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Edited Transcript of PCH earnings conference call or presentation 28-Apr-20 4:00pm GMT

Q1 2020 PotlatchDeltic Corp Earnings Call

Spokane May 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Potlatchdeltic Corp earnings conference call or presentation Tuesday, April 28, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric J. Cremers

PotlatchDeltic Corporation - President, COO & Director

* Jerald W. Richards

PotlatchDeltic Corporation - VP & CFO

* Michael J. Covey

PotlatchDeltic Corporation - Chairman & CEO

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Conference Call Participants

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* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* John Plimpton Babcock

BofA Merrill Lynch, Research Division - Associate

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

* Mark Adam Weintraub

Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst

* Paul C. Quinn

RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Deltic First Quarter 2020 Conference Call. (Operator Instructions) Thank you.

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.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [2]

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Good morning, and welcome to Potlatch Deltic's First Quarter 2020 Earnings Conference Call. Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer, are also on the line. The 3 of us are dialing in separately.

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.potlatchdeltic.com.

I'll now turn the call over to Mike for some comments, and then I will cover our first quarter results and our outlook.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [3]

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Thank you, Jerry. We had very strong results in the first quarter, which was especially important given the slowdown in business activity, which began mid-March due to the COVID pandemic. It was encouraging that our $48 million in EBITDDA in Q1 came from strong results in each of our 3 businesses. In particular, wood products operating results improved significantly compared to Q4 2019. All our attention is now forward-looking and is focused on adjusting business plans almost weekly to contend with market conditions, customer needs and the health and safety of our workforce.

I will spend a few minutes explaining where the company stands today, both operationally and financially. I also want to take some time to outline our response to the COVID pandemic and how we continue to protect the health and safety of our employees as our top priority. Finally, I will take -- make a few comments about how our operations and financial position may change going forward as progress to defeat the virus continues and American returns to work. First, it is important to understand that we have been deemed an essential business in every state that issued stay home orders, and we plan to operate each of our businesses at full capacity where market conditions allow.

Today, we are operating all of our sawmills on a 2-shift basis and adding overtime at some locations, where we have good demand and positive margins. On April 20, we curtailed operations at our plywood plant in St. Maries, Idaho, the specialty and industrial-grade plywood product we manufacture is used in the boat, recreational vehicle and furniture industries and stay home orders forced many of our customers to shut down in April. We expect many of these customers to return to work in early May, although there have been no definitive announcements. We will restart our plywood mill when we have enough orders, which we anticipate will be the week of May 11 at the earliest.

Our timberland business continues to operate at nearly full capacity, with numerous mill closures in the south due to the COVID pandemic and downtime related to a powerful string of tornadoes on April 12, we have scaled back some of our sawlog and pulpwood deliveries for the second quarter and do not anticipate making up the volume in the back half of the year. Fortunately, we can defer harvest and capture the biological growth of the trees in the future. Sawlog pricing is relatively flat quarter-over-quarter across all our southern markets, with little change expected from Q1 price levels.

We have been in spring breakup mode in Idaho since mid-February, and we'll -- logging will commence as planned on May 4. All of our Idaho customers are operating and are expected to accept log deliveries as planned in Q2. We continue to expect northern harvest volumes to total about 1.8 million tons for the year, and we expect log prices to be relatively stable and similar to last year. As you know, about 70% of our sawlog deliveries are pegged to lumber prices through an indexing formula. A downturn in the economy most certainly will impact our Chenal Valley real estate development business in Little Rock. Although we do not expect any commercial real estate sales in 2020, we still expect to sell over 100 residential lots this year compared to 142 lots in 2019. Our rural recreational land sales in Arkansas and Minnesota should remain on track for the year, which is consistent with our experience during the great financial crisis. Early feedback this quarter from our real estate brokers indicates that interest in rural land remains high.

At the end of the first quarter, we had a cash balance of $79 million and $460 million of liquidity, including an undrawn revolver. During Q1, we returned $39 million to shareholders in the form of dividends and share repurchases. During Q1, we purchased $12 million of company stock at an average price of $30.79 per share. We have no concerns regarding our ability to fund the dividend. Having said that, share repurchases may be a more attractive way to return cash to shareholders when our stock trades at a deep discount to fair value.

Now let's turn for a minute to how we are managing the health and safety challenges of operating our businesses at full capacity during the pandemic. First, our crews and teams have been able to work safely to date with no COVID exposure outages. We have plans and provisions in place in the event we have COVID exposure in the workplace. We have increased the frequency of cleaning, added physical distancing where it's practicable and are screening visitors and vendors. We have banned all travel and group meetings, and everyone who can work from home is doing so. We had one of our best quarters on record for safety in the wood products division, which was encouraging in the first quarter.

Looking forward, I believe it's a good reminder that 80% of our asset value lies in our 1.9 million acres of timberland, where pricing and volume are quite stable. We have modestly scaled back harvest plans due to weaker demand, but the trees will continue to grow and be available for harvest in 2021 and beyond.

Wood products pricing remains the single largest wildcard in forecasting our expected results. Demand has remained surprisingly strong, especially in repair and remodel markets. With many people working from home or staying home, home improvement projects requiring lumber are driving increased demand. Having said that, it was so great to see March housing starts tumble to 1.2 million starts seasonally, a 22% drop in total starts and a 17% decline in single family starts. We have no doubt that the April figures will be even lower. However, much of the industry has curtailed capacity with announced curtailments in the range of 25% or approximately 15 billion board feet.

We are scrubbing business plans in each of our divisions to find opportunities to reduce costs and capital expenditures for the remainder of 2020. We have already identified $7 million that can be saved or deferred. Reduced diesel fuel costs will contribute significantly to our cost savings effort as logging accelerates in the third quarter. Capital allocation remains a key focus for the management team and the Board as we manage through this unprecedented period.

I'll now turn it back over to Jerry to discuss the quarter and our outlook.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [4]

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Thank you, Mike. On Page 4 of the slides, the stronger-than-expected start to 2020 that Mike mentioned is reflected by total first quarter adjusted EBITDDA of $48 million. Lumber price realizations and harvest volumes both exceeded our plan for the quarter. I'll now review each of our operating segments and provide more color on the first quarter results.

Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDDA was $35 million in the first quarter compared to $38 million in the fourth quarter. We harvested 434,000 tons of sawlogs in the north in the first quarter. While this is down seasonally from the 473,000 tons that we harvested in the fourth quarter, it is 16% higher than the first quarter of 2019.

Northern sawlog prices were 1% lower on a per ton basis in the first quarter compared to the fourth quarter. The negative effect of a normal seasonal increase in the density of logs was mostly offset by higher index prices. In the south, our harvest volume was relatively flat quarter-over-quarter at about 1 million tons. Our southern sawlog prices were 2% lower in the first quarter compared to the fourth quarter. The decline was due to a seasonally lower proportion of hardwood sawlogs in the mix. Pine sawlog prices were flat quarter-over-quarter.

Turning to wood products on Slides 8 and 9. Adjusted EBITDDA of $13 million in the first quarter was $11 million higher than the fourth quarter. Our average lumber price realization increased 8% from $366 per thousand board feet in the fourth quarter to $396 per thousand board feet in the first quarter. Our mills operated well in the quarter. Lumber shipments of 283 million board feet were higher than we expected despite removing overtime production hours in the second half of March. Our mills ended the quarter with lower than normal lumber inventories.

Moving to real estate on Slides 10 and 11. The segment's adjusted EBITDDA was $7 million in the first quarter compared to $14 million in the fourth quarter. An increase in rural acres sold partially offset seasonally lower Chenal Valley lot sales, and there were no commercial land sales in the first quarter.

Shifting to financial items, which are summarized on Slide 12. Our total liquidity remains strong at nearly $460 million. This amount includes cash of $79 million and availability on our revolver, which remains undrawn. As Mike mentioned, we spent $12 million to repurchase 401,000 shares in the first quarter for an average of $30.79 per share. In March, we locked in future debt refinance rates at historically low levels using forward-starting interest rate swaps. The swaps cover all Farm Credit term loans maturing through January '29 -- 2029, totaling $654 million.

Interest rate savings will be staggered because the lower rates become effective when each existing debt tranche is refinanced at its maturity. On a weighted average basis, the swaps will reduce the cost of these term loans by approximately 150 basis points net of patronage and income taxes. The $46 million scheduled to mature in December 2020 is the first of the planned debt refinances. Annual interest expense will decline approximately $900,000 on this debt beginning in December.

As announced in March, we transferred $101 million of pension obligations to New York Life. The transaction was funded with pension plan assets, maintains financially secure benefits for our pension plan participants and reduces Potlatch Deltic's pension funding risk. We recognized a noncash pension settlement charge of $32 million after taxes.

Capital expenditures were $10 million in the first quarter. We expect our capital expenditures will be $40 million to $44 million in 2020. Note that these amounts include real estate development expenditures, which are included in cash from operations in our cash flow statement.

We have revised our 2020 outlook, which is presented on Slide 13 to reflect our current best estimate of the shift in business conditions caused by COVID-19. We expect to harvest 5.5 million to 5.8 million tons in our timberlands segment in 2020. The decline relative to our annual plan of approximately 6 million tons is due to announced mill curtailments in the south. Harvest volumes in the north are planned to be seasonally lower in the second quarter compared to the first quarter due to spring breakup. We expect northern sawlog prices to decrease modestly in the second quarter due primarily to seasonally heavier logs and lower index prices.

Harvest volumes in the south in the second quarter are expected to decline sequentially due to mill curtailments and should approximate second quarter of 2019. We expect southern sawlog prices to be comparable to the first quarter. We have reduced our estimated range of lumbar shipment volume downward to 1.0 billion to 1.1 billion board feet of lumber in 2020. Our average lumber price in April is approximately $20 lower than our first quarter average lumber price. We anticipate lumber prices holding steady for the rest of the quarter and estimate that our average second quarter lumber prices will be approximately 5% lower than the first quarter.

As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDDA for us on an annual basis. We plan to ship 230 million to 240 million board feet of lumber in the second quarter. On a related note, we lost a week of production at our Warren, Arkansas mill in April due to a tornado cause power outage.

Shifting to real estate. We expect to sell 20,000 to 23,000 acres of rural land and 100 to 120 Chenal Valley lots in 2020. Additional real estate details are provided on the slide. Overall, we estimate that second quarter total adjusted EBITDDA will be lower than first quarter primarily due to lower lumber prices and a seasonal decrease in harvest volumes. We believe we are well positioned to weather the current storm and to take advantage of favorable long-term industry fundamentals. So that concludes our prepared remarks.

David, now we'd like to open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of John Babcock with Bank of America Merrill Lynch.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [2]

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Overall, I guess, I just wanted to start out on kind of harvest and how you're thinking about this and also just generally what's going on in the industry. So overall, my question -- I mean it seems like demand has pulled back a fair bit on the wood products side. And you talked about the overall curtailments in the industry. How much pullback are you seeing on the harvest side from that? Obviously, it seems like you guys have pulled back your harvest a little bit. But what are you seeing from some of the other landowners out there?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [3]

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John, this is Mike. And I'll kind of direct traffic here since we're on different lines and let Eric answer that.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [4]

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Yes. John, so I can't speak to what other landowners are doing necessarily, but I would imagine that their situation is comparable to ours. So in our situation, all of our harvest shortfall for the year is going to occur in the south. In our operating area, down south, we've now seen curtailments by many of our customers, including 11 lumber mills, 6 OSB or plywood mills and 3 pulp mills.

So in total, the curtailments in our region amount to about 15,000 tons per week of deliveries. So our assumption is that all of these mills are going to stay down for the entire second quarter, which if you do the math on that, that amounts to about 200,000 tons, and that's split roughly 50% sawlog, 50% pulpwood. We expect there to be a little bit of overhang as we move into Q3. But then as we get into Q4, we expect things to normalize.

So everybody is going to have it a little bit differently depending upon their particular region and log price dynamics and the competitiveness of the mills in their particular region. But I would expect everybody is going to see lower harvest volumes just like us.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [5]

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Okay. And then my next question, because you also talked about seeing pretty decent demand on the repair and remodel side of things. How has demand in that channel trended kind of through April so far? And what are you thinking about where that will go in the coming month or 2?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [6]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [7]

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Yes. So John, you are correct. We are seeing considerable strength right now in R&R. And underlying fundamentals, quite frankly, are still good for the repair and remodel market segment. Overall, R&R represents -- it's the largest segment of lumber demand at about 40% of market demand. And for us, it's about 40% of our business. And of course, as you can imagine, lots of different factors influence R&R activity.

So near term, R&R is holding up maybe because of stimulus checks from the government, people are bored at home looking for something to do. We've also had favorable weather. So there's lots of reasons why near-term R&R is held up. But longer term, we think R&R is going to be okay as well. Home equity in the United States is still relatively high. The median house age in the U.S. is now at record levels at around 40 years. So we think there's lots of reasons why R&R is going to hold up, both in the near term and in the long term.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [8]

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Okay. And then just on overall lumber demand in your markets, I mean, is there a way to quantify how much of a demand decline you've seen in April?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [9]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [10]

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Yes. So John, that's a real tough one to answer because we sell to customers and then they turn around and sell to customers. I would tell you that for us, it varies a lot by mill or by region. The south has held up for us fairly well. We've got decent takeaway there. And of course, all our mills are running there. In the Midwest, our stud mills, it's largely a repair, remodel market for those mills. That business has held up very well as we just got done talking about. Western lumber is the one weak spot that we have in our business right now. Western lumber prices have come down quite a bit. We compete with Canadian SPF in western lumber, and those prices have really come down. So it really varies a lot by market segment.

I think all told, I've heard lumber demand across North America is going to be down roughly 5 billion to 6 billion board feet this year. And if you do the math on housing starts perhaps coming down a little bit, who knows maybe 200,000, going from 1.3 million to 1.1 million, which seems to be a reasonable guess. You get to a shortfall of around 5 billion to 6 billion board feet. And I would expect that, that's spread pretty evenly around the country and by market segment.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [11]

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Okay. And then just last kind of 2 questions before I turn it over, and this is really on capital allocation. I guess first of all, how much is left on the share repurchase authorization that you have out there? And then also, if you could just kind of review your capital allocation priorities right now, that would be great.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [12]

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Jerry, you want to speak to the remainder?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [13]

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Yes, you bet. So cumulatively, under the current share repurchase authorization, we bought $37 million worth of stock, so we have $63 million left.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [14]

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And John, I'll just make some overarching comments about capital allocation. We've tried to be nimble and flexible about this as market conditions change. And certainly, when our timberlands are trading at a deep discount to fair value, and it's -- I don't know, at a $30 to $34 stock price that's somewhere just over $1,000 an acre. Clearly, the best value that we can find in the market is to buy our own trees back through purchasing our own stock rather than an acquisition plan. So at this point, we'd be on the sidelines for acquisitions with a strong preference to purchase our own stock as a way to return value to shareholders.

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Operator [15]

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Your next question comes from the line of Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [16]

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First question for me, just kind of picking up where John left off there on capital allocation. Just to clarify as far as the share repurchases and again, recognizing you're probably restricted at purchasing at the moment. Maybe just elaborate on how you think about share repurchases versus preserving liquidity in the current environment. Again, it sounds like in the prepared remarks, you're pretty committed to the dividend. But just thinking through the focus on liquidity as opposed to buying back more stock?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [17]

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Jerry, do you want to speak to that?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [18]

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Yes, you bet. So in terms of -- so I think you posed the question in a very good way, Collin, which is there's a balance there. Certainly, COVID-19 and the pullback in business creates a bit of uncertainty. So very important that we maintain our strong liquidity position, and it is strong. So that gives us a lot of confidence going forward. And it also provides some flexibility. So to illustrate that confidence, we were able to buy 12 million of shares in the first quarter. So I think as we move forward, we'll continue to try to strike that appropriate balance, but feel like we have a fair bit of flexibility and a lot of confidence in our position.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [19]

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Collin, I just -- Collin, I'll just add to that. The $79 million in cash that we had at the end of the first quarter is more than enough to run the business. We will not borrow money to repurchase our stock. To the extent that we have surplus capital available, and that certainly gives us an opportunity to purchase the stock, if the price is attractive.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [20]

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Got it. Understood. To that point, the incremental cash, to your point, is now more favorable towards repurchases as opposed to acquisitions. But again, striking a balance on liquidity and repurchases going forward. Understood.

Moving on to kind of the prepared remarks around the real estate activity, recognizing that, obviously, the situation is fluid, but you commented on the stability of kind of the rural and recreational land sales. Can you maybe just elaborate a little bit more on that? And have you seen anything fall out of the pipeline yet that kind of following the pandemic?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [21]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [22]

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Collin, so yes, so regarding rural demand, we are seeing surprisingly strong interest in rural demand, and we think there's a couple of different reasons why. First, it's a hard asset. All you have to do is go look at the volatility in the stock market, and you can appreciate how land can hold its value and appreciate that aspect of it. The land that we're selling is relatively low cost. This is rural acreage that it's a relatively affordable price point. Somebody can buy a nice rural track for $80,000, $100,000. The other thing that's worth mentioning is that rural land, by definition, is away from population density. And in this age of coronavirus, that seems to be a pretty desirable thing.

So for Q2, we have already got a lot of our contracts in place. In fact, the vast majority of our acreage or rural acreage that we planned on selling -- we plan on selling in Q2 is already under contract. And thus far, almost all of our contracts continue to close. And I think right now, we've got about 30 deals under contract and 2 have canceled on us. They have been very small deals that have canceled. So net-net, it looks like it's -- the outlook is very, very favorable. So we continue to be optimistic that this business is going to continue to produce for us despite the economic backdrop. And it's also very similar to what we realized back in the great financial crisis. Rural demand, demand for rural acres remain relatively high. So we're very optimistic about our rural business.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [23]

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That's helpful. And then as we think about the timber operation, and again, you discussed in detail a lot of the mill curtailments you've seen. But can you maybe touch on specifically pulpwood pricing and/or pulpwood demand just in your wood baskets in the U.S. south to some of these sawmills curtail production. Presumably, there's less residuals in the marketplace. So thinking through kind of the impact that you're seeing on the pulpwood side would be good to get your perspective.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [24]

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Yes. So as was mentioned earlier, pulpwood prices are pretty stable for us. There's no doubt, there's a little bit of downward pressure there. I'd say maybe $1 or $2 per ton for the full year. And that's true almost regardless of which state you look at. We're seeing slightly lower pulpwood prices. I think what's benefiting pulpwood, even though you have like paper demand is in secular decline, tissue machines are running probably as hard as they possibly can right now. So you've got some offsetting factors there. But net-net, pulpwood prices are relatively stable.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [25]

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Okay. And one last one for me and recognizing that you're going to be probably pretty sensitive on too much detail here, but just -- as you think about the plywood plant in Idaho, is there any way to quantify the financial impact there of the downtime that you've seen so far? Or provide any sort of context around how much it contributed to profitability last year.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [26]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [27]

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Yes. So Collin, as you noted, the plywood business is under some amount of pressure right now, it -- as was mentioned, when we announced that we were curtailing operations there, we said it was going to be for 2 weeks. We've now had -- have to extend that to 3 weeks. It's very hard for us to build an order file to reopen that mill. And what we're finding challenging is that our customers -- again, these are RV manufacturers, boat manufacturers, furniture manufacturers, they are struggling with their own start-up. They don't know if they're going to run one shift. They don't know if they're going to run 2 shifts. They don't know what demand is going to look like when they finally get back up and running again and people start returning to work. So our customers are very tentative to commit to buying much volume from us.

Now that being said, we are starting to build an order file as we get out into May. I won't say that it's a really strong order file. Almost by definition, it's weak, but we are starting to build one. And we're optimistic that as we -- as things gradually get better, as the country continues to heal up from coronavirus, we're optimistic, for example, that people are going to want to get an RV and go vacation away from population dense areas. And maybe that will spur RV demand. But for right now, it's challenging for our plywood business. And we don't -- to get back to your specific question, we don't break out profitability specifically for our industrial plywood business for competitive reasons.

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Operator [28]

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Your next question comes from the line of Steve Chercover with D.A. Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [29]

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So it does sound like you're not really taking downtime in lumber besides what was imposed on you by the tornadoes. And is it because your inventories were lower than you anticipated exiting Q1? Or are you somehow just better situated than the competition?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [30]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [31]

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Yes. So Steve, I think we've mentioned this on prior calls that we regularly benchmark our mills. And generally speaking, we think we have either first or second quartile mills. There's always one that may be an outlier in that mix, but even that one is not a fourth quartile mill. So if you look across the landscape of lumber mills and who has to curtail when demand drops like this and pricing drops like this, it's those mills that are positioned the worst. Those mills that are in the fourth quartile, for example. And as we've seen, 25% to 30% of the capacity come out of the industry, it's going to be those mills that have got the worst cost structures that are going to have to close first.

And frankly, we're in a good enough position to where we have not felt the need to curtail. We've not run as much overtime at all of our mills. Our St. Maries mill, for example, is not running overtime today. And it's because, relatively speaking, western lumber prices are the weakest of the group. And we struggle to justify running overtime at that mill. But I think to answer your question, we feel like our mills are positioned more competitively than others. And consequently, we don't see a need to take downtime.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [32]

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And most of your lumber mills, particularly in the south, the Arkansas mills are commodity. But are some of your mills up in Idaho more pine boards and therefore a little less susceptible to the vagaries of the market?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [33]

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No. So the really different regional dynamics going on here, although they do overlap, depending upon the particular region, the particular market. So our mill in Idaho produces dimensional lumber. Dimensional lumber in Idaho is not really an R&R, a DIY kind of a product. So it's not getting the benefit of all the tailwind of all the DIY work that we've talked about. And if you think about our mill in Idaho, it's competing against other inland producers, and it's competing against western SPF, in particular. And western SPF prices have just collapsed. And as they've collapsed, it's getting more challenging for us to compete against western SPF.

You've also got Washington state is closed for construction. It's one of the few states that's closed for construction, residential construction. And consequently, you've got one market area where demand has dropped. But yet, there hasn't been a ton of announced curtailments in western mills. So it's all about supply and demand at the end of the day, but our St. Maries mill is the one that's feeling it the worst right now.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [34]

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Okay. And switching to the plywood. I realize you're trying to put back together an order file there. But might that -- the end market demand for that particular plywood be more discretionary since it's geared towards boats and RVs than product that's destined for residential construction sheeting?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [35]

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Yes. I think they're both big discretionary purchases, whether it's a house or it's a boat or an RV. Yes, there's no doubt if consumer confidence takes a hit, which it has, stock markets come down, unemployment goes up, there's no doubt, it's -- you're going to see declining demand for boats and RVs and big ticket things like furniture.

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Operator [36]

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

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [37]

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Just following up on -- it looks like overall, on your guidance that you just got a little bit more conservative. And we're -- I just want to dial in on the timberland guidance because at the end of -- on the Q4 call, it was about 6 million. And now if I look at your guidance here, it's down sort of 3% to 8%. And I'm -- where I'm looking at housing starts and some of the forecasts and given that it's a very cloudy environment to see it. It seems like starts have come down quite a bit more than that.

So I'm just trying to reconcile while you're -- do you really think it's going to be that strong? And how do you reconcile -- I guess it was back to Eric's description about 200,000 tons, it looks like the midpoint would be down 350,000 tons. So I'm just trying to reconcile all those things. Do you think it's going to hold up as well as it appears in your guidance?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [38]

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Eric, go ahead.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [39]

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Yes. So Paul, so the 200,000 tons that I referenced was just a second quarter impact. And I mentioned that there's going to be a little spillover effect into Q3, depending upon how all this plays out. We are being conservative in our guidance, that's in our nature. One thing I'd like to remind you is that we run 3 sawmills in Arkansas that consume the vast majority of our sawlog production in the state, in the south. So we kind of control that revenue stream and that P&L from our southern resource business, if you will. And we have very good visibility into what those 3 sawmills are doing.

So we have very high confidence in those sawmills. We have seen a little bit of pullback in pulpwood demand. There's been a couple closures, curtailments down there. But net-net, things are still running and still consuming a lot of pulpwood. So we got a pretty good handle on what the business is going to look like for the rest of the year.

Now if lumber prices plummet, go even further south -- which we don't think that's going to happen. We feel like lumber prices have bottomed. All bets are off if a lot of mills start -- more mills start curtailing, including our own. But for right now, we feel like we've hit the bottom, and we're coming back up.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [40]

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So that forecast at basically April lumber prices were down $20 or 5% off the Q1 average, do you think that's going to hold basically for the balance of the year?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [41]

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Yes. We actually think we're going to see a bounce in Q3 of who knows 4%, perhaps is kind of what we have in our estimates and then kind of flat into Q4. I listened to the Camp 4 call, and I think they talked about improved pricing as we get into the back half of the year. I think we share a very similar view.

And although housing starts have -- sorry, I'm just going to add that, although housing starts have plummeted here in April, and I'm sure May is going to be weak. Most people think that they're going to get back into the kind of the 1 2, 1 3 range when we get to the fourth quarter this year. So things aren't going to stay depressed forever.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [42]

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Right. And then just on COVID itself. Just -- if you could just give us a summary of where your employees have tested positive, and how you've worked around those instances if that's happened?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [43]

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Paul, this is Mike. To our knowledge, we have not had in our operating environment in our mills and timberlands positive tests that have caused any kind of changes in how we operate. We certainly had people absent from work for whatever reason, but it's not as a result of a positive COVID test.

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Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [44]

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Wow. Pretty lucky. Hope it keeps up.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [45]

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Well, I think, it's not surprising that we operate largely in very rural places. Many of these counties where we have facilities or timberland operations, the data shows 1 or 2 or maybe 3 people in the county have had COVID positive results. So it's pretty rural areas.

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Operator [46]

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

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [47]

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Maybe starting off on the lumber side, can you talk a little more about sort of inventories in the channel? You've talked about demand, but just maybe sort of channel inventories. It seemed to me that for the last few weeks, at least, a lot of inventory must have come out of the channel because there wasn't kind of much buying activity happening at the mill level, yet we still had sort of construction activity going on. So maybe any color on sort of channel inventories?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [48]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [49]

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Yes. So Ketan, that's a challenging one to answer. But there's very little data, as you know, on lumber inventories in the distribution channel. What I will say is that anecdotally, our sales folks are constantly talking to customers. And so they're getting kind of real-time feedback on what they're seeing. And what tends to happen when you get into a falling lumber market where we -- like we've had for the last 6 to 8 weeks, customers will back away real fast because they don't want to catch a falling knife.

And what you see is that inventories in the distribution channel fall to very low levels. And dealers will not step in and buy lumber unless they have to. They'd rather deplete their existing inventories or until they think prices have bottomed. So anecdotally, what I'd tell you is that our view is that inventories are at very low levels in the distribution channel.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [50]

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Got it. That's helpful color. And then just switching to the timberland side and especially on the southern sawlog side. Last year, first half, we had pretty strong sawlog pricing, a large part of it was driven by kind of rains. And now we've got -- we are in this environment when there's a lot of uncertainty. Talk about kind of what you are seeing out there in terms of sawlog pricing. You mentioned that Q2 pricing is going to be relatively flat quarter-over-quarter. But to the extent that mills continue to take downtime, demand remains weak. How do you see that playing out as we get into the back half of the year? I'm not asking for specific numbers, but just as you guys kind of see how it could impact southern sawlog prices.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [51]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [52]

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Yes. So Ketan, you're right. The sawlog prices ran up in 2019. That was largely due to the inclement weather last year, excessive rainfall, really limited harvesting activities, including our own. You saw prices come down for southern pine to about $44 in the first quarter. Our expectation is that these prices kind of hold. We're in good log in haul conditions. You're right. Mill inventories, mill log inventories are at really low levels right now because everybody is afraid to hold inventory.

A typical southern mill might have 2 weeks of logs in their decks. And we understand most mills are running with who knows 3 to 5 days' worth of logs in their decks. So people are running on really tight inventories. But pricing has come down maybe $1 a ton or so off of where it was, but it's holding. And frankly, it's back to where it was in 2018. And it's back to where it was about 10 years ago. Prices have been very stable, very flat in the south for southern yellow pine sawlogs. We don't see that changing as we move into the back half of the year.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [53]

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Got it. And then just switching back to the lumber side. And so a question on kind of duties. My understanding is that the duties will come down as you move into the back half of the year. And again, I mean, still a lot of uncertainty around how all of this plays out in terms of demand. But to the extent that demand remains weak and if -- and duty has come down as you move into the back half of the year, how do you think that impacts lumber prices?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [54]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [55]

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Yes. So Ketan, you're right. Those lumber duties are set to fall to roughly 10% from where they are today, which is up around 20%. I think the interesting thing is that if you look at the cost competitiveness of mills around North America, the mills that are taking it the hardest right now in this low price environment are the Canadian mills. They're the ones with the highest cost structures, generally speaking. So I think they need that 10% duty just to get their P&L back in order.

So we don't think it's going to have a big impact on pricing. It's not like all of a sudden, mills are going to go from being uncompetitive to competitive when they get an extra 10% in their P&L. I think they're going to, more likely, just go from losing money to breaking even is the way I would characterize it. So we don't think it's going to have a big impact.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [56]

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Does that impact, though, kind of the rationalization aspect of the whole industry? I mean if duties come down, it gives them some sort of a kind of buffer on the cost side?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [57]

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There's no doubt that the duty coming down will help make their mills more competitive. But on a relative basis, they're still going to be relatively high cost mills. So we don't think the landscape changes a whole lot from that duty going to 10%.

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Operator [58]

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Your next question comes from the line of Mark Weintraub with Seaport Global.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [59]

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First, just one follow-up on the lumber. You indicated you thought that prices likely hit bottom, and certainly, they're going up a little bit now as we speak. Is that largely, do you think, a function of where the cost curve is? Or you -- was that more a supply demand driven expectation?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [60]

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Eric?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [61]

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Yes. So Mark, I would say, we've seen 25% of the industry announced curtailments. That's announced curtailments. We're guessing that there's another 5% that may be on top of that 25%. So you've seen 30% of the industry shut down here in the very near term. Meanwhile, construction activity, there's no doubt, orders are slowing, but they've not come to a complete halt. And don't forget, you've seen the R&R market segment, which is 40%. If anything, it's higher than it was pre coronavirus. And our home center customers are screaming for more product.

So it's easy to look at housing starts and think that demand is just completely collapsed, but you got to take into consideration strength in R&R. But back to your question about why are things holding up? It's probably more the supply side of the equation than it is the demand side of the equation.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [62]

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Okay. That's helpful. And then on the timberland side, and I realize things are fast-moving here. But any color you could provide -- have the timberland -- has timberland M&A essentially temporarily frozen given all the uncertainty? And is it a viable strategy to consider selling some timberlands to buy back your stock at a very wide discount if the state of affairs continues for any length of time?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [63]

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Well, I'll take the first part first. I think that there's been 4 transactions of any size closed this year. Two of those were large Weyerhaeuser deals, the rest have been smaller. Rayonier sold a tract in Mississippi. So it's been fairly quiet. Most of the other properties that were on the market that were pending have been pulled or put on hold. So I do think the market's frozen at this point. And there's very little liquidity in that market currently as investors kind of wait to see what happens.

During the Great Recession, it was possible to -- the financial crisis to sell timberland in a down market. And I would imagine it would be possible at discounted prices to do it today. We have not entertained the idea of doing that to support a larger share repurchase. Maybe as the liquidity gets back into the market, that will be something worth considering. But I think it will be a pretty tough sell today to put timberland on the market. There just wouldn't be any takers.

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Operator [64]

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And at this time, I'm showing there are no more questions. I'll now turn the call back over to Jerry Richards.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [65]

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All right. Thank you, David. So I also appreciate everybody's interest in Potlatch Deltic. I'll be available to answer the detailed model questions rest of the day and hope you and yours stay safe in this COVID environment.

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Operator [66]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.