Potlatchdeltic Corp

NASDAQ:PCH

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Megan and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Second Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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.

[Jerry Richards, VP & CFO]

Thank you, Megan. Good morning everyone and welcome to PotlatchDeltic's second quarter 2020 earnings conference call. 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.potlatchdeltic.com.

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

[Mike Covey, Chairman & CEO]

Thanks, Jerry, and good morning.

What a difference a few months makes in a very short period, lumber markets shifted from illiquidity to a historic run. It was not possible to accurately forecast the severity and duration of the effect of the COVID pandemic on our end markets earlier this spring. A massive destocking of lumber in the supply chain sent a signal that led to significant curtailment of North American lumber manufacturing capacity to balance production with existing visible demand. As spring developed, it became clear that industry fundamentals not only remained strong, but it strengthened.

Historically, low mortgage rates, the Millennial demographic cohort entering prime Home Buying years and the old age of U.S. housing stock all bode well for housing and repair and remodel demand, both of which lead to higher lumber sales.

Additionally, a potential shift from urban to suburban living and continuation of working remotely maybe two ways that the COVID pandemic positively impacts housing demand. The atypical early spring pullback in lumber production led to an acute shortage which underpins the current historic run in lumber prices. It will likely take several months for lumber supply to catch-up with demand, particularly given increasing housing unit construction, reports of transportation constraints, traditional holiday downtime, and the potential effect of the late summer fire season which is now upon us.

Turning to the quarter, we generated adjusted EBITDA of $35 million. Our employees did an excellent job managing through the constraints and challenges imposed by the COVID pandemic. Our three business segments performed well during what is typically our seasonally lightest quarter.

As we continue to face this pandemic, operating safely is our top priority and is a core value.

As discussed on last quarter call, we have increased the frequency of cleaning, added physical distancing where it's practicable, and are screening visitors and vendors. We also banned most travel and all group meetings and most employees who can work-from-home continue to do so.

While our positive COVID cases have been limited thus far, our mill managers have had to actively and creatively manage work schedules due to absenteeism caused by contact tracing, requirements to self-quarantine or lack of childcare for families. The COVID pandemic presents a risk that could cause our operations to be disrupted and requires continued diligence. I want to thank our employees especially those in our mills for their continued efforts and safety precautions during this challenging time.

We're running as much overtime as we can in our sawmills to meet strong customer demand. The home center business remains particularly robust which benefits our Lake States' stud businesses, as well as Southern Yellow Pine's sold to treaters. Our lumber order files currently extended to late August at continued high prices. As a result, we currently expect wood products adjusted EBITDA to be over $50 million in the third quarter.

Our industrial grade plywood facility resumed operations in May after taking three weeks of market downtime during the quarter. As a reminder, the specialty and industrial grade plywood product we manufacture used in the boat, RV, and furniture industries and the stay-of-home orders forced many of our customers to shut down in April. Plywood mill ran at reduced operating posture for the remainder of the quarter to balance production with customer orders, and returned to a normal operating posture in July.

In Idaho, our Timberlands business was in Spring breakup mode before resuming log deliveries in early May. Sawlog demand remains strong in the region and the third quarter is our seasonally highest harvest quarter. As you know, about 70% of our Idaho sawlog deliveries are pegged to lumber prices through the indexing formula on a lag basis. Therefore, we expect our Idaho Timberlands adjusted EBITDA to increase materially compared to the second quarter due to higher prices and harvest volumes.

In the South, third-party mill customers restarted operations they had curtailed as a result of the COVID pandemic and our sawlog demand improved as the quarter progressed. While we still do not anticipate making up the volume in the back half of the year, there is a possibility that the harvest shortfall will be less than we originally expected. Sawlog pricing remains relatively flat quarter-over-quarter across all of our Southern markets with little change expected in the second half of the year.

In our real estate business, we remain cautiously optimistic about our Chenal Valley real estate development business near Little Rock. We still expect to sell over 100 residential lots this year.

In June, we announced an agreement to sell approximately 72,000 acres in Minnesota to the Conservation Fund for approximately $48 million. This is a significant milestone in our long-term strategy to maximize shareholder value through the sale of rural real estate.

Our partnership with the Conservation Fund has also been a catalyst to conserve more than 200,000 acres in Minnesota for various conservation purposes, once this transaction and others underway are completed. We expect the sale to close in the fourth quarter and the proceeds will further enhance our already strong liquidity position and flexibility.

During the second quarter, we returned $30 million to shareholders in the form of dividends and share repurchases, including the purchase of $3 million of company stock. In aggregate over the last two years, we've spent $41 million to purchase 1.2 million shares of PotlatchDeltic stock at an average price of $34 per share.

To wrap-up my comments, business conditions are extremely good and we expect to report extraordinarily strong results in the third quarter. PotlatchDeltic is well-positioned to take advantage of favorable industry fundamentals and our strong liquidity provides a high degree of flexibility as we seek to maximize shareholder value.

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

[Jerry Richards, VP & CFO]

Thank you, Mike.

Starting with Page 4 of the slides, adjusted EBITDA was $35.3 million in the second quarter compared to $47.6 million in the first quarter. A sequential decline in the second quarter is normal due to seasonally lower harvest volumes during Spring breakup in Idaho. Having said that, lumber prices and shipments both exceeded our expectations for the quarter.

I'll now review each of our operating segments and provide more color on the second quarter results. Information for our Timberland segment is displayed on Slides 5 through 7, and the segment's adjusted EBITDA was $25.6 million in the second quarter compared to $35 million in the first quarter. We harvested 303,000 tons of sawlogs in the North in the second quarter. This is down seasonally from the 434,000 tons that we harvested in the first quarter.

Northern sawlog prices were 6% higher on a per ton basis in the second quarter compared to the first quarter. The higher sawlog prices were the result of the positive effect of a normal seasonal decrease in the density logs and slightly higher index prices.

In the south, our harvest volume was lower quarter-over-quarter as expected due to market curtailments taken by third-party mill customers. Sawlog deliveries increased each month during the quarter as mill customers restarted their operations.

Our Southern sawlog prices were 1% lower in the second quarter compared to the first quarter.

Turning to wood products, on Slides 8 and 9, adjusted EBITDA was $10.9 million in the second quarter compared to $13.2 million in the first quarter. Lumber shipments declined from 283 million board feet in the first quarter to 249 million board feet in the second quarter. Our sawmill production hours were constrained in the quarter for multiple reasons, particularly in April, when we lost a week of production at our Warren, Arkansas mill due to a tornado caused power outage. We resumed production overtime hours near the end of April when the pace of lumber orders increased.

Our average lumber price realization increased 4% from $396 per thousand board feet in the first quarter to $412 per thousand board feet in the second quarter. To provide context, it is helpful to look at our lumber prices by month. Our average lumber price realizations were below our first quarter average in April, increased modestly in May, and accelerated to $452 per thousand board feet in June or $40 higher than the quarterly average.

Moving to real estate on Slides 10 and 11, the segment's adjusted EBITDA was $9.3 million in the second quarter compared to $7.3 million in the first quarter, an increase in rural acres sold more than offset slightly lower Chenal Valley log sales.

Shifting the financial items which are summarized on Slide 12, our total liquidity remains strong at $460 million. This amount includes cash of $81 million and availability on our revolver which remains undrawn.

As Mike mentioned, we spent $3 million to purchase 89,000 shares in the second quarter for an average of $33.81 per share. We plan to refinance $46 million of debt scheduled to mature in December 2020 and have locked the interest rate. Annual interest expense will decline approximately $900,000 on this debt beginning in December.

Capital expenditures were $10.8 million in the second quarter. While we currently expect that our capital expenditures will be $40 million to $44 million in 2020, we're reviewing options to pull some 2021 high return mill projects forward to this year.

Note that the amounts I just mentioned include real estate development expenditures, which are included in cash from operations on our cash flow statement and exclude Timberland acquisitions.

I will now provide some high-level outlook comments. The details are presented on Slide 13.

Harvest volumes in the north are planned to be seasonally higher in the third quarter compared to the second quarter. We expect Northern sawlog prices to increase significantly in the third quarter due primarily to higher indexed prices.

Higher volumes in the South in the third quarter are expected to increase seasonally. We expect Southern sawlog prices to be comparable to the second quarter.

Lumber prices continue to increase in the third quarter at an accelerated pace. Our average lumber prices thus far, including orders that extend into late August, is approximately 30% higher than our second quarter average lumber price. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. We plan ship 270 to 280 million board feet of lumber in the third quarter.

Shifting to real estate, we expect to sell 11,000 to 12,000 acres of rural land and approximately 20 Chenal Valley lots in the third quarter. For the year, we now expect to sell 93,000 to 97,000 acres of rural land, including the 72,000 acre Minnesota transaction that we announced in June and expect to close in the fourth quarter.

Virtually all of our remaining 102,000 acres in Minnesota are now under contract in transactions expected to close through 2022. Given that the bulk of the rural acres that we sold historically were in Minnesota, the focus of the rural land sales program will shift to Arkansas in the future.

As a reminder, the 2018 Deltic merger included approximately 57,000 acres that we identified as having value higher than Timberlands, including a portion proximate to Little Rock, as well as the Chenal Valley Masterplan community.

Overall, we estimate that third quarter total adjusted EBITDA will be at least three times higher than second quarter, due to significantly higher lumber prices, including indexed Idaho sawlog prices, a seasonal increase in harvest volumes, and higher lumber shipments.

We believe that the primary risk to achieving our third quarter outlook remains the COVID pandemics potential to disrupt our operations or to cause further damage to the economy. We're very well-positioned to take advantage of favorable industry fundamentals.

That concludes our prepared remarks. Megan, I'd now like to open the call to Q&A.

[Operator]

Your first question comes from John Babcock with Bank of America. Your line is open.

[John Babcock, Bank of America]

Hey, good morning, and thanks for providing all the detail here. Starting out I want to obviously talk about lumber prices. We've clearly seen a sharp rise over the last couple of weeks which you indicated. And so I was wondering if you could share how you're thinking about pricing levels from here and what factors you see is likely to drive reversal in these trends at some point, whether it is demand or supply driven and ultimately how that might work?

[Eric Cremers, President & COO]

Yes, John. So this is -- this is Eric. Well, we began 2020 on very solid footing with our Q1 prices about 8% higher than our Q4 2019 prices, largely driven by better than expected housing starts. Forecast for housing starts for 2020 were moving into the $1.4 million, even $1.5 million range the highest since the Great Recession. And then the pandemic hit late in Q1, customers stopped buying lumber and liquidated inventories. And our prices in April dropped about 8% from where they were in March. And then you saw, as Mike mentioned, a massive curtailment by the industry, and some people reporting that curtailment represented as much as 40% of industry capacity, roughly 20 billion to 25 billion board feet of capacity came off the market. So the pandemic then resulted in millions of people staying at home basically with nothing to do, what did they do with their time, well they turn to repair and remodel projects.

Furthermore, weather across the U.S. has been very favorable for outdoor R&R projects. So demand really didn't collapse nearly as much as expected and prices firmed up. Our May lumber prices were up 3% over April and then June was up 13% over May, in total Q2 was up 4% over Q1, but that was heavily impacted by a relatively low April.

Just to give you a sense of it, three months ago, Reese expected North American demand to be down about 6 billion board feet for the year. And now they expect it to be down just 2 billion board feet.

And so while they thought R&R expenditures were going to be down roughly 5% year-over-year before and now expect them to be up 2% year-over-year. So you've had a huge, huge change.

So as you know, lumber prices are -- they're very hard to predict. But we have very good visibility here into Q3, as we're roughly two-thirds through the quarter at this point in time with our selling. We know that inventories are very lean through distribution channels. Our order files are very long and demand remains very firm. So as Mike and Jerry mentioned in the call script, prices are roughly up 30% Q3 over Q2. So the real question is what happens as we get into Q4? You are likely to see a typical seasonal slowdown. That wouldn't be unusual. And you probably will see some pricing pressure in the fourth quarter. What's probably going to happen is R&R work is going to start to slow, but you're probably going to see that offset by new home construction.

If you've been following the past couple of days, the builders have been releasing their results. And their June orders are very, very strong, 50% up year-over-year, for example. So roughly R&R is going to come down but new home starts are going to continue to increase and hopefully the starts offset the R&R decline. So help answer your question.

[John Babcock, Bank of America]

Yes, yes, partly. I mean, I guess, I was kind of because obviously like typically when we see in prices spike like this and maybe it continues higher. There's typically some sort of bounce back on the other side of it. And so I guess I'm trying to get a sense for what might cause that. And I guess maybe the next question I had which is just generally, what's kind of lumber's partnering in the market might help answer that. But any -- if you could just kind of comment on that supply and whether you're seeing any new supplier enter the market at this point, obviously being kind of the supply was taken out, that might be helpful.

[Eric Cremers, President & COO]

Yes, I think any of that that 40% of curtailment that I mentioned previously, all that has come back on. Everybody, I would guess is running as hard as they possibly can given these prices. But I had a conversation with the sales department yesterday and said, hey, are you seeing any signs of a slowdown? And they said absolutely not. There's no sign of a plateau in here. In fact, if you go look at lumber futures on the CME, you see that prices are continuing to rally. So there's no sign of this thing rolling over and if you had any lumber capacity whatsoever, you're using it to produce lumber.

[Mike Covey, Chairman & CEO]

John, this is Mike. I don't think there's any new mill startups scheduled the Canadian Mills that are down would have been restarted already. They're down due to log supply constraints. No, it's challenging to run in a COVID environment to run over time and to add more shifts or more people. So I think the supply is what it is.

[John Babcock, Bank of America]

Do you have a sense for what percent of the market ultimately has been impacted by the log constraints?

[Mike Covey, Chairman & CEO]

By the what?

[Jerry Richards, VP & CFO]

By the log constraints?

[John Babcock, Bank of America]

By the log constraints, log availability?

[Jerry Richards, VP & CFO]

I mean what's been commonly reported John, this is Jerry speaking is about 2 billion board feet of capacity in Western Canada was shut down as it relates to the log constraints. I mean, obviously the roughly 40% curtailments that Eric just mentioned a bit ago in response to the question that was really market curtailments temporary downtime but in terms of permanent due to log supply like I said it's around 2 billion.

[John Babcock, Bank of America]

Okay. And you said that of the 40% that went down basically all of those are back up and running at this point?

[Jerry Richards, VP & CFO]

Virtually all, yes.

[John Babcock, Bank of America]

Okay, well. And then just next question, I guess before I kind of turn it over; I was just wondering if you can talk about the Southern sawlog markets. I mean it seems like volumes are still pretty decent during the quarter. Have you seen any notable changes in that market particularly I guess with the rise in lumber prices and curtailments now kind of coming to an end and those resuming production?

[Mike Covey, Chairman & CEO]

Well, I'll make a general comment and Eric can add detailed color to it. The story of Southern log pricing and Southern log markets just does not change quarter-over-quarter. It's -- while prices remain in a very narrow band between $40 and $45 a ton and they have kind of through thick and thin, we get small temporary spikes due to weather and harvesting constraints and then they quickly revert and normalize again.

[Eric Cremers, President & COO]

Yes, the only thing I would add to that, John, is FDA just hosted a webinar, I don't know a month ago and one of the topics they covered was growth to drain in the U.S. South and what you're seeing is that timber inventories are continuing to increase in U.S. South. So it's hard. It's all about supply and demand at the end of the day. And as long as you've got incremental growth that's outstripping demand, or harvest volume, it's hard to see prices turning up.

[Mike Covey, Chairman & CEO]

So I think I'll just by adding that's I think one of the strategic and unique benefits that we have with the position of our company is with a large Southern manufacturing business, we can capture these converting margins, especially in this environment in our Wood Products business well. The trees continue to grow and provide stable returns to support the dividend.

[Operator]

Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is open.

[Ketan Mamtora, BMO Capital Markets]

Well, obviously, a much different discussion from three months back, but that's how it goes sometimes. First question, maybe just -- you mentioned in your prepared remarks you are running the sawmills non-overtime, you're pulling back some projects from FY 2021 into 2020. Maybe just now without getting into specifics, if you all don't feel comfortable at this point, but maybe just give us some sense of what incremental room you'll have to increase capacity on the lumber side? And kind of what kind of projects we are looking at that maybe pull forward into from 2021?

[Eric Cremers, President & COO]

Yes. So Ketan, this is Eric. We are looking at a number of projects here. We haven't talked to our board about this yet, so I don't want to get too far ahead of myself. But it roughly totals $5 million. And the improvements that it would make to the business include things like improved grade yield, increased production volume, decreased labor costs, expanded product mix. So there is nothing extraordinarily unusual about these projects. They're all kind of at the margin, incremental and existing mills. We're not talking about a Greenfield mill or anything like that.

So some of that money, roughly $5 million, some of that would get spent this year, but some of that would get spent in early next year. And I would expect that on the next call, we'll provide more color about those projects.

But, Ketan, every -- you asked a question about our incremental production volumes. Every year, we find a way to eke out anywhere from 2% to 5% volume gains. And I don't want to talk about 2021 production volumes yet because we're not prepared to give guidance, but I don't think it would be out of the ordinary for us to announce come January that 2021 is going to see higher production volume in our mills than 2020.

[Ketan Mamtora, BMO Capital Markets]

Got it. Okay. So that's very helpful. So you still think that there is room at your existing mills that you all can do things and add capacity, reduce costs. You still think there is room there?

[Eric Cremers, President & COO]

Yes, absolutely. What I'd remind you is that, just this year -- with our forecast, this year we expect to be 3% higher than what we did last year, which you know, this will be a record year for us. But even this year, we had to take out roughly 40 million feet of production due to COVID. That was overtime that we took out in Q1 and Q2. So if we have margin in our mills next year, we're going to get that extra 40 million feet.

[Ketan Mamtora, BMO Capital Markets]

Got it. That's helpful. And then just sticking with lumber for a second, do you think there is any risk with the kind of rally that we've seen in lumber prices for imports from Europe to go up?

[Eric Cremers, President & COO]

Yes. I mean, I think at the margin they can go higher. I mean, you're starting to see the dollar roll over a little bit here, which is I think it's down year-to-date now, which is which is helpful. There might be a little bit more room. But I think we're talking about maybe this being measured on in terms of 100,000, 200,000, 300,000 board feet. The Central Europe has been pushing lumber into this market now for the past year or two. And it appears that there isn't a whole lot more room for them to produce more lumber. And by the way, the quality of that lumber is not as high is what is produced here domestically. So I think it can go higher. Can it go a lot higher? I don't think so.

[Ketan Mamtora, BMO Capital Markets]

Got it. That's helpful. And then just turning to capital allocation priorities, obviously Q3, you all will have a big windfall from the safeguard lumber prices. But sort of how do you think about capital allocation at this point given how much things have changed from what we have talked in April and May to what we are seeing right now?

[Mike Covey, Chairman & CEO]

Well, this is Mike. You can't get with such a cyclical lumber market -- and we've been through this many times in the past. You can't get carried away with these increases or big fallouts that happen periodically. I guess, as a reminder, we've increased our dividend about 116% since 2012. And almost all of those increases in our dividend have come from sustainable changes in our Timberland earning stream, whether it's through acquisitions or price recovery, especially in Idaho. We have refinanced just about all the debt that we can. We have, as Jerry mentioned, one small tranche left of $46 million that will mature at the end of this year that we'll refinance.

Our stock has appreciated 50% since the start of Q2. And prior to that, we purchased $41 million worth of stock, priced at $34. And as Eric mentioned, we have just a small handful of capital projects that we'll try to pull forward. So really it comes down to looking and waiting for Timberland opportunities that make sense to grow the company and to grow the dividend. That's what we've had a history of doing and being patient and looking for those. So that's where our focus will shift in these better markets.

[Operator]

Our next question is from Mark Weintraub with Seaport Global. Your line is open.

[Mark Weintraub, Seaport Global]

Thank you. Had a slew of questions, but the great majority have been answered. So a little bit peripheral, perhaps. But as you think about all the cash that you're generating on the capital allocation question you noted, either growing the dividend slowly over time or -- sorry, growing the dividend or timber acquisitions, conceptually in the past you've talked about wanting to kind of match that dividend to the underlying Timberland business and its ability to generate cash. Would you shift when you have quarters like what the third quarter north of $100 million in EBITDA that you essentially are building potentially a bank of cash? Would you contemplate using that and thinking of amortizing it and increasing the dividend as opposed to just thinking about using the cash generating capability of the timber holdings as your core base? Hopefully, the question was kind of clear?

[Mike Covey, Chairman & CEO]

No, I understand the question. It's a discussion that periodically we have with the board. I think whenever we have these markets that are just so choppy; it's a good reminder to look back as recently as 2019 when our Wood Products business generated $12 million in EBITDA in total. So things have -- things can change very quickly.

And that's why we've had a premise to really kind of underpin the dividend with the Timberlands earning stream. And certainly this excess cash that we're going to have and in part from the sale of Minnesota, I think certainly would give us more confidence to help support or increase the dividend over time if we can find an acquisition opportunity that makes sense. We can't sit on cash forever. It needs to be returned to shareholders. And certainly, increasing the dividend would be one way to do that.

[Mark Weintraub, Seaport Global]

Makes sense. And then any update on what might be happening in Chenal Valley and all these different changes? And anything that you can provide to us, any color about if there are certain trends that might be more recent to think about?

[Eric Cremers, President & COO]

This is Eric, Mark. What I would tell you is that we have been very happy with the performance of additional Chenal. When the pandemic hit, everybody thought residential real estate, commercial real estate would completely collapse. And certainly, our lot sales are going to be less than we expected at the start of the year, I think we guided to 140 and we're now expecting, I don't know, 100 to 120, something like that. The business is coming back and holding up better than we had expected it would given the pandemic.

And I am hearing that there is commercial activity kicking around in Chenal, which it surprises me frankly that there would be commercial activity anywhere. But there is interest in Chenal because of such a hot product in Little Rock. And I would tell you that our lot sales will come in below what we guided to earlier in the year, but they are holding up better than we had expected. So we're very pleased with how Chenal is coming along.

[Mark Weintraub, Seaport Global]

Great. And I almost sort of expected to hear that it might have improved to be better with all the homebuilders now talking about getting more aggressive, about buying lots, et cetera. Are you seeing any evidence that the setup for next year could prove -- you could make up ground next year or is it too early to comment on that?

[Eric Cremers, President & COO]

Yes. I hate to give guidance for 2021. We've got a precedent that we'll give guidance for the year in January when we release our fourth quarter results. But I would certainly -- given what I'm looking at right now, I would expect next year to be better than this year, that's for sure.

[Operator]

Our next question is from Steve Chercover with D.A. Davidson. Your line is open.

[Steve Chercover, D.A. Davidson]

Yes, thank you. Good morning, everyone. So my first question pertains to Minnesota and that sale that closes in Q4. It looks like it's big enough that you're not going to run it through the income statement or at least it will be treated as extraordinary. Is that accurate?

[Jerry Richards, VP & CFO]

Yes. Steve, this is Jerry. So we actually will run it through the income statement. Our expectation is, you would see it run through real estate revenue and real estate cost of sales just like all the other rural land sales. I mean, this is certainly a large transaction, larger than most and certainly in my memory. But from time-to-time, we have some pretty large rural sales as well. So at least how I'm scoring it internally, I'm planning on running it through normal results.

[Steve Chercover, D.A. Davidson]

Okay. Well, we'll have some good guidance in three months. With respect to the conservation group, will they continue to manage it as commercial timberlands with obvious ease or restrictions as to future development or is that volume out of the market?

[Eric Cremers, President & COO]

No, I think -- Steve, this is Eric. I think their intention is to continue to operate it as timberland. Now will they hold the land? Not likely. They have a tendency to flip these properties to other conservation groups. But in all likelihood, this will be a conservation outcome with continued harvest activity.

[Steve Chercover, D.A. Davidson]

Got you. Which is not a bad thing. Can you tell us what the financial contribution that it's been making on an annual basis in terms of maybe EBITDA?

[Mike Covey, Chairman & CEO]

Yes. In term of Timberland contribution, our Timberland business in Minnesota is a pretty nominal contributor, in fact, it pretty much covers holding cost, would be the way I think about that, Steve. When we think about Minnesota, it's really real estate land play. And certainly, you can see the track record over time on rural land sales. So that would be the -- I think the more appropriate way to think about it.

[Steve Chercover, D.A. Davidson]

So no lost EBITDA. Nice chunk of change for future reference. Okay. Switching gears to log prices in Idaho. Since there is such a substantial lag and since we're still going parabolic on lumber in Q3, does that imply that we're going to have extraordinarily strong log prices in Q4?

[Eric Cremers, President & COO]

Well, yes. It all depends on how lumber prices play out, Steve. But what I'd tell you right now is, certainly in Q3, we're seeing very strong log prices, in the 25% kind of plus 25% kind of range. So we'll see how Q4 plays out. But I would expect Q4 to be pretty strong as well.

[Steve Chercover, D.A. Davidson]

Well, how long is the lag, Eric?

[Eric Cremers, President & COO]

It's six weeks. Six weeks.

[Steve Chercover, D.A. Davidson]

Six weeks. Got you. So if you've got visibility on lumber almost at the end of September then at least the first half of Q4 should see some pretty dynamite pricing?

[Eric Cremers, President & COO]

Yes. You'll start to see that log density factor work against us as we get into the Q4 as logs get denser on a per ton basis. But nonetheless, we still expect really strong pricing in the fourth quarter.

[Mike Covey, Chairman & CEO]

And we've also had a nice uplift on Cedar log prices, which as you know, make up about 10% of our mix.

[Steve Chercover, D.A. Davidson]

Got you. Okay, final question. And Mike kind of alluded to how quickly things can change and with $12 million in EBITDA out of lumber in 2019 after a phenomenal 2018, so you go from feast to famine. And knowing that, having experienced it recently, do you think the industry can try and prevent another unhappy ending? Is there anything that we -- any lessons learned or maybe just start to bobble back even though the pricing is good due to seasonality?

[Mike Covey, Chairman & CEO]

Yes. We're just not going to -- we just won't make comments about supply and demand kind of industry fundamentals. It's an antitrust red flag, and we won't touch that question.

[Steve Chercover, D.A. Davidson]

All right, then I won't push it. Okay. Well, congratulations and stay safe. Thank you.

[Jerry Richards, VP & CFO]

Thanks.

[Mike Covey, Chairman & CEO]

Thank you.

[Operator]

Our final -- our next question is from Paul Quinn with RBC Capital Markets. Your line is open.

[Paul Quinn, RBC Capital Markets]

Just I guess, starting with the Wood Products. Just trying to understand this shipment guidance of 270 to 280. I mean, you have the capability to run a lot higher than that. And given the unprecedented lumber prices here, I would have thought you've been doing as much as you can, if not, adding shifts and overtime to it?

[Eric Cremers, President & COO]

Yeah, Paul So our guide is 270 to 280. I think there is a pretty strong chance that we beat that number. And we are running our mills as hard as we possibly can and we're shipping everything that we possibly can.

[Paul Quinn, RBC Capital Markets]

Okay. And then just, you guys are 50:50 sort of random like versus stud, we've seen a huge shift in that where stud has been, I guess, a lot number of years down and now it popped above. What do you associate that with?

[Mike Covey, Chairman & CEO]

Well, I think to a large degree it's related to the home center demand. It's not going for construction purposes; it's going for DIY purposes. But out of our two Great Lakes stud mills where we produce, I don't know 350 million to 400 million feet of studs, the home center demand is more than 50% of each of those product mixes, and we just can't -- absolutely cannot keep up with it.

[Paul Quinn, RBC Capital Markets]

Okay. So then given your comments that you think repair and remodel will slow down, but you're seeing a pickup in new home construction, do we expect sort of that interplay between stud and random prices to revert back to what we saw a year ago?

[Mike Covey, Chairman & CEO]

I don't know. It's impossible to predict what's going to happen there. I think stud prices are at all time record levels. So you'd have to assume that that's not going to continue forever.

[Paul Quinn, RBC Capital Markets]

Okay. And then maybe just an update on what's going on with your industrial plywood business as that come back through the quarter?

[Eric Cremers, President & COO]

Well, yes. It's definitely gotten better. We made money in the first quarter in plywood, we lost money in the second quarter and we'll make money in the third quarter. The mill is not running as hard as we would like it to. We'd like to put on overtime, but the sales team is out working, trying to extend the order file and we'd like better performance. But market conditions -- furniture demand is still not back to where it needs to be. So there is still some market segments that are under pressure, but it is getting better.

[Paul Quinn, RBC Capital Markets]

Excellent. Looks like a great quarter coming up here. Thanks so much, guys. Best of luck.

[Mike Covey, Chairman & CEO]

Thank you.

[Eric Cremers, President & COO]

Thanks.

[Operator]

Our final question is from Ketan Mamtora with BMO Capital Markets. Your line is open.

[Ketan Mamtora, BMO Capital Markets]

Thank you. I want to come back to sort of capital allocation again, and you've been pretty clear about how you think about the regular dividends and share repurchases. I'm just curious, absent M&A, how do you think about sort of special dividends or kind of one-time dividend? How do you kind of think about it?

[Mike Covey, Chairman & CEO]

Well, I can give you my perspective, and time to time we've discussed it with the Board, but I can't speak for them. But I think it's our job to put the cash to work to create long-term shareholder returns, and a special dividend doesn't do that. And I don't think we get any credit for it in the market for doing it. It's quick and forgotten and done. And I think that would be absolutely the last resort that we'd come to. And it's up to us to find ways to put the money to work to enhance returns.

[Operator]

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

[Jerry Richards, VP & CFO]

All right. Thank you. Megan, and thanks everyone for your participation on the call. Look forward to following up on any detailed modeling type questions be available the rest of the day, and hope everybody has a good day. Talk to you soon.

[Operator]

This concludes today’s conference call. You may now disconnect.