Wood Products business. Under the previous threshold, we had ample cushion under the test, but this new threshold certainly provides us an opportunity to further grow Wood Products. Now it's either through discretionary larger-scale capital projects on our existing mill footprint that provides an attractive IRR such as what we just recently did with Waldo. Or we could look at strategic mill acquisitions that are the right fit that would align with our existing Wood Products and Timberland portfolio. But at the end of the day, we certainly view this increase in the threshold that is very positive for the company.

Yes, Anthony, I'll take the second question regarding solar. Yes, I'm not sure the One Big Beautiful Bill had much, if any, impact on the outlook for solar. And let me give you the reason why. At the end of Q2, we announced that we had 38,000 acres under option for solar. And actually, where we sit here today, we have 34,000 acres. So we're down 4,000 acres. We did have, in fact, one cancellation here recently that I don't think surprised us. It was a developer that was struggling with its utility for an offtake agreement. And when they canceled their option, we reached out to another larger solar developer and said, hey, this property has now come available. What do you think? Do you have an interest? And they jumped on it. And we think we're going to get a new option in place at more favorable terms than the option that got canceled. The other data point that I would highlight is the fact that -- we've got another solar farm that we're in negotiations with right now, and it is big. It's 9,000 acres, over $100 million net present value. And we're down to the final short strokes, negotiating that option agreement. And we expect to have that in place by the end of Q3. That's going to put our solar acres up to 43,000. And frankly, I got a forecast from the team that does this workforce, and they think we could be at 51,000 acres under option by the end of the year and that our potential remains 70,000 to 75,000 acres in total. So I don't think this One Big Beautiful Bill had much of an impact at all on solar. And in fact, it may even accelerate some projects to enter into service quickly to try to capture the tax benefit. So I remain very optimistic on solar.

Your next question comes from the line of George Staphos with Bank of America.

I want to go back to Wood Products. How are you, Eric? So same, Eric, can you give us a little bit more color or detail in terms of what was going on with that project? You said you accelerated the investment there, which it seemed like it gave you some negative onetime effect in the quarter. But if you could give us a little bit more detail on sort of what was going on there in the first place. And then relatedly, you obviously, you called out what was going on with Waldo. That's unfortunate, but it's behind you. But in terms of manufacturing costs overall being a nearly $1 million headwind sequentially in the quarter, what else was going on there and what was in that bucket? And I had a quick follow-on after that.

I'll take the first one, and I'll let Wayne have the second one. So yes, regarding the project at St. Maries, so we're replacing the sawbox out of the St. Maries sawmill, and effectively, we're getting rid of band saws and we're going to circular saws. It's just more efficient. We can eliminate a handful of positions. It's a $3 million project in total. It's taken us a couple of years to get it done. 20% IRR. We're very happy with the project. But for us to implement the project, we had to get a piece of machinery, which Canada produces a lot of the machinery that goes into sawmills. We had to get that equipment exported out of Canada down into the United States for installation. That project was scheduled to happen during Q3. Well, go back to the spring of this year when there was all kinds of tariff talk, not just from the Trump administration, but also from Canada. And there was a lot of talk about a tariff going in place on that imported machinery from Canada. And the potential hit was, I think, $300,000, if I'm remembering correctly, $200,000 to $300,000. And we said, well, we were going to do the project in Q3, but why don't we go ahead and accelerate it into Q2 so that we can avoid that potential tariff hit. So we accelerated it into Q2, and that meant the mill had not as much production, and it had excess maintenance costs for the installation of the project. So that was a decent hit. It was, I don't know, a couple of million dollars perhaps net impact to our P&L. That was scheduled for Q3, and now it's behind us because we got it done in Q2, and we didn't get stuck with the tariff.

Understood. Yes, and on the -- Wayne, go ahead. .

Yes. And then I guess on your second question on manufacturing costs, yes, there's a little bit of additional residual headwind there in manufacturing costs. But that really is mostly kind of carryover from Q1 that -- on inventory in Q1 that's flowing into Q2. So I think outside of these onetime items, for the most part, Wood Products' manufacturing costs were pretty stable. And we expect that to continue into Q3 and see manufacturing costs on a per unit basis improve, especially as we -- production and shipment levels will go up in Q3.

Yes. And George, just to add to that, we expect our cash processing costs per thousand in Q3 to be 13% lower than Q2. That gives you a sense of the order of magnitude of these -- of the project at St. Maries and the Waldo utility issue, what it had on our P&L.

So Eric, maybe a little bit of an unfair question, and we won't really hold you to it, but let's assume your pricing forecast hold. I mean, would it be fair to say that you might be able to climb all the way back to your 1Q level of EBITDDA by the third quarter in the Wood Products segment. If I add back all the onetimers, Ketan was chatting about that, plus manufacturing costs, plus some throughput. Is that too big of a stretch for you at this juncture?

No, not at all.

Okay. I appreciate that. Last question -- go ahead.

And George, yes, I would just highlight, we also took LCM at the end of the quarter. Quarter-over-quarter, that was about $3 million. We anticipate pricing to improve. So we don't -- we wouldn't expect in that pricing trend that to repeat as well.

Yes, sure. I was -- in my thinking, I was already reversing that out as well, Wayne. But no, that's great. Where do you -- I mean, I know you're probably going to say they're lean, but I'll ask the question anyway. Where do you see inventories right now in the channel on lumber? And then if you could give us just a quick update on where you see your operating rates for this year in lumber. And if you had a view on where the market -- recognizing the markets are localized, what you see for North American operating rates in lumber, that would be great.

Yes. Thanks, George. Yes, I do think inventories are lean. There may be a little bit of inventory building that's been taking place here over the past couple of weeks in anticipation of these duties moving up. I mean if I look at what's happened to like the Western SPF composite, it bottomed back in late May. It since moved up $34. If I looked at Western SPF 2x4s, it bottomed May 8, I think it was, and it's now up $78. Well, it's not up due to improved demand, I can tell you that because as we've been talking about, demand is tepid. So I do think there might be a little bit of inventory building going on out there, but I just don't think it's a lot. Now back to your second question, operating rates. We continue to run our mills all out. It's how we get per unit cost down. And it's how we -- each incremental stick of lumber has got positive cash flow, positive margins. So the harder we run, the better our results are going to be. If I had to guess how the industry is operating, it's probably in the upper 70s, 78%, 79%, something like that. And if you've got a mill that's in the fourth quartile, each incremental stick won't be incrementally cash flow positive to you like it is to us because we've got mills that are in the better quadrants. So they're not going to run when market conditions get tough, unlike us, which we can afford to run when market conditions get tough.

Your next question comes from the line of Kurt Yinger with D.A. Davidson.

I want to talk kind of two higher-level questions. The first is on kind of timberlands M&A. You touched on kind of the NCS opportunities, the relative stability of the cash flows, the overall demand. We've also seen pretty compelling pricing relative to what's probably embedded in your stock at this stage. So I'm just curious if we were to put maybe the balance sheet aside for a second, would you kind of be inclined to be an incremental buyer or seller at this stage in regards to the Timberland portfolio?

Well, it's a great question, Kurt. I mean I'd love to be an incremental buyer. It's a great asset class. The demand for rural land has never been higher. I'd love to be a buyer, but -- on the one hand, but on the other hand, we're not going to do something that destroys shareholder value. And the prices people are paying for timberland, we don't know how they get to an acceptable return on investment. So that kind of moves us to the sidelines on buying timberland. Now thankfully, we do have a capital allocation option like share repurchases, which makes all the sense in the world to us right now. And in terms of being a seller, I think we are a seller. We want to bear in mind our need for a long-term harvest profile. That's our future. So we're not going to sell all of our acreage. But we did enter into -- if you recall last year, we had a large sale to FIA. I think it was in the second quarter that we generated, I don't know, $50-some million. That was perfectly good timberland. That was industrial plantation, 4 year-old timberland that we sold at a significant premium. So we will, from time to time, put in place a timberland sale. And by and large, we use the proceeds from that sale to repurchase stock. We bought -- after we executed that FIA sale, we've since bought back about $95 million worth of stock. So I suspect you might continue to see that trend going forward if conditions stay where they are, which is timberland prices staying high and our stock price staying depressed.

Right. Okay. Perfect. No, I appreciate the directness of the answer there. That's great. The second one is just on lumber. Clearly, there's been a lot of capacity that's been taken out over the last few years, but still has not been kind of sufficient to really tension supply and demand. I guess when we think about the duties and the potential of tariffs, is the certainty of that, you think, enough to result in maybe some more material actions or enough capacity being taken offline? Or is there anything else that you sense people are holding on to on maybe the optimistic side to where we might not see kind of that sort of supply response in the market?

Yes, it's a really, really, really good question, Kurt. I'd tell you, it's hard to speculate what -- if you're running a Canadian mill, what do you do here? Your duty is going -- just went from, what, 14% up to 34%. And my understanding is the average mill up in BC with a 14% duty was running at breakeven -- cash flow breakeven. So now they're running at a minus 20% cash flow profile. Do they hang on and wait for a better day? Because I think most people are forecasting the duty to come down to 15% next year. But what if they get stuck with a tariff along the way? That mountain pine beetle, as you know, has decimated the forest in BC. And with all the fires up there, getting low-cost logs is just getting harder and harder and harder. So I don't know what a Canadian operator will do, but that's the answer to your question. Do they continue to hang on and try to survive and make it to a better day or do they just throw in the towel? And all of a sudden, we see another 2 billion, 3 billion, 4 billion board feet of capacity to leave the market. I don't know the answer to that question, but I do know that operating conditions are only getting more challenging for them.

Yes. Okay. That makes sense. Appreciate all the color.

Your next question comes from the line of Matthew McKellar with RBC Capital Markets.

Just one for me. Are you seeing many opportunities to invest in your Wood Products business today that would clear your return hurdles based on your expectations of how lumber prices evolve? And I guess maybe just more broadly, how would you have us think about how CapEx trends in that business over the next couple of years?

Yes. Great question. We've done an extensive analysis. We do have opportunities to continue to grow and improve our Wood Products business. What we told ourselves for 2025 is that we were going to get Waldo up and running, get it to its potential and kind of settle down and let's see where markets are at and then revisit expansion opportunities as we get towards the end of the year. So that work is underway as we speak and we'll have more to say as we get to later in the year or early next year.

Next question comes from the line of Mark Weintraub with Seaport Research Partners.

I apologize I had some technical difficulties, so if this was already covered, just skip over. But did you talk about Section 232 investigations and if you have a perspective on what's happening or what might happen there?

We did talk about it earlier, Mark, and I'll just say that we don't have any inside information, but my theory, my view is that one is coming, a tariff given what we've seen in steel, aluminum, copper and other industries, but it's per speculation.

Got you. And then -- so I guess if I heard you right, you said you thought that duties next year would be going down to about 15%, which I guess surprised me given that lumber prices hadn't gone up. Did I hear you right? And why do you think that?

Well, it's a 2-year lag, as I understand it, Mark. And I didn't do the analysis on that. I just read it somewhere. It was either FEA or RISI or one of the other industry pundits that covers the sector that they forecast a 15% duty next year. So I could be wrong. I don't have any detailed analysis on that.

Got you. And then kind of last -- kind of a bigger picture question. So since the start of 2023, and I recognize that earnings have been depressed in this period. So it was very different in 2021 or 2022, but corporate has been equivalent to almost 25% of EBITDDA on average. I mean are there things you think you can and should be doing to be scaling up or making other adjustments to make that less of a drag on a percentage basis, again, recognizing that we've been in tough time these last few years.

Yes, Mark, I mean, I think it's not really fair to compare corporate overhead in a period of time when we are at kind of trough earnings. There's a base level of corporate overhead that it takes to run this business particularly in Wood Products, which is a very people-intensive business, a lot of IT solutions, that sort of thing. So it looks like it's outsized when you get into a period of time like we're in right now, but if lumber margins are where they're supposed to be, which over the long-term average, it's $100 a thousand, we're making $120 million in Wood Products, and suddenly our corporate overhead doesn't look all that large in comparison. But we're always analyzing our corporate overhead departments, making sure that the money is well spent and that we're only doing what we have to do.

And maybe coming kind of from the other way, if you were adding scale either through Wood Products manufacturing, what have you, I mean you sort of said that given the arbitrage public-private maybe buying timberlands doesn't make a lot of sense. Would that be accomplished without corporate really going up and that sort of -- there's, I guess, the question of scale that I'm sort of trying to think about.

Yes. No, for sure. If we added a mill, if we added timberland, we wouldn't be adding corporate overhead. Certainly, when we acquired CatchMark, we gutted our corporate -- their corporate overhead, and we did that same thing with Deltic. So yes, so we can add assets. There's a lot of leverage there to be gained by having a larger footprint. That's for sure.

Your next question comes from the line of Mike Roxland with Truist Securities.

Can you hear me now? .

Yes.

Apologies for the technical difficulties here. Eric, you mentioned $50 per thousand increase you're expecting lumber prices maybe by September. What does that embed in terms of capacity closures? I know you mentioned in response to -- in response to your prior question that you're not sure how much capacity -- further capacity come out -- could come out from Canada. In fairness, a lot of the BC closures that have occurred over the last few years has removed the high-cost capacity. So when you think about the $50 per thousand that you're saying the prices go up, what are you thinking in terms of million board feet that could come out to drive that price increase?

Well, I don't know if that capacity exists. I think it's going to be about 1 billion board feet over time. It's not going to happen by September. It takes time for mills to wind down log decks and get rid of lumber inventories and whatnot. But I think there's an extra $1 billion -- 1 billion board feet of capacity that's going to come out of Canada, mostly in BC, but the Arbec decision, it surprised me because that's over in Quebec, as I understand. And I didn't think conditions were nearly as bad in Quebec because they are in BC, but nonetheless, it was a set of high-cost mills that got closed. But if I had to pick a number, I'd say 1 billion board feet won't happen by September, not likely.

So the $50 price increase you're embedding for September -- forecasting in terms of increase for September, embedded something less than 1 billion board feet?

Yes. I mean I think what's going to happen is -- I think what's going to happen is anybody importing lumber now into United States from Canada is going to have to pay that duty to bring that lumber in. And then they're going to have that lumber sitting in inventory, and they're going to say, "Well, gee, I just got -- the duty went up 20% I need to sell my lumber for $80 higher, and they're going to find that there's no buyers for $80 higher because it will be something less. And what that less is it may be $50, it may be $40, who knows. But eventually, it's going to put pressure back on that mill up in Canada that can't make a profit, getting its product across the border. It's going to take time. Just like those Arbec mills, they're not -- I mean, they're probably going to run for a couple of more months here but they will start winding down. And same thing with the Canfor mills. I mean, there wasn't a switch that got flipped overnight. These things take time. And so prices will gradually move higher as you see capacity come out of the market.

Got it. And then just one quick follow-up on the One Big Beautiful Bill. You mentioned minimal impact, if any, on solar. Any read- throughs to wind, carbon, CCS, anything like that from that bill?

Well, yes, there are a variety of puts and takes in the Big Beautiful Bill. And what I would say that for the most part, they were a net positive for our business. On the negative side of the ledger, clearly, tax credits for renewables now sunset earlier, and I think it's sunsetted for wind as well as solar. The other -- another negative thing was that the EV tax credit was eliminated, which for us, is going to have a really small net negative impact on potentially lithium demand and pricing. But on the positive side of the ledger, which there are many benefits, the CCS tax credit was preserved, there are new tax credits for low-income housing. The accelerated depreciation for new equipment was reinstated, and that was phasing out prior to the Big Beautiful Bill. The net asset test, we talked about it earlier for REITs, was lifted from 20% to 25%. And the other thing I'd say is the tax credit for battery energy storage systems, which I think is the way of the future, was preserved, which is going to help lithium demand. So lots of puts and takes here. But I think in general, it was a net positive outcome for us.

The question comes from the line of Buck Horne with Raymond James.

Just one quick clarification. I think you mentioned quarter-over-quarter given the -- or after the St. Maries upgrades, you were looking at cash processing costs down 13% quarter-over-quarter. Was that just for St. Maries? Or was that for the overall Wood Products division overall?

No, Buck, that's for the whole division. Processing costs per thousand, they're going to come down 13%. And that wasn't just from St. Maries. That was also from the issue that we had at Waldo with our utility there. And there are a couple of other really small things that we didn't get into earlier. But collectively, it's a 13% decrease in cash processing costs.

Wow. Very helpful. Appreciate the clarification. And then separately, are you seeing any signs that builders are -- homebuilders that are trying to actively start switching over in terms of species to yellow pine away from the SPF to try to mitigate future cost increases? Are those conversations happening? Are you reaching out to say, "Hey, we can help you use yellow pine in your operation as opposed to higher-cost SPF?"

Yes, Buck, this is Wayne. I would say on substitution, there is been a -- we don't see a big shift or a lot of discussion around that. I think you see it more maybe in Southern Yellow Pine, where probably truss manufacturers with 2x4s may be looking to do substitution there. But widely speaking, we're not seeing that. But over time, that could shift if they get more comfortable with Southern Yellow Pine, switching from Western SPF. But generally speaking, not a significant movement there.

And it seems that we have no further questions left. I would now like to turn the call over to Wayne Wasechek for closing remarks. Please go ahead.

Thank you, everyone, for joining us this morning. Please contact me with any follow-up questions. Have a great day. Thanks.