Potlatchdeltic Corp (PCH) 2017 Q2 法說會逐字稿

Good morning. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Second Quarter 2017 Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Thank you, Karen, and good morning. Welcome to Potlatch's investor call and webcast covering our second quarter 2017 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating 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 concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com. I'll now turn the call over to Mike for some comments, and then I will cover our second quarter results and outlook.

Thanks, Jerry. Good morning. We had an outstanding quarter, led by lumber prices. The strength in our financial performance is even more notable, given that the second quarter is typically our weakest quarter of the year due to seasonally lower harvest volumes. Touching briefly on our 3 business units, the Resource segment's strong second quarter earnings were driven by a 26% increase in Northern sawlog prices. This price increase was primarily due to the effect of higher lumber prices on indexed volumes. In addition, cedar sawlog prices remained very strong. The Real Estate segment closed 64 transactions in the quarter and traffic was robust, indicating that interest in our rural recreation property remains high. Our mills are operating extremely well on an all key performance indicators, including improvement in safety. The Wood Products segment also set a new lumber shipment record and generated its highest quarterly profit in over a decade. The quarter also demonstrated our geographic diversity and the benefit of participating in a variety of different regional lumber markets. Looking ahead, we remain very bullish on lumber prices for a number of reasons. In our view, distributors were caught with low inventories in early July. The need to replenish came at a time when curtailments caused by the forest fires in British Columbia reduced supply. In addition, the Canadian dollar recently strengthened about 6%. As a result of both factors, Western SPF prices spiked upward and Southern yellow pine prices have turned positive. As Random Lengths reported, the shortage in Western SPF lumber has also pushed lumber prices for certain species in the inland region to record highs. This is very positive for both our Saint Maries Idaho sawmill and our Idaho Resource business, which indexes the price of sawlogs to inland lumber prices. We were pleased to see the stronger housing start numbers for June, including higher single-family starts, which are important to us, given that a single-family unit uses about 3x the lumber -- the amount of lumber as a multifamily unit. Building permits at a seasonally adjusted rate of 1.25 million units indicates that the volume of lumber needed to build houses will continue to grow. Demand in the repair and remodel segment, which uses more lumber than new residential construction, remains robust. This translates into very strong prices for premium studs manufactured by our Great Lakes sawmills.

The preliminary antidumping duty levied at the end of June was generally in line with our expectation, and it is an important step in the process to allow the U.S. industry to grow to its natural size. We continue to believe that a market-share-based quota is the appropriate long-term solution. We expect that lumber prices will remain volatile as the preliminary countervailing duty expires at the end of August as well as when, and if, Canada and the U.S. reach a settlement in the trade case.

Our priority for cash that we are accumulating due to a strong lumber price, remains bolt-on timberland acquisitions with attractive returns. We have completed a few small transactions and continue to evaluate opportunities adjacent to our timberlands. We expect our third quarter earnings will exceed the second quarter results we reported today due to seasonally higher harvest volumes in our 2 operating regions. In addition, we expect we will continue to benefit from solid lumber prices relative to historical norms and strong lumber shipments. 2017 is shaping up to be an excellent year, and we are bullish about Potlatch's prospects going forward. I'll now turn the call back to Jerry to discuss the quarter.

Thanks, Mike. Beginning with Page 3 of the slides accompanying this call, we reported net income of $24.3 million or $0.59 per diluted share in the second quarter. This compares to net income of $16.9 million or $0.41 per diluted share in the first quarter. EBITDA was $48.1 million in the second quarter compared to $35 million last quarter. I'll now review the results of our operating segments.

Information for our resource segment is displayed on Slides 4 through 6. Operating income for the segment was $19.5 million in the second quarter compared to $14.9 million last quarter. The increase in earnings is largely due to significantly higher sawlog prices in the North, which more than offset seasonally lighter harvest volumes. I'll provide more color as I cover each region.

Turning to Slide 5. Northern sawlog prices increased 26% and averaged $115 per ton for the quarter. The effect of higher lumber prices on our indexed volume was the single largest factor that drove this increase. Demand and prices for cedar sawlogs continue to be very strong. Cedar sawlogs represented a slightly higher percentage of the northern sawlog mix in the second quarter. We delivered 334,000 tons of sawlogs in the North in the second quarter. This is a normal seasonal decline in volume due to spring breakup.

I will now turn to the South on Slide 6. Logging conditions were challenging due to heavy precipitation. As a result, our harvest volume of 453,000 tons in the second quarter was lower than the first quarter. We expect to make up the minor shortfall relative to our plan in the remainder of the year. Sawlog prices in the South weakened 2% in spite of reduced supply caused by wet weather limiting logging access. Logs have been sufficiently available to prevent price tension in the region.

Results for the Wood Products segment are displayed on Slides 7 and 8. Operating income was $24.7 million in the quarter, which is almost 3x higher than the $8.7 million earned in the first quarter. The increase in earnings was driven by higher lumber prices and shipment volumes, which were up 11% and 13%, respectively. The increase in our lumber prices outpaced the Random Lengths Framing Lumber Composite primarily due to strength in our Great Lakes stud prices, which speaks well for our geographic diversity.

In addition, in April this year, we entered into a lumber price swap and locked in the price on 36 million board feet of Southern Yellow Pine lumber that will be delivered in the second half of 2017 at $425 per thousand board feet. We recognize the gain of $3.3 million in Wood Products results to reflect the value of the swap as of the end of the first quarter -- or second quarter, excuse me. All the mills are operating well, and as Mike said, the segment set quarterly records for shipment volumes and operating earnings. I will now shift to our Real Estate segment on Slides 9 and 10.

Real Estate's operating income was $5.8 million in the second quarter compared to $8.6 million last quarter. The average sales price decreased from $2,200 per acre in the first quarter to a more typical $1,500 per acre in the second quarter. Last quarter's average price was elevated, primarily due to a large conservation sale in Alabama for almost $2,600 per acre. Second quarter sales were more heavily weighted to recurring sales of Minnesota rural recreational real estate than the first quarter.

Turning to financial highlights on Slide 11. We ended the quarter with cash of $110.3 million. We also have $249 million available on our revolver. We repaid $5 million of medium-term notes that matured in the quarter. We have $20 million of long-term debt maturing at the end of 2017 and early 2018 that we expect to repay with cash on hand. This debt has a weighted average interest rate of 6.4%. Capital expenditures were $5.5 million in the second quarter excluding acquisitions. A high-return project is planned in our Warren, Arkansas lumber mill in the fourth quarter that will not require any downtime. We're on track to spend capital of $27 million this year, excluding acquisitions.

Now I'd like to comment on our outlook, which is summarized on Slide 12. We expect to harvest between 1.3 million and 1.4 million tons in the third quarter. The increase in volume relative to the second quarter is normal and is due to drier, more favorable logging conditions. We do not currently anticipate any curtailments due to fire risk given the amount of snow we had in the Idaho last winter, and summer temperatures have been normal thus far. Slightly more than half of the total harvest volume in the third quarter is planned to occur in the South. Sawlogs are anticipated to represent approximately 90% of the harvest in the North and 45% of the harvest in the South, including stumpage. Our outlook assumes that our average northern sawlog price will decline about 5% per ton in the third quarter. We expect Southern sawlog prices to increase about 15% in the third quarter. This is primarily due to a higher proportion of hardwood sawlogs in the sales mix. We do not foresee any appreciable change in the price of southern yellow pine sawlogs. Resource earnings would increase about $20 million in the third quarter compared to the second quarter as a result of seasonally higher harvest volumes and based on these price assumptions.

Turning to Wood Products. We expect lumber shipments to be 190 million board feet in the third quarter. Our forecast, which we developed early in July, anticipated that the countervailing duty would not be collected for the month of September, leading to buying behavior that would cause lumber prices to be off about 5% to 10% in the third quarter compared to the second quarter. However, the recent fire events in British Columbia, low field inventories and the stronger Canadian dollar all introduced uncertainty and volatility to our outlook, which may be conservative. Wood Products earnings would be about $15 million at these volumes and prices. This is a strong result and would be the segment's second highest quarterly earnings in the last 3 years.

For Real Estate, we estimate that we will sell about 2,500 acres at an average price of $1,400 per acre, and that land basis in the quarter will be 15% to 20% of revenue. We expect that corporate expenses will be about $10 million, and that interest expense will be $7 million in the third quarter. We estimate an annual tax rate of 15% to 20% for the full year of 2017. The consolidated tax rate should be 10% to 15% in the third quarter as seasonally strong Resource earnings are not taxed. Overall, we're very optimistic about the third quarter and the year, and expect earnings to be higher in the third quarter compared to the second quarter. Our harvest volumes will hit a seasonal peak in the third quarter. We also expect lumber prices to remain relatively strong, which benefits our Wood Products and northern Resource businesses.

That concludes our prepared remarks. Karen, I would now like to open the call up to Q&A.

(Operator Instructions) And your first question comes from the line of George Staphos of Bank of America.

This is actually John Babcock on the line for George. First question I just had for you was, with the continuing improvement in the lumber market and obviously like the peak earnings you had during the quarter, I was wondering if you could remind us of the various factors that you guys consider when thinking about the dividend.

John, this is Mike. Well, certainly the recent strength that we've had over the last few quarters in the lumber market has helped build our cash balance, which continues to grow. We have long said, for some time, that we would look for improvement in Southern Yellow Pines sawlog prices to be the catalyst for another dividend increase. The last one we did was almost 3 years ago. But, I think as our cash balance grows and time goes by, with housing starts continuing to improve and other fundamentals improving, I think there's kind of more likelihood that we will step up the dividend in advance of an increase in Southern Yellow Pines sawlog prices because we have really the financial comfort to bridge, if you will, to get through a period to support a higher dividend until those log prices do move up in the South. Also, our northern segment Resource business has been significantly stronger than we anticipated, and fundamentally, we want to underpin the dividend with earnings from our timber business, not our Wood Products business. So that gives us more confidence.

And then with regards to the lumber business again, I was just wondering if you could talk about whether this kind of 190 million board feet level of production or shipments rather is sustainable and ultimately what you're general operating rates are at this point?

Yes. So this is Eric. Yes, our -- we do think that 190 million feet number is sustainable. And in fact, as we've demonstrated over the past several years, we're always looking at ways to increase capacity, to increase throughput at our mills. We have several projects that we're contemplating for later this year or next year and beyond that will continue to drive those production volumes higher. So I wouldn't expect us to stop at this 190 million foot level that we've reached here in Q2 and we expect to get in Q3. We expect to drive that number higher longer term.

And could you talk a little bit about those potential projects that could raise the productivity?

Well, it -- there's a variety of projects at a number of different mills. I mean, one simple one that we're looking at, just to give you an example, is out at our St. Maries sawmill, we are currently kiln constrained. The team has done a fantastic job driving productivity and throughput at the mill, and now we find ourselves constrained with our drying capabilities. And so we are considering a project at that mill for next year that will drive volume higher there, something like, who knows, 20 million, 30 million feet of incremental production. That just gives you a sense for the kind of stuff we're working on.

Okay. And on that note, I was wondering if you could talk about generally the industry as a whole? I mean, have you seen more interest in adding capacity in the lumber market with the trade -- with the duties that went in place in the U.S.?

I don't think that duties are catalysts to added capacity in any way. I think the fundamentals in the lumber business have been good for a while. The margins, particularly in the South, have been really strong for the last few years. The capacity additions that we see largely are in the U.S. South, and there are a number of those in our wood baskets. And we've seen a couple of new projects, a brand-new mill, which has just started in Shelton, Washington on the West Coast. But I don't think the duties have anything to do with the capacity additions. I think it's more a function of people looking at where we're at in the housing side. And they think there's going to be reasonable returns in the business, and so they add capacity.

And your next question comes from the line of Gail Glazerman of Roe Equity Research.

I guess, just to start. Can you give me a little bit more color on the small acquisitions you think you did, and then just broadly speaking, what you're seeing on the land markets for industrial timberland?

Yes, Gail. So there continues to be ample amounts of capital pursuing acquisitions in the timberland sector. We've now got 3 small transactions under contract or near contract. And they are all relatively small, as Mike said. I would tell you that we bought them at discount rates in the 5.5% to 10% kind of range. And they add volume to our outlook, and they're bought at attractive prices. So we're happy with those acquisitions, and we continue to kick the tires on others as well.

Okay. And can you just talk in a little bit more detail about the price gaps and trends that has developed across various lumber grades? It seems a bit more extreme than normal. And any sign that that's starting to flow to Southern Yellow Pine?

Yes, Gail. So historically, Southern Yellow Pine is traded at, who knows, a $50 premium to SPF lumber. And of course, depending upon what is happening in local markets, this premium could be above or below that premium. The imposition of duties that we saw in Q2 and their subsequent pass-through to buyers, followed by recent fire-related curtailments in British Columbia, have caused SPF 2 x 4 to now rise to a premium to Southern Yellow Pine 2 x 4. We expect this to reverse as we move through the year. And especially when we get to Q4, when markets that prefer Southern Yellow Pine, like the treating market or when southern U.S. housing really kicks into gear and you see slower construction in the northern markets, we expect that pricing trend to reverse.

Okay. And then just broadly speaking, any anecdotal signs on how the markets are adjusting to the duties? And just do you think -- and I guess we're pushing August, if you think that come September, there wouldn't be duties in place, are you starting to see producers kind of hold back volume in anticipation of being able to fill without duties?

Well, as we said in our prepared remarks, Gail, we expected to see some weakness in the lumber market in September when there was a -- when the CVD duty fell off for a 4-month period of time or so until Congress makes the final determination. We expected that to happen, but I think the recent wildfires, supply shortages, strengthening of the Canadian dollar, I think a lot of distributors got caught (inaudible). We have not seen evidence that people are backing off buying their habits (inaudible) September. So as I was saying, we have not seen market behavior that would indicate that people have backed off yet. But as we get closer to the end of the August and the expiration of the CVD duties, or the suspension of them for a few months, we'll have an update in a few weeks. But so far, (inaudible)

Okay. And just in general, what are you seeing in flow of Canadian wood in the U.S.? I guess, year-to-date, the data tends to be a bit lagged. But any insights there?

Yes, Gail. This is Eric. I think it has slowed a little bit. We're hearing things are picking up over in China so I think there has been a little bit of a slowdown of Canadian wood coming to the U.S. But I don't know if that's related to this duty situation coming up in the third quarter.

And your next question comes from the line of Collin Mings of Raymond James.

Just following up on John's question. I just -- should we think about really, call it, 760 million board feet as just kind of a minimum annual production run rate going forward? I think in the past, it's obviously to the, response to your earlier question, that stepped up over time. I think the most recent number you guys have kind of thrown out, there was maybe around 720 million board feet. But should we think about 760 million as kind of the minimum run rate and then potential upside given from the projects you're looking at?

Yes. So Collin, so production does vary by quarter. There is some seasonality to the Wood Products business. When you get into those colder months in those colder climates, our Lake States known in particular, logs get brittle and productivity does slow down the mill. So you will see Q1 and Q4 levels a little bit lower than the 190-some-million feet that we hit here in Q2 and we expect to get in Q3. I think the way to think of it is that, for the year, we'll probably finish somewhere between 725 million and 730 million feet. And as I've mentioned, we're working on stuff for projects for next year that will expand capacity further. I'm hopeful that we can get another 20 million feet next year. And so you can think of modeling 725 million or 730 million for this year and potentially up to 750 million for next year.

Okay, that's very helpful. Going back to the prepared remarks, just you touched on a little bit as far as the swap, the gain recognized in the quarter. But can you maybe expand on that a little bit more? And then, to what extent might you look at other options to lock in the favorable pricing environment?

Yes. So Collin, we have had a relationship with Koch Industries now for many years regarding these lumber hedges. And I think the last one we did was probably 2 or 3 years ago, and we're net positive with those hedges. So back in April, and we're always getting proposals from Koch, by the way, but most of them, we quickly reject because they're prices that are typically below where the market is trading at. Well, in April, they gave us a proposal for Southern Yellow Pine 2 x 6 at a price of $425 per 1,000. And at the time, lumber -- Southern Yellow Pine 2 x 6 was trading below that. As I recall, it was around $415, maybe something like that. And I think we looked at it and we said, "gee, this looks a little like a pretty high price. Things are looking pretty toppy here." And so executing this hedge effectively would amount to us committing roughly 10% of the company's volume at that price, which we considered to be pretty high. We weren't, obviously, making a bet on all the company's volume, just is the 10% from that one product, that one species. And I wouldn't say we got lucky. I think we were right in our analysis that lumber prices were getting toppy. And in fact, after we executed the trade, Southern Yellow Pine rolled over and rolled over all the way down to, I don't know, $340, $345, something like that. So the accounting rules that you book the gain, I'll let Jerry speak to that if you have questions on that, but accounting rules that you book the gain, even if you're not into the period where there's cash payments going back and forth. So anyway, so now that we've booked this $3.3 million gain, if Southern Yellow pine does rally, we'll have to reverse some of that gain. But we're pretty happy with that trade right now, obviously.

Okay. And then I guess, your appetite for doing structures like that, going forward, you just said you kind of evaluate it on a one-by-one basis?

Yes, absolutely. It's always one-by-one. We have to think about the volume in the contract because there's a lot of paperwork involved with this. There's a lot of accounting. We have to get board approval so we won't do it in small volumes and we won't do it unless we think, obviously, the price offered is pretty attractive.

Okay. And then, maybe just, Jerry, just along those lines, given where pricing is currently, what would be kind of the mark-to-market adjustment here thus far in 3Q?

Yes. So maybe the best way to think about that, Collin, is Eric talked about the price we locked in was $425 per thousand. The average forward curve price at the time we marked, that was about $330 per thousand. So as Southern Yellow Pine moves up, and again, the other key metric is the volume is about 6 million feet per month. So in terms of a move from that $330 that I just threw out, that would be away kind of calibrate what the P&L adjustment might be.

Okay. Okay, that's helpful. And I did want to go back to just the upside in the Resource results for the quarter. And I know we've discussed this really at length in the past and on prior calls. But just maybe just remind us a little bit as far as the indexing in the northern segment and Idaho, just given that the upside there really seemed to be more than I know that we were expecting, and even it sounds like based on your initial forecast you guys put out there in April for the quarter, there was upside relative to that. So maybe just how much of that was driven by the specific -- kind of the specific species and grade that you guys track for index? And how much of that was driven by the cedar pricing? And any additional color there just to kind of give us a sense of how to think about that going forward would be helpful.

Yes. So Collin, it was a great quarter for our northern Resource business. We saw strong pricing gains across the spectrum. As you may recall, 70% of our northern sawlogs are indexed to the price of the WWPA lumber index. So it's not a Random Lengths index. It's the WWPA's. So it's a western species, a western dimension. In the third quarter, we did see some pricing gains from cedar. But importantly, we saw a 29% increase on those other mixed sawlogs driven by those higher lumber prices. So even though cedar was an important component to the overall price increase, we saw price increases on mixed sawlogs is well. So really, it was driven by a combination of factors, not just cedar.

Okay. That's very helpful. One last one, and I'll turn it over. Just curious, given broadly speaking, there have been some concerns to start the year about pulpwood pricing in the U.S. South, maybe just kind of what's your take on that? Obviously, some potential on the kind of outskirts, I think some of your markets, some mill restarts. Potentially, one OSB restart there. Just kind of what are you seeing on the pulpwood side?

Yes. So pulpwood pricing has been a challenge in the U.S. South, particularly pine pulpwood. There's been a lot of the silviculture investments in the U.S. South over the past couple of decades, and that's resulted in a forest that grows pretty fast and needs thinning. And so pulpwood has been under pressure. Now we're encouraged by the increased consumption of pulpwood in the U.S. South. As I recall, consumption was about 110 million tons per year across the U.S. South back in '06, and we're now looking at about 116 million tons per year of consumption across the U.S. South. Now as you pointed out in your note, Norbord is starting up a new -- an OSB mill in Alabama, Eastern Alabama. A little bit outside of our wood basket, but as you know, these wood baskets tend to overlap, and what happens in one can work its way over into an adjacent wood basket. So we're encouraged by all the capacity that's going in, in the U.S. South. And at some point in time, we will see prices reverse, both for pulpwood and for sawlogs in the South, but it looks like it's not going to happen this year.

Your next question comes from the line of Ketan Mamtora of BMO Capital Markets.

First, I just want to go back to the lumber dispute. There was a lot of discussion over the past couple of weeks that a settlement was likely. Any thoughts on that, what you guys are hearing? And then if we don't get a settlement over the next few weeks, do you think lumber gets rolled into the broader NAFTA negotiation and that could mean it could take a pretty long time to get the settlement?

Well, there had been rumors that Secretary Ross and his Canadian counterpart had made some kind of a handshake deal on the Canadian lumber settlement. But I don't think that there's any -- no substantiation to those rumors that we're aware of and we're not aware of an agreement. As far as we know, the 2 governments continue to discuss the lumber trade case separate and apart from NAFTA, although it's our understanding that the administration would like to get this resolved before January of 2018 and kind of the commencement of NAFTA discussions. I have no idea if lumber will get rolled into NAFTA. But I guess we are as hopeful that we can see a solution and a quota-based solution over the next few months, I'd also go back to 2006 and the last trade case. I think it took 5 years from the imposition of duties until -- in 2001 until the agreement was signed in '06. So it's not necessarily going to be quick.

All right, that's helpful. And just switching gears to M&A. I know you talked about bolt-ons. But can you talk at a high level, your appetite for kind of larger acquisitions in timber and willingness to issue equity for the right kind of a deal?

Sure. We're always trying to find significant-sized acquisitions that are around our geographic footprint in the central U.S. South or the inland West that complement our timberlands and that we can execute with synergies and make sense. There are a limited number of those. They've been expensive. And Southern Yellow Pine Timberland trades at still quite lofty prices, so it's hard to find things that we can execute that add to shareholder value. We have no interest getting in bigger just for the sake of getting bigger. We have to find acquisitions that can help improve shareholder value. So -- and I think the same thing would take the financing of the transaction. First thing is finding a deal that makes sense and is priced right, and second is, how do you finance it. And the issuance of equity would depend on where our stock trades at the time and our access to debt markets and the overall size of the transaction.

Got it. That's helpful. And then just one last one. I want to go back to dividend. And you mentioned that you might look at increasing dividend before the real turn in Southern sawlog pricing. Would you be able to provide any additional parameters? Or would it be fair to say that maybe there's kind of a core dividend, which is linked more to the resources income? And then a variable component which moves with Wood Products income or EBITDA?

No. I think we continue to look at the cash flow stream from the whole company and all of our business segments and how we think those are going to unfold over time. And as long as we can see a sustainable path to cash flow from the company, I think that would prompt the board to increase the dividend and, certainly, our cash balance, if it continues to hold gives us a some cushion, if you will, until we see the improvement in overall markets, especially in the South. But we'll have to wait until -- We typically review that in the fourth quarter, Ketan, and I don't think that will be any different this year. So I think we'll cover that then.

(Operator Instructions) Your next question comes from the line of Chip Dillon of Vertical Research.

I just want to make sure we handle this lumber swap correctly. It sounds like it's a smart thing to do from time to time. And I guess, the first question is, you mentioned that there's about a given amount of deliveries you have to make each month. I think, did you say 6 million square board feet. How many months into the future does this contract -- do you have to make deliveries against it?

Yes. So Chip, this is Jerry. In terms of the volume that we've locked in price, it is 36 million feet in total for the second half of the year. And it covers 6 million feet per month starting in July. So every month, we will cash settle 6 million feet, and that'll slowly amortize when we get to the end of the year.

And just to be clear, Chip, we're not actually delivering to them against that contract. We're producing and selling lumber to our customers like we always have. This was purely a wager with Koch. Okay.

Got you. But you've locked in the $425, is what you're saying, in essence?

Correct.

And so you might deliver to another customer at a lower price but they have to make up the difference?

Exactly.

If it's lower. And if it's higher, you have to make up the difference. I see. And so this will -- my last question, I'm starting to get into the weeds. Let's just say 3 months from now, or more importantly in the fourth quarter, would the bookkeeping adjustments or the non-cash adjustments be based on what's left to be delivered on the contract? Or would it be based on all 36 million feet, let's say, if we're looking at the fourth quarter?

So Chip, this is Jerry again. It would be based on what's remaining to be delivered. So once we cash settle on July, for example, July is done. Close the books on that. And any remaining adjustments would only be August through the end of the year.

I got you. And are you going to -- and last point is, are you going to identify what the amounts are that you're marking to market these next 2 quarters so we can figure that out?

Absolutely. In fact, Chip, we -- attached to the press release, you can see it, but there's a separate row in our income statement where we highlight the swaps specifically, and we'll continue to do that through the remainder of the contract period.

And if -- let's just say the prices stayed exactly where they were on the last day of June, I guess this is what you mark it by, then there would be no more adjustments, and the 3.2 million or whatever is kind of yours to keep. Is that a fair way to look at it?

You're absolutely correct.

Okay. Okay, that's very helpful. And then as you think about the -- I know couple of years ago -- or excuse me, 18 months ago, you might remember those days when the stock was $25 and you all had a big sort of arbitrage buyback plan. I don't sense you guys have bought back stock much, and I didn't check the statement closely this morning, but are you -- what is your thought about buying back stock here versus buying land?

Yes. So Chip, this is Jerry again. The last time we repurchased stock was about a year ago, right after we put the authorization in place and we bought 169,000 shares for about $6 million. And we've bought no shares since that point in time. And I think as you alluded to in your comments or your question, our stock price has had a really nice run. And quite frankly, repurchasing stock has become much less attractive. Our priority right now would be to find bolt-on acquisitions, as both Mike and Eric have has commented, that have attractive returns. So that's where we would spend that dollar as opposed to repurchasing our stock at this point.

And this seems like, as in the past, that even with the great results in Wood Products, that's not really where you're looking. Or would you actually look to be -- to add more lumber-making capacity?

No. We will certainly look at these incremental projects at existing facilities that Eric's alluded to that -- each of those costs $3 million or $5 million to add some capacity or improve efficiency, but we are not pursuing standalone manufacturing facilities to add to our portfolio. If they were coupled with timberland and had a timberland component that was integrated with a Wood Products manufacturing facility, whether it was lumber or plywood or something else, we'd certainly look at that.

Your next question comes from the line of Paul Quinn of RBC Capital Markets.

If we can spend a couple of minutes on the U.S. South here. Just trying to understand what's going on with log markets, both on the sawlog side as well as the pulp log side. So it's look it looks like you're -- you described that sawlog price being down 2%. Maybe you could give us a sort of an idea as to how that price realization changed between Arkansas and Alabama and Mississippi? And then also, just with the price being down, it looks like it's a factor of weather/mix with less hardwood in there. But generally, when you -- when we've seen wet weather in the U.S. South, we've always seen a rise in price so I'm just trying to understand that as well.

Yes. So Paul, this is Eric. I'll try to address the first part of your question, which is what happened to pine prices in the South. Yes, our prices did decline about 2% from quarter 1 to quarter 2. Pine prices were either flat to modestly up in our 3 different markets: Flat in Alabama, up 0.3% in Arkansas and up 2% in Mississippi. What caused that decline into sawlog pricing from Q1 to Q2 was really driven by hardwood mix. It went from 6% in Q1 to just 3% in Q2. That's a seasonally low quarter for us for hardwood mix. And that's really what drove that decline from Q1 to Q2.

And to your point about wet weather typically causing tension in log markets, I can certainly agree with that. I don't know if it didn't last long enough this time or we were too close to the period when it was going to dry out or people just took advantage of markets and supply was plentiful, but we did not see -- due to a pretty wet quarter at least in our operating area in 2Q, we just didn't see tension in the market due to the weather like we'd expect.

Okay. And just flipping over to pulp. We've had pretty strong pulp markets here for the last 6, 9 months, and container mill is rocking along as well. And just trying to understand why that pulp price seems to continue to track lower despite, I would say, the robust demand. Is that a function of increased lumber production in the U.S. South, i.e. chip production, and therefore, the pulp logs are having to compete with residual chips?

Yes. I think, Paul, certainly a component is increased production coming out of lumber mills. But I think it also is a part of this function of the increasing silviculture investment made in the U.S. South, 10, 20 years ago. Those trees are now getting to an age where they need thinning, and that's the smart silviculture treatment. And therefore, those logs need to find a home. So certainly, the extra lumber production is driving increased residuals, but I think the silviculture is an important component.

You have some discretion with a plantation as to when you elect to clear cut it for final harvest at age 25 or 30 or whatever. But you don't have flexibility on the time that it needs to be thinned. You have to do it. And so the wood comes to the market.

Okay. Then just overall, we're seeing in the South here, a sort of the continued disappointment on the sawlog side. It all looks like supply is going to be plentiful on the pulp log side. Just wondering why timberland prices in the U.S. South continue to trade up where they're trading in and why you wouldn't see a leg-down in those given the rising interest rate environment?

Well, there's a lot of -- that timberland pricing in the U.S. South is justified by a forward price curve that anticipates prices moving higher. What would drive those prices higher? Obviously, increased consumption of sawlogs. Where are we going to get that increased consumption? Increased steel going in the U.S. South. And we've talked about on prior calls, but there's a something like 12 million tons of incremental capacity that's going into our 3 states: Arkansas, Alabama and Mississippi, a total of, I don't know, 15, 16 different projects. So eventually, that forward price curve will be realized. It's just a question of when, I think, not if.

So it sounds like that slope of the curve looks like 50% grade to be able to get the current price down there. Maybe I'll just ask you one last question on the timberland transactions that you've got under contract, these 3 that you talked about, how material is that in terms of dollars amount? Is that like less than $10 million total?

Yes, it's less than $10 million, Paul. These are not big transactions, but they're accretive. They fit nicely with our existing operations. They're great fit. They're done at value-creating price levels. They're logical for us to do. And I'm glad that we're nimble enough to be able to consummate small deals like this.

But it's not material enough to affect your cash balance?

No.

And your next question comes from the line of Mark Weintraub of Buckingham Research.

Just wanted to -- first, just following up on, Eric, you mentioned 12 million tons coming in, in your U.S. southern geographies of the map. Was that saw timber and pulpwood? Or was that just for saw timber?

That's for both, Mark. It's roughly 5 million of sawlog and 7 million of pulpwood.

Okay. And you -- and what -- off of what base? Just trying to get a sense as to what kind of percentage increase that would represent on the saw timber side in particular?

Well, I can give you one statistic that I know, which is that in Arkansas, pre-downturn, 12 million tons per year of sawlogs were being consumed. That dropped to a low of 6 million tons a year. And now that's back up to 7 million. And I would tell you that these projects represent about 2 million tons of incremental sawlog consumption in that state. So we take it from 7 million today to 9 million, more or less, compared to 12 million, which is where we were at pre-recession.

Right. So hopefully, more to come still. And I take it though, and an earlier question had been asked to this regard. Is there anything specific that would be -- for instance, there's obviously a couple of plywood facilities that went down. Anything that seems to be getting closer to fruition that might give you greater confidence on being able to estimate the timing of when that tension in the South can lead to better pricing?

It really hard to predict, Mark. There's no one project you can point to that's going to make or break the wood basket. It's a cumulative effect of those projects. So to give you a sense of it, some of these that I'm looking at, I've got a list in front of me, some of them are incremental production coming out of a mill that's just 200,000 tons of incremental consumption per year. You have that on the low end and then on the high end, you've got Sun Paper's mill, which -- we're still optimistic that's going to go in down in Arkansas and that's 3 million tons per year. Certainly, that would move the needle. But most of these are 500,000, 600,000, 700,000, 800,000 tons a year that individually aren't going to probably move the needle on pricing in a wood basket. But cumulatively, they will.

Right. I guess, I'm just trying to think through as you pointed out making terrific money in the lumber business and those businesses tied to it. And that you could use the cash that you've built on your balance sheet to help bridge a period of time where you maybe want to increase the dividend in front of southern timber pricing actually improving. I'm just trying to get a sense as to how you can get that comfort or clarity on when you think that southern timber can indeed -- can move? Or do you -- are you willing to -- recognizing that there is a lot of uncertainty move on the dividend with an expectation that it's reasonable that it could be better within 2 years, say, and then if it isn't, you'd have to adjust accordingly. Is that the way to think about how you would likely approach it?

We're building a long bridge. So I think with the cash balances that we have on hand, and I think our optimism about the northern Resource business and the Wood Products business that I think it's reasonable that a modest increase to the dividend certainly is not going to eat into that and give us any discomfort that we'd have to turn around and change the dividend in a couple of years time. If that was the case, I don't think the board would move ahead.

Okay. And just curious, from a financial leverage perspective, where your business is now, are the debt levels that you're carrying, are those roughly where you want them to be? Would you take it down some? Or would you -- where would your thinking on that score be?

Yes. So Mark, this is Jerry. I think where we're at in terms of leverage, EBITDA base is about 3.3x. So that's very comfortable, and I think down in the kind of investment-grade range, and that's based on trailing 12-month EBITDA. So I think debt levels are certainly very comfortable. We have a lot of financial flexibility with the untapped revolver. But having said that, like I said we have some high interest rate -- higher interest rate loans that are coming due. We have a strong cash balance. So I think in the near term, our anticipation, we'd continue to pay maturities as they come due, at least for the next 18 months or so.

Okay. And then lastly, so along with the handshake there, rumored, related to the softwood lumber agreement, there were also some numbers thrown out there on potential quota levels of 27%, 28%. Do those types of levels fit the type of -- Mike, you had originally said how quotas make the most sense from your perspective. Is that the type of level that makes sense? Because it -- or any color you can provide there?

Well, to be clear, I think we -- there was rumors of a handshake, and we have no way to confirm that. I -- that there was or wasn't. We don't think there was any understanding, but we really don't know. Yes, the U.S. -- the softwood lumber coalition supports a quota-based system that has quota levels that kind -- are as high as 28%. It may have to step down to that. But certainly, in our perspective, 28% as a final settlement point would kind be at the high end what we would hope to be achieved. Hopefully, it's lower than that. But that's a framework for a discussion, certainly.

And your last question comes from the line of Steve Chercover of Davidson.

A bit late in the call, but just a couple of questions. In Q2, despite the duty, the Canadians were happy to ship to the U.S. So why is it your expectation that they would pull back? Or I guess the prices would come down because they'll be full throttle. I mean, aren't they already full throttle on their volumes?

Well, I don't know for sure, Steve. I think that, certainly, with the CBD, some companies have more punitive CBDs than others. And I would expect that the behavior by different companies could change depending on their CBD level. But I think a rational person would look at the market and say, if duties of roughly 20% are going to go away starting on August 28, wouldn't you expect people to ship more lumber after August 28 than before? And I think that's our thinking that drove us to believe that there'd be downward pressure on lumber prices when the CBD expires.

Yes. I mean, I agree with you with respect of the direction of the lumber prices. I guess, just from a volume perspective, I think it's still pretty lucrative. And then switching gears a wee bit. For the bolt-on transactions, did you say that the discount rates were 5% to 10%. Could you tighten that up a wee bit?

No, because it's -- there's a couple of different transactions here, Steve. And one is at the low end at 5.5%. And I'm looking at one at the high end that's 10%. So it's just range.

Got it. But would that be up even at the low end, 100 or 200 basis points over the last couple of years, and is that representative of -- if you could find a some bigger deals, would that be the appropriate discount rate?

I still think if it was a larger transaction in the U.S. South, it would still be down in that, who knows, 5.5% range, yes. And I think the survey data that I've seen for Idaho is that it's slightly higher. It's maybe 6%, I think. Sizemore & Sizemore puts out a survey, and it's a little bit higher in Idaho but it's pretty low as well.

And there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Very good. Thanks, Karen. And I'd like to thank everybody for your time and attention on the call this morning, and look forward to catching up as we move forward.

And this does conclude today's conference call. All participants may now disconnect.