Good morning. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Second Quarter 2024 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 2024 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 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 review our second quarter results and our outlook..

Well, thank you, and good morning, everyone. Thank you for joining us. Yesterday, after the market closed, we reported second quarter total adjusted EBITDA of $103 million. This is a $73 million increase from the first quarter and was largely driven by strong real estate performance.

Overall, we had solid operational execution across each of our business segments, despite the current economic environment and languishing lumber markets. Turning to our second quarter results, starting with our Timberlands division. This segment generated adjusted EBITDA of $34 million in the second quarter.

We harvested 1.9 million tons, exceeding our Q2 harvest plan as better-than-expected weather conditions in both our Northern and our Southern regions provided favorable logging and hauling conditions. Sawlog prices in Idaho increased due to our indexed agreements, coupled with higher cedar prices.

For the South, our average Southern log price realizations were comparable to the first quarter despite challenging lumber market conditions. Moving to our Wood Products segment results. Adjusted EBITDA was a loss of $7 million in the second quarter compared to breakeven in the first quarter.

During the second quarter, lumber markets remained challenging as seasonal homebuilding activity did not result in tightening lumber markets. While there is weakness across all lumber markets, it has been most notable for our Southern Yellow Pine.

Southern Yellow Pine prices are at historically low levels, which stem from pronounced weakness in multifamily construction, declining demand from treaters, and ample supply of product.

While depressed lumber markets continued to weigh on our Wood Products results, we continue to focus on the areas we can control including optimizing our product mix effect running our mills and effectively managing costs.

As we look towards third quarter, we believe lumber prices are at or near the bottom, as we have seen recent signs of modest upward trend in lumber prices. Entering the back half of the year, we have reached several significant milestones with our $131 million Waldo, Arkansas sawmill modernization and expansion project.

The project continues to progress well with completion in third quarter remaining on track and within budget. In the early part of the third quarter, the mill will undertake a limited period of downtime to tie in the new equipment.

This downtime is expected to reduce our Wood Products division lumber production by approximately 10% or 25 million board feet in the third quarter. Following completion, we anticipate a ramp-up in production through Q4 and into next year.

Based on other brownfield additions in the industry that we have seen, we expect it will take 6 to 12 months to reach the mill's new capacity of 275 million board feet per year.

As a reminder, the project will increase the mill's annual capacity by 85 million board feet, will improve recovery by approximately 6% and reduced cash processing costs by about 30%.

Once the ramp-up phase is completed, we expect the mill to generate approximately $25 million of incremental EBITDA annually under a mid-cycle sales environment with this project. Shifting to our Real Estate segment. This business generated $90 million in adjusted EBITDA in the second quarter.

Our rural real estate side of the business produced very strong financial results as we successfully completed the sale of 43,000 acres at an average of $2,000 per acre during Q2. The highlight of our second quarter rural real estate activity was the closing of the previously announced 34,000 acre young timberland transaction for $57 million.

As discussed on the last call, the timberland was sold at a significant premium as it was just four years old and had no meaningful cash flows for the next 20 years. The quarter also included other value-added transactions at significant premiums to timberland value, including a 2,000 acre conservation land sale in Arkansas $4,700 per acre.

Demand for rural real estate continues to remain quite strong. The development side of our real estate business remains steady as higher interest rate environment.

During the second quarter, we completed a $6 million commercial land sale and sold 13 residential lots at an average price of about $113,000 per lot in our Chenal Valley master planned community in Little Rock. While we felt short of our residential lot sales outlook in the second quarter.

We remain optimistic about our residential sales in the remainder of this year based on strong take-up from regional builders on our latest residential lot offerings just this past week. Regarding our emerging Natural Climate Solutions business, it continues to evolve and grow.

Starting with solar opportunities, our portfolio of option contracts with solar developers continues to expand with four new contracts added since the last quarter ended.

Our inventory of solar option contracts now represents 27,000 acres or over 1% of our entire Timberland Holdings with an estimated value of approximately $300 million on a net present value basis. Given the appetite the utility sector continues to demonstrate for solar energy, we anticipate further growth of our pipeline.

By year's end, we expect our solar option contracts portfolio to include over 30,000 acres with an estimated net present value of roughly $340 million. We're also actively pursuing an NCS opportunity focusing on subsurface leases for lithium deposits crucial for battery production.

Notably, certain areas of our timberlands in Southern Arkansas featured geological formations that offer promising prospects for lithium. Currently, we are engaged in discussions with selected counterparties regarding the initial leasing of a portion of our subsurface rights. Shifting to forest carbon credit opportunities.

The voluntary carbon credit for high-quality credits continues to grow. Carbon registries that support voluntary markets continue to evolve in order to ensure high-quality credits are being brought to market.

In fact, the leading carbon registries are shifting their methodologies to have projects adhere to the relatively new core carbon principles or CCP, established by the Integrity Council for the voluntary carbon market.

These relatively new core carbon principles are quick becoming widely recognized as establishing a global benchmark for the highest integrity carbon credits found in the voluntary marketplace. Consequently, we believe that forced carbon credits that are labeled CCP will garner the highest demand and therefore, will obtain premium pricing.

With this in mind, we are shifting our approach in redesigning our 50,000 acre Southern Timberland carbon project to meet these new CCP standards.

We believe this will ensure our project or any future projects that we identify will be globally recognized as having real and verifiable primate impact under a transparent methodology using best practices, along with creating strong demand in premium pricing.

Once we further assess the redesign of our carbon project, which is expected by the end of the year, we will have a clearer picture of the type and time horizon of bringing a CCP labeled carbon project to market. We have also identified potentially valuable prospects in carbon capture and storage as well as bioenergy and biofuels.

While these ventures are not expected to materialize immediately, they hold the potential for substantial value in the long run. We continue to believe that all of the natural climate solutions opportunities will increase demand for rural land, likely driving timberland values higher due to increasing and diverse cash flows.

Moving to capital allocation. We remain committed to our disciplined and opportunistic approach, and we constantly evaluate all of our capital allocation opportunities to grow shareholder value over time. In the current economic environment, capital allocation is dynamic and can change from quarter-to-quarter.

Aside from our dividend, share repurchases were a very attractive option in Q2 as we were trading considerably below our estimated net asset value. In the second quarter, we returned $25 million to shareholders through share repurchase activity. Approximately 610,000 shares were repurchased at an average price of $41 per share.

We have now utilized half of our current share repurchase authorization with $100 million remaining under the program. Now turning our attention to the U.S. housing market. The overall market continues to be weighed down by elevated mortgage rates and affordability challenges.

Despite these factors, new single-family residential construction continues to demonstrate a fair level of resilience as starts have exceeded 1 million units in 7 out of the last 8 months. This has contributed to some level of stability in the market.

This level of activity has been supported by large homebuilders continuing to use incentives such as mortgage rate buy downs to address affordability. As for the multifamily segment of new residential construction has experienced a pullback due to an influx of supply entering the market and the excessive cost of financing construction.

There are some positive macroeconomic indicators, including inflation data showing signs of easing. If this trend in inflation continues, it is anticipated that the Federal Reserve will start to pivot from its restrictive rate policy and begin to lower rates, possibly as early as September.

Consequently, we would expect the housing market to see renewed momentum once mortgage rates drop -- Not only would new homes become more affordable, but existing home sales would improve as existing homeowners are not as locked into a low mortgage rate. Longer term, we remain optimistic on new residential housing fundamentals.

This is supported by an underlying shortage of housing stock which some funded estimated 4 million units and a strong demographic tailwind. Now moving to the Repair and Remodel segment, which in fact, is the largest demand driver for lumber. Demand in this market has softened, especially in the do-it-yourself segment.

The near-term headwinds on repair and model appear to be driven by elevated interest rates, this raising cost of discretionary projects, coupled with the low turnover of existing homes, which typically spurs R&R activity.

Looking forward, favorable longer-term fundamentals continue to remain with an aging housing stock at over 40 years on average, continued work from home policies and elevated home equity levels.

Back in May, we released our 2023 Corporate Responsibility Report, highlighting the continued momentum we are generating around our corporate responsibility goals and initiatives.

Looking ahead, we continue to be diligently focused on completing our strategic modernization and expansion project at the Waldo sawmill on schedule within budget and with the utmost safety for our employees and our contractors. Additionally, we are committed to enhancing operational and financial performance across all of our business segments.

And in light of tough market conditions have implemented additional cost controls across all of our mills. Our investment-grade balance sheet, ample liquidity and disciplined capital allocation strategy positions us to deliver long-term value for our shareholders.

I will now turn it over to Wayne to discuss our current second quarter results and our outlook..

Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $103 million in the second quarter compared to $30 million in the first quarter. The sequential quarter-over-quarter $73 million increase in EBITDA was driven by strong rural real estate sales.

I will now review each of our operating segments and provide more color on our second quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment contributed $34 million in EBITDA for second quarter results, which was comparable to the first quarter.

Second quarter EBITDA benefited from higher sawlog prices in Idaho, which were offset by seasonally higher forest management and road costs across our regions. Our sawlog harvest in Idaho was 365,000 tons in the second quarter compared to 329,000 tons in the first quarter.

Our team leveraged good hauling conditions coming out of spring breakup, which led to exceeding our planned harvest volume for the second quarter. Our Idaho sawlog prices increased from $103 per ton in the first quarter to $113 per ton in the second quarter or 9%.

The favorable per ton increase reflects higher lumber indexed and cedar sawlog prices and the positive effect of a normal decrease in the densile sawlogs. Turning to the South. We harvested 1.5 million tons in the second quarter compared to 1.6 million tons in the first quarter.

Slide 7 shows our sawlog prices down 2%, which is on a rounded basis, but actual southern sawlog prices were 1% lower in the second quarter compared to the first quarter.

The moderate decline can be treated to a higher mix of smaller diameter pine sawlog along with the market factors affected by some of the log inventories at or nil capacity across the region. Moving to Wood Products on Slides 8 and 9. Adjusted EBITDA decreased from breakeven in the first quarter to a loss of $7 million in the second quarter.

Lower average lumber prices, combined with higher per unit cash processing costs primarily associated with our Waldo, Arkansas sawmill with its ongoing modernization and expansion project drove the decline.

Average lumber price realizations decreased 2% from $430 per 1,000 board feet in the first quarter to $423 per 1,000 board feet in the second quarter. By comparison, the random lengths framing lumber composite price was 5% lower in the second quarter compared to the first quarter.

Note that our regional mix and product mix is not the same as the composite. There's also a timing difference between our sales and the composite. Lumbar shipments increased by 15 million board feet from 271 million board feet in the first quarter to 286 million board feet in the second quarter. Shifting to real estate on Slides 10 and 11.

The segment's adjusted EBITDA was $90 million in the second quarter compared to $6 million in the first quarter. EBITDA generated by rural sales was considerably higher in the second quarter led by the closing of the previously announced $57 million Southern Timberland transaction.

Our rural real estate business remains robust, and we closed on a total of 47 transactions aggregating to 43,000 acres. EBITDA generated by our Chenal Valley master plan community increased in the second quarter by nearly $5 million compared to the first quarter due to a 12 acre commercial real estate sale for $500,000 per acre.

During the second quarter, we also closed on the sale of 13 residential lots at a lower average price than in the first quarter due to a different product mix of lots. Turning to capital structure, which is summarized on Slide 12. Our total liquidity was just under $500 million.

This amount includes $200 million of cash on our balance sheet as well as availability on our undrawn revolver. We repurchased 610,000 shares at $41 per share for a total of $25 million in the second quarter. We have $100 million remaining on our $200 million repurchase authorization.

We intend to refinance $176 million of debt that is due for maturity in October, November of this year. On our balance sheet, we currently hold notional forward starting swaps of $200 million, valued at approximately $38 million.

Our strategy was to optimize the use of these swaps, either partially or in full, to refinance this debt at interest rates below the prevailing market rates. Capital expenditures were $28 million in the second quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement.

Our full year capital expenditures remain in the range of $100 million to $110 million, not accounting for any possible timberland acquisitions.

This estimate includes approximately $44 million for the final installments on the modernization and expansion project at the Waldo, Arkansas sawmill, of which approximately $27 million remains to be spent for the rest of the year.

Furthermore, we anticipate that our annual CapEx will drop significantly and return to a more normalized level next year, as we do not plan to undertake any major projects comparable to the Waldo initiative. I will now provide some high-level outlook comments. The details are presented on Slide 13.

We expect to harvest 1.9 million to 2 million tons in our Timberland segment in the third quarter, with nearly 80% of the volume in the South. Harvest volumes in the North are planned to be at their seasonal peak as the third quarter typically has the logging and hauling conditions of any quarter during the year.

We anticipate a decline in Northern sawlog prices in the third quarter due to lower prices for indexed sawlogs. In the South, we plan to harvest approximately 1.5 million tons in the third quarter. We expect our Southern sawlog prices in the third quarter to be comparable to the second quarter.

We plan to ship 250 million to 260 million broad feet of lumber in the third quarter. This forecasted shipment volume takes into account a reduced production level in the third quarter for scheduled downtime at our Waldo, Arkansas sawmill.

This pause in operations is necessary to complete the installation of new equipment as part of the expansion and modernization project. Our full year projected shipment volume remains at approximately 1.1 million board feet. Our average lumber price thus far in the third quarter is 9% lower compared to our second quarter average lumber price.

This is based on approximately 135 million board feet of lumber. As a reminder, a $10 per 1,000 board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. Shifting to Real Estate. We expect to sell approximately 6,600 acres of rural land in the third quarter.

Additionally, because of notable strong demand for rural real estate thus far this year, we anticipate this roughly 55,000 acres of rural land in 2024. For real estate development, we expect to sell approximately 45 Chenal Valley residential lots in the third quarter. Additional real estate details are provided on the slide.

Overall, we anticipate our total adjusted EBITDA will be lower in the third quarter compared to the second quarter. This expectation is based on the decline in rural in real estate activity. That concludes our prepared remarks. Greg, I would like to open the call to Q&A..

[Operator Instructions] It looks like our first question comes from the line of Anthony Pettinari with Citi..

Your full year lumber shipment guidance unchanged from the beginning of the year, I think at 1.1 billion board feet. And some of your competitors are taking curtailments or maybe sharper actions on capacity.

And I'm just wondering, if you would consider similar actions, given profitability has been challenged for maybe longer than we expected? Or just generally, how you think about that?.

Yes, Anthony, this is Eric. I guess, as a starter, we mentioned on -- in the prepared remarks that Waldo is going to be down for a portion of Q3, which is going to lower our shipments 25 million to 30 million feet in the quarter. So in some ways, we are taking downtime here.

But as we do the -- and everybody's financial situation, where their mills sit on the cost curve, everybody's situation is a little bit different from the next competitors. For us, we are more than covering our cash variable costs at all of our mills. So for us, taking -- effectively, what that does is it hurts the P&L even more.

So the math for us is to keep running as hard as we can. Now the math is going to be different for other competitors, and that's why you're starting to sell the -- close mills and take out shifts and take out over time and whatnot. So that's kind of our posture in this current market environment..

And you referenced, we've seen kind of an uptick in lumber, I guess, in recent weeks.

Is there anything specifically that you did attribute that to? And are you seeing curtailments or closures by competitors maybe accelerate or maybe start to be felt in the market a little bit more do you think the Canadian tariffs could be meaningful? Just kind of to the extent you can, how you kind of about lumber in July and August and the trends we're seeing?.

Yes. That's a good question. I think July will be the low point for lumber prices for the year. I mean I get the forecasting lumber price is a bit of a pull there. And as you know, and commodity markets like this. But our sense of it is that July is going to be the low point for the year.

In the past couple of weeks, and in fact, go all the way back to the start of the year, we've seen, I don't know, 2.5 billion to 3 billion board feet of capacity come out of the markets. We saw a couple of mills, Weyerhaeuser just announced you're closing a mill. Malheur over in the John Day, Oregan just announced or closing a mill.

Stimson, just down the road here in Plumber Idaho announced they're closing their mill. If you [indiscernible] with curtailments that we're seeing from, well, West Fraser, Canfor Weyerhaeuser all announced meaningful capacity cuts in just the past week. In total, that amounts to about 2.5 billion to 3 billion board feet coming out of the market.

Meanwhile, I think demand is kind of bottoming. And as I look out into next year with interest rates coming down, I can see housing starts being up, I don't know, 150,000 units to maybe 1.5 million next year. I can see R&R markets coming back as we get out into next year with lower financing costs.

I can see multifamily coming back as we get out into next year with all this new supply that's come on the market as it gets absorbed. I see European imports rolling over. So I think the market is setting up for a decent run in lumber prices.

Now is it going to happen in Q3 or Q4, probably not because we are going into a seasonally slow period of the year with construction activity slowing? But I think as you get out into next year, I think things are looking a lot better..

And our next question comes from the line of Michael Roxland with Truist Securities..

How much of the weakness that we're seeing in housing starts, do you think relates to smaller builders who don't have the wherewithal or the larger builders to offer [indiscernible] incentives?.

Yes. I think that's a lot of the weakness in the market, Michael. I mean you look at the big builders with their big balance sheets, they continue to take market share from small builders. And I think the public builders is now up over 50% of the market.

And with their ability to buy down rates, I compare and contrast that with what I'm seeing in our own master plan community in Chenal where you've got builders that might do 1 to 5 homes a year more or less. They don't have a big balance sheet. It's -- their own personal equity that's on the line. I think that's driving a lot of the market right now..

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

Yes. And I am encouraged. I mean, yes, if you listen -- I mean, in our prepared remarks, we talked about a very successful lot draw that we had just last week in Chenal. Now those were higher-end homes, golf course lot home, so to speak, but we have really good uptake in that draw. So demand is there.

It looks to us like demand appears to be a letter on the high end of the market than it does the low end of the market. But with rates coming off, we've already seen 30-year mortgage rates. I mean, last year, they peaked at around 7.8%. And today, they're around 6.7%, 6.8%. So they've already come down 100 basis points.

We get a few interest rate cuts from the Fed and we get the spread between treasuries and mortgage rates. If we get that to compress a little bit, which that spread is pretty wide right now. I think we could see a lot of -- we could easily see homebuilding get back up to, I think, 1.5% next year is my base case forecast.

And then I think in the '26, it could be 1.6%, 1.7%. There's just a ton of pent-up demand out there. It's just that people can't afford it..

And just one quick final question. In terms of lumber because you mentioned in your opening remarks as well, it's focusing on costs, focusing on things a year-on-year control.

Given the persistence of number, can you just provide any color on initiatives that you're pursuing in your mills to improve profitability?.

Well, yes, we've got a strict edict out to the mills now that you need to make sure what you're buying is what you absolutely need to be buying to keep your mill running.

Now we're not going to do stupid things like deferred maintenance that's just going to bite us down the road, but it's really making sure that everything that they're buying is something that they need to keep their mill running successfully. But that's the only thing that we're doing too we're shifting our product mix.

We don't produce a lot of 2x4, but if you've been watching 2x4 Southern Yellow Pine prices, they've been at just rock bottom levels. So with some of our mills, we're able to flex our product mix to capture premium prices. But generally, that's somewhat limited..

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

[Indiscernible].

George, we can barely hear you..

Let's try that.

How's that? Is that better?.

Much better. Yes, it's much better..

There you go. I appreciate that. So good performance, tough operating quarter macro quarter, I should say. Can we go to Slide 8 and look at the waterfall. And just as we sort of think about third quarter, recognizing there are no guarantees on pricing. With Waldo going through its last ages, that's going to cost you some volume.

So volume is probably a negative in 3Q versus 2Q.

Can you give us a sense on how that manufacturing cost portion of the waterfall might look sequentially 3Q versus 2Q? Will it be maybe better because 2Q was so tough? Or might it still be a little bit lower just because you're going through those last stages? How should we think about those 2 boxes, if you will, or 2 bars?.

Yes, George, this is Wayne. When we think about -- I think when we look to move from Q2 into Q3, especially as it relates to Waldo, we believe we absorb most of those costs -- a higher cost with the modernization project and its effect on manufacturing.

So we had that negative impact in Q2, but we think that will reverse itself over the back half of the year. So that $3 million will kind of roll out in Q3 and Q4 with both improved costs, better fixed costs absorption the remainder of the year. So I think we'll be more favorable as we trend the rest of the year..

Okay. So we should see some green bars on manufacturing cost in the third quarter without getting into the pennies and dollars here, that should be a positive. And are there any other things that might help you in terms of your overall Wood Products EBITDA, again, recognizing you're at cash costs are better in terms of profitability.

What about the cost reduction opportunities that you see? Is there a way to put a dollar amount on that, the things that you're doing right now, just given where we are in the cycle?.

Well, yes. So I think, George, the way to think of it is that we're pushing both processing costs and fiber costs down at the mills. In total, we think our cash processing costs are going to come down maybe 2% full year over full year. We think our fiber costs, especially at St.

Maries and that our Gwinn, Michigan mill are going to come down, who knows, 6% more or less. So we think our total cash costs at our mills are going to decline roughly 4% full year over full year. So there will be a benefit here. It's not going to be gargantuan.

It's tough to move the needle because we're always -- theoretically, we're always working as hard as we can to get log costs down and to get operating costs down. But there will be a modest pickup from these efforts..

Okay. No, I appreciate that, Eric. Appreciate that, Wayne. A couple more questions for me and I'll turn it over and come back.

Can you talk a little bit more about the CCP registry and kind of different about how they evaluate credits to what you had been using? And ultimately what it can mean in terms of value for credit? And then just maybe back to wood.

You talked about 2.5 billion to 3 billion board feet of capacity being taken out of the market either permanently or temporarily.

To the extent that you have a purview on this, what do you think in the South, in particular, the amount of remaining excess capacity is, in fact, you think there's any remaining excess capacity?.

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

Yes. So George, on the carbon credits, clearly, the projects that we're developing, we believe, would certainly achieve additionality and produce high-quality credits. I think the market -- the voluntary market, though, continues to evolve and develop. Certainly, buyers continue to demand greater governance and transparency.

And I think the market is really searching for greater alignment of standards for these type of projects. And as Eric mentioned, this Integrity Council for voluntary credit markets, developing these core principles becoming globally recognized. I think it establishes a common standard.

And we think that these principles will stabilize the carbon trading markets really once they become mainstream. And so we believe that these standards -- these label projects will attract the highest demand and achieve higher premium pricing. We think potential upwards of 50% premium pricing.

And keep in mind, these type of projects are not a 1 to 2-year project. These are -- tend to be multi-decade projects. So we're really thinking about the long-term value here. And that's why we are pivoting to implement these new standards on a project..

Yes. George, you may have seen -- I mean there's been a few articles out just in the past couple of weeks about dubious credits being issued. And one was in the Wall Street Journal, there was another big article in the Guardian. So we think buyers are getting a little bit suspicious about forestry carbon credits.

Now a lot of those dubious credits are coming out of third world countries. But nonetheless, IC-VCM has decided that there needs to be a global framework for capturing carbon out of forestry.

So like Wayne said, we expect pricing to be -- this is going to really clear up the marketplace, and we think prices are going to be upwards of 50% or more compared to where they are today.

So we think about, okay, if we defer, delay our project a year, 2 years, whatever it takes, to get 50% higher pricing, it's just the right thing to do for our shareholders. So that's kind of how we're thinking about it. Now your second question with regard to how many more mills in the South can close. I -- honestly, I cannot answer that question.

All I know is what our mills, what our P&Ls look like. And I'm sure there are a lot of other mills, especially smaller private ones where people have got to make really, really tough decisions about do they want to keep running in this kind of an environment. It's really, really hard to know.

All I can tell you is I've seen cost curve for the south and at least half of the mills in the South are losing a lot of money right now..

Yes. It was less of the cost or more about just overall excess supply recognizing they're somewhat joined at the [hep]. But if you had a view on excess supply, grade, if not I'll turn it over..

Okay..

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

All the potential opportunity around lithium on a couple of the recent calls.

Could you provide just a bit more color on the potential size of the opportunity here? And maybe what kind of time line you're thinking about for something to come to fruition?.

Yes. I think as far as the size of the opportunity, I think we're still working through that potential. It's a little bit early to give any sort of guidance on where we think that could end up. But we certainly think that's an attractive opportunity.

When the spectrum of NCS opportunities, that's more near term than, say, for example, where we think carbon capture and storage is for us. That's a little bit longer tail to that. But lithium, we believe, has in the next couple of years, we think that, that opportunity could come to fruition..

That's helpful. And then you called out European lumber imports rolling over as part of how you're thinking about the outlook.

Can you give us a sense of what you're seeing on that front today?.

Yes. So year-to-date, U.S. offshore ports down 14%. Most of that is from Europe. And I think the fact of the matter is markets are very weak in Europe right now. So European producers have been looking for a home for their lumber. They've been beneficiaries of the spruce bark beetle that has made fiber really cheap for their mills.

Fortunately, that's coming to an end here. The U.S. markets being where pricing is at today is not nearly as attractive to European producers as it was a year or 2 ago, which is why you're seeing imports drop that 14% number. We think imports are going to continue to roll over as we move forward.

And I think probably the biggest factor behind that is going to be a European recovery. We're now starting to see Europe lower interest rates. ECB, I think, just cut rates 25 basis points a month or so ago. And so we expect more lumber to stay within Europe, and less of it to get exported into the U.S.

So we see a softening in those imports going forward..

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

Great.

Wayne, I’m sorry if I missed this, but in terms of Northern sawlog pricing, how are you thinking about, I guess, the degree about which those could be lower Q3 versus Q2?.

Yes. For Northern sawlogs probably we're looking -- our estimates probably kind of mid-single digits down from the second quarter is around 5%. And I think that's -- there's a mix there. So a couple of things driving that. I believe, certainly indexing -- the indexed sawlogs are down. Keep in mind, there's a one lag there.

So that's priding from June to August. But on the flip side, offsetting some of that weakness is, we have more cedar in the mix, plus cedar pricing for us is actually quite strong compared to historical averages. And we have pretty tight supply in the Idaho region, and that's really driving some strong pricing.

So kind of those 2 factors combined, we're looking to be down around 5%..

And then on the solar side, how are you guys thinking about kind of the time line in terms of when we could start to see, I guess, a couple or a handful or a meaningful total of some of these options really starting to convert to leases?.

Yes. We've talked about this on prior calls, how challenging it is the backlog of projects, these utilities, these developers have got. Waiting to get clearance from regulators and FERC and whatnot. So the timing of these things is really hard to predict. We have actually closed one. We closed one back in Q1 of 2022. It was a sale and CatchMark.

Of course, we own CatchMark now. We had one that closed in Q1 of 2018. So 2 have actually already closed. Now that was before the IRA. So now that the IRA is in place. There's been just a tremendous amount of activity. And we think next year, there's a potential for one maybe two of our projects to get executed. And so we'll see.

We're in discussions now with that partner, but we'll see. But I think starting next year, you'll see some of these options get exercised..

And then just last one for me on CapEx levels sense that they would come down next year. I guess if I were to just kind of take the outlook and then take off kind of the remainder spending related to Waldo this year.

Is that a reasonable kind of starting point for thinking about 2025, maybe in that 60 million Zip code?.

Yes. I think at this point, we're -- we'll see how markets continue to progress the remainder of the year. I mean we have a number of -- we're always looking at projects in our Wood Products business that are higher return and have a high IRR. So yes, I think it's a bit early for us to give guidance on CapEx for next year..

And our final question today comes from the line of Mark Weintraub with Seaport Research Partners..

First, maybe just following up on the solar cost. As you've highlighted, it can be a real dial mover when thinking about the degree of value it can represent of the existing enterprise. But we are -- it seems running into -- maybe delays isn't the right word, but it's been hard to realize these money start to see them flow through.

Is there something you can kind of communicate to give us more confidence, give the market more confidence that it's coming, when it's coming, why it's coming?.

Yes, Mark. So there's been an enormous amount of renewable energy work that's been done in the past year to in the U.S. I think something like '23 was a record year, it was 32 gigawatts, which was up considerably from prior year. Market is supposed to be up threefold by 2030 solar power. So there is just a flurry of activity here.

And one of the first things the developer has to do to really get their project rolling is identify a piece of property that they can use for their solar farm. And so we happen to be at the very front end of that whole project. I think as we get into next year and we start having more conversations with these developers that have got these projects.

By the way they're paying us all along the way here, and they've got no revenue right now from these farms. So it is in their very best interest to accelerate their projects as much as they possibly can.

But I think as we get out into next year, and we perhaps get 1 or 2 of these over the goal line, I think we'll have a lot better feel for what the runway looks like for the ramping up of these projects. But right now, it's -- most of those option agreements are 4, 5 years in length. A lot of them have been signed just in the last 12 to 24 months.

So it's really a bit soon to say when they're going to start hitting that the first option term is coming to an end in the next 2 to 3 years for a lot of these contracts. So hopefully, we'll see activity contracts executed over that 2 to 3-year time frame..

And is it really not you get over the goal line where you can have a very of confidence an individual project? Or are there milestones where you can be able to point to why you have a higher degree of confidence today on some of them than you had which are getting closer than, say, 3 months ago? Or is it really -- it's going to be that, call it, at the end of the day, whether it goes forward or not?.

Yes. I think as we get closer and closer to when the contract expires, we'll have more conversations with the developer about where they're at with their project. Ironically, we had one. I think it was last year that did not get executed.

We were very happy that the option did not get executed because we turned around and we leased it to another developer at an even higher rate. So sometimes, these things falling apart can be a good thing.

But I think we won't really get -- have much visibility into what each and every one of these projects looks like until we get closer to having them come to fruition. Now I do know that for next year, we are having conversations with 1 or 2 of them, and I'm optimistic about those, but we're not there yet either..

Right. And so if I understand correctly, so the carbon credits, I think you had thought maybe you would have some by the end of this year. And I think that that's now being pushed back as you're going -- as you change TAC.

Is there any sort of -- some of your competitors have kind of put out targets in time lines, in fact, both of your [Timber competitors].

Is there anything -- maybe not right now, but is that something you'd be ready to share with us at some point soon or if there's color you can give us now?.

Yes. I think, Mark, over the next few quarters, I think it's reasonable to assume that we might come up with a forecast. I mean you can just see -- I'm sure you read that greenwashing article in the Wall Street Journal just a couple of weeks ago, there's a lot of crosscurrents in the carbon credit market right now.

And we have been a bit reluctant to give guidance knowing that there's all this turbulence, as the dust settles, and we get greater clarity. I mean, Wayne talked about our lithium deposits in Arkansas, well, the state of Arkansas hasn't even set the royalty rate yet on what we're going to get paid for our lithium.

And so I can't tell you if that's a $1 million opportunity a year or a $20 million opportunity. We just don't know. So I'm reluctant to give detailed guidance, but I think as we move further along the path here and we get more clarity on where these markets are headed, I think we'll be in a good position to give guidance..

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

Wayne?.

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

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