PotlatchDeltic Corporation (PCH) CEO Michael Covey on Q3 2018 Results - Earnings Call Transcript

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About: PotlatchDeltic Corp. (PCH)
by: SA Transcripts

PotlatchDeltic Corporation (NASDAQ:PCH) Q3 2018 Results Earnings Conference Call October 29, 2018 11:00 AM ET

Executives

Jerry Richards - VP and CFO

Michael Covey - Chairman and CEO

Eric Cremers - President and COO

Analysts

John Babcock - Bank of America Merrill Lynch

Collin Mings - Raymond James

Ketan Mamtora - BMO Capital Markets

Salvator Tiano - Vertical Research

Steve Chercover - Davidson

Paul Quinn - RBC Capital

Operator

Good morning. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Third Quarter 2018 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

Thank you, Angela and good morning. Welcome to PotlatchDeltic's investor call and webcast covering our third quarter 2018 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com.

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

Michael Covey

Thank you, Jerry and good morning everyone. All three of our businesses continue to operate well, and the Deltic merger that we completed in February continues to meet or exceed our expectations by nearly every measure.

We generated $102 million of adjusted EBITDA in the third quarter including $46 million contributed by Wood Products. We expect adjusted EBITDA to exceed $300 million for the full year, almost 60% above any previous peak achieved by Potlatch since the Clearwater spin.

Speaking of the Deltic merger, I'm pleased to announce that we have achieved our annual synergy target and we're at $51 million run rate as of the end of September. This is well ahead of schedule, given that the goal was to hit the target by the end of 2019.

Mill production levels have increased, harvesting has ramped up, and Deltic was treated as a REIT effective with the merger close. There is still some integration work to be completed over the next few months, but most of the heavy lifting is complete.

Turning to lumber prices, though the market has been in a free fall since lumber prices hit an all-time high in -- record in June. While we expected a downward correction, the length and pace of decline have been a surprise and we are -- believe -- we believe that's inconsistent with market fundamentals.

We expect lumber demand will continue to grow faster than supply and that industry operating rates will remain healthy. Factors on the demand side that give us confidence include a healthy rate of household formation, strong employment and wage growth, higher consumer and homebuilder confidence, and the fact that houses remain affordable relative to historic levels.

It is important to keep in mind that there has been a significant amount of noise in the recent housing start statistics, including the effect of two major hurricanes and torrential rainfall in Texas, the largest homebuilding market in the country.

Single-family housing units, which use about three times as much lumber as multifamily units, are up almost 5% year-over-year. In addition, the repair and remodel market segment should remain strong through the old age of U.S. housing stocks and strong home prices. The repair and remodel segment has been growing in the mid to high single-digits and accounts for about 40% of lumber demand, which is a bit more than new home construction.

On the supply side of the equation, it appears that Canadian producers have meaningfully reduced this supply overhang caused by transportation issues in the first quarter. Over the longer term, fiber availability will constrain Canada's ability to supply the U.S. market.

Continuing with the supply theme, it is well documented that lumber capacity additions in the U.S. South will be measured. There are only two major sawmill equipment suppliers and each is requiring deposits to secure a place in line.

As we think about the demand and supply dynamics, fundamentals appear much stronger than the current lumber pricing environment. We expect improvement once we move past what is seasonally the weakest part of the year as well as recent weather disruptions. Field inventories are low, which should support pricing recovery.

Turning to capital allocation, we have several ongoing initiatives. During the third quarter, we contributed $44 million to our pension plan to capture a tax benefit. We also announced a $3.54 per share special distribution at the end of August. This is associated with converting Deltic to a REIT and will be completed on November 15th. We estimate that 20% or $44 million will be paid in cash and the remainder in stock.

In late August, our Board authorized a $100 million share repurchase. We did not purchase any shares in the third quarter before the open window period closed in mid-September.

Today, we are trading at a significant discount to our net asset value. Our dividend payout ratio is around 55% of cash available for distribution on a last 12-month basis, excluding cost to achieve synergies.

As we've mentioned on calls earlier this year, our Board will revisit the dividend in the fourth quarter. However, a share repurchase at our current price may be a more attractive way to return capital to shareholders. I continue to be excited about PotlatchDeltic's prospects and believe that we have good runway ahead of us.

I'll now turn it back to Jerry to discuss the quarter and then we'll take questions.

Jerry Richards

Thanks Mike. I'll start with page four of the slides. Adjusted EBITDA increased $7.6 million from $94.2 million in the second quarter to $101.8 million in the third quarter. The benefit of higher seasonal sawlog volumes in the north and increased lumber shipments were largely offset by the effect of weaker lumber prices in the sale of fewer real estate acres.

I'll now review each of our operating segments and provide more color on the third quarter results. Information for our Resource segment is displayed on slides five through seven. The segment's adjusted EBITDA was $58.7 million in the third quarter, which is $15 million higher than the second quarter.

We harvested 500,000 tons of sawlogs in the North in the third quarter. This is up seasonally from the 378,000 tons that were harvested in the second quarter when operating days are limited due to spring breakup.

Northern sawlog prices were 6% higher on a per ton basis in the third quarter. The increase in our sawlog price realization mostly reflects seasonally lighter logs due to lower moisture content. Index log prices delivered through mid-August reflected higher lumber prices that existed in June. As a result, our mix sawlog prices were flat on a volume or MBF basis in the third quarter compared to the second quarter.

Turning to the South, we harvested 978,000 tons in the quarter. This was down 135,000 tons compared to the second quarter. Unseasonably wet weather hampered operations in the third quarter, while operating conditions were good in the second quarter.

Our Southern sawlog prices were 8% higher this quarter. Our Southern sawlog price realizations typically increased in the third quarter due to seasonally higher hardwood sawlog harvest activity. The effect was muted this year as wet weather constrained our ability to harvest hardwood sawlogs in the third quarter.

Southern pine sawlog prices were relatively flat quarter-over-quarter. Log and haul cost were $4.8 million higher in the third quarter compared to the second quarter. This was due to the net increase in harvest volumes in the North.

I'll now shift to Wood products, which is covered on slides eight and nine. The segment's adjusted EBITDA was $46.5 million, which is down $5 million compared to the second quarter. Lumber shipments increased $26 million board feet to $285 million board feet in the third quarter. We made progress on the shortfall caused by truck and rail issues in the second quarter and still expect to ship just over $1 billion board feet of lumber for the year.

Our average lumber prices decreased 6% from $517 per thousand board feet in the second quarter to $486 per thousand board feet in the third quarter. Cost of sales for the lumber mills increased due to the higher shipment volumes. Adjusted EBITDA related to our two panel mills decreased $1 million largely due to an annual maintenance shutdown at the MDF plant.

I will now cover our Real Estate segment on slides 10 and 11. Real Estate's adjusted EBITDA decreased $4.9 million in the third quarter. We closed on the sale of approximately 8,000 acres of non-strategic timberlands to a conservation entity for $900 per acre in the second quarter. A comparable transaction did not occur in the third quarter.

As a result, sales activity declined from 11,571 acres of rural land in the second quarter to 3,160 acres in the third quarter. We believe there are significant rural real estate opportunities on the former Deltic timberlands and completed the first few Deltic rural property sales in the third quarter.

Turning to synergies and operational efficiencies on slide 12. Excellent progress against our targets has occurred since the merger closed in February. As Mike mentioned, we have achieved our synergy target well ahead of schedule and we're at a run rate of $51 million at the end of September.

Shifting to liquidity highlights presented on slide 13. We ended the quarter with $137.5 million of cash. We accelerated $44 million of future contributions to our pension plan in the third quarter. Doing so allowed us to claim this as a tax deduction at the higher 2017 corporate income tax rates. The tax benefit associated with this contribution comprised most of the $5.3 million reduction in income taxes that we recorded in the third quarter.

Separately, we will distribute up to $44.4 million of cash to shareholders as part of a special distribution on November 15th. The remainder of the distribution will be in stock. The special distribution completes the conversion of Deltic's timber operations to REIT status.

We are evaluating other uses of cash, including a dividend increase, repurchasing our shares, investing in additional high return projects in our mills, and acquisitions. In addition, we are considering refinancing our 7.5% debt that matures in 2019, which would reduce interest expense about $4 million per year at current interest rates. Capital expenditures were $12.5 million in the third quarter. We expect that capital expenditures will be in the range of $50 million to $55 million for the year.

The assumptions embedded in our fourth quarter outlook are included on slide 14. We expect fourth quarter resource adjusted EBITDA to be slightly less than half the third quarter amount due to lower harvest volumes and sawlog prices.

We expect Wood Products' adjusted EBITDA in the fourth quarter to be materially lower than the third quarter. This assumes an average lumber price realization that is 15% to 20% lower than the third quarter and slightly lower lumber shipments.

Our average lumber price was $375 per thousand board feet so far in the fourth quarter, which is 22% lower than the third quarter. We believe that prices are nearing a bottom and will slowly work their way higher in November and December.

We estimate that Real Estate's fourth quarter adjusted EBITDA will be significantly higher than the amount generated by the segment in the third quarter. Most of the year's development lot sales are planned to occur in the fourth quarter.

2018 has been a tremendous year despite the correction in lumber prices. We closed the Deltic merger in the first quarter and achieved our $50 million synergy run rate target ahead of schedule. The expanded footprint provided the opportunity to generate what we will expect would be just over $300 million of adjusted EBITDA for the year. Finally, a strong balance sheet provides the flexibility to return cash to shareholders and invest in our businesses.

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

Question-and-Answer Session

Operator

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

John Babcock

Hey good morning. Just wanted to quickly follow-up on the capital allocation topic here. What is the company's latest thinking on capital allocation priorities including share repurchases, particularly given where the stock is trading right now?

Michael Covey

Well, John, it's Mike. As I mentioned, our Board authorized a $100 million repurchase program in -- about the 1st of September. The open window period closed on us in mid-September. So, we were not able to execute a buyback in the third quarter. That's become even a more attractive opportunity in fourth quarter with a decline in our share price. We believe we trade significantly below net asset value today, whether it's our own estimates of that or the analyst community.

So certainly the share buyback is a high priority. We've always said we'd look at a dividend increase in the fourth quarter, which remains an important component of how we return capital to shareholders. So I think those two things are still top of mind. We talked about acquisitions broadly, but I think our focus there would just be small bolt-on acquisitions, nothing major.

John Babcock

Okay. Thank you. And then I was wondering more on the topic of lumber and pricing trends and the fundamentals there. If you could talk first about -- first of all about where inventories stand in the supply chain now versus where they were about a month or two ago? And then also just generally how market conditions look right now? And what you think it will take for hardwood prices to change direction?

Eric Cremers

Yes, John, this is Eric. Well, our sense of it in talking to our customers is that inventories in the supply chain are relatively low levels. Yet there's plenty of demand and order books are relatively strong. I think there was a Forest Products Conference that RISI had out in San Francisco here not too long ago and they reported that inventories were at incredibly low levels, half a month of supply compared to what typically might be 1.5 months of supply.

So our sense of it is that inventories are relatively low, which gives us optimism going forward that once the seasonal slowdown and housing turns the corner and demand picks back up again that order books, with them being strong, will get some firming of prices here.

You're also starting to see some curtailments out in the West; several mills have announced downtime, which ought to help the supply/demand balance. So like most pundits who are forecasting prices are up, I think, 10% Q1 versus Q4, that's roughly our outlook as well. So we think we're -- as Jerry said earlier, we're at or near the bottom in lumber prices, and we think we're about to turn the corner.

John Babcock

Okay. And then just what was the impact of transportation constraints on Wood Products during the quarter?

Eric Cremers

Well impact of transportation constraints in Q3 was almost small, very modest. Really hit us the hardest in Q2 when we had rail issues and trucking issues. Trucks are still expensive. There's still a shortage of trucking capacity, but now that the produce season is behind us, things have eased quite a bit. So transportation wasn't a huge issue in Q3.

John Babcock

Okay. And then last question before I turn it over. Just wanted to get a sense for how Northern sawlog pricing might have trended during the quarter if it weren't for the decline in lumber pricing. Just to kind of -- just any sort of ballpark would be helpful there.

Eric Cremers

Well, the lumber pricing is what drives our Northern sawlog prices. And so it's hard to -- you really can't exclude that impact. There is a normal seasonal impact due to the fact that logs are -- they're heavier as you get into the winter time. So that seasonal impact from the weather issue alone is about 6% comparing Q4 to Q3.

There's also a lag in how that index pricing arrangement works with lumber prices. It's about month and a half months' price lag. So as lumber prices decline, it doesn't really show up in lower log prices until you're about month and a half down the road. So we've now seen a significant drop in lumber prices. It started really to happen in mid-August or so. And so that's now going to start finding its way to Northern sawlogs in Q4.

John Babcock

Thank you.

Operator

And your next question is from Collin Mings with Raymond James.

Collin Mings

Hey, good morning guys.

Michael Covey

Good morning.

Jerry Richards

Good morning.

Collin Mings

First question for me just on the synergies target. Congratulations on hitting the goal there, but can you maybe just update us on the additional opportunities you've identified? I think on the last call you kind of touched on maybe an additional $8 million to $10 million of annual opportunities beyond that $50 million target. So, maybe just talk a little bit more about the additional opportunities you've identified and, kind of, what we could think about as far as potential impact from those?

Eric Cremers

Yes, so Collin, our additional operational synergy totals still are in that $8 million to $10 million range. We're very happy with what we're seeing with Deltic. Hopefully, that came across loud and clear in the commentary.

But we're really focused on those four primary synergy buckets, but some of the additional synergies that we're seeing. There are things like the Waldo mill had been sending its shavings to our MDF mill. There is a vertical integration strategy at Deltic that we have now, kind of, unwound. We're all about margin.

We're now sending those shavings to Drax, that's $150,000 a year of incremental margin. There was some discounting to move volume out of their mills that was taking place. It was easy on the sales force that we've unwound those discounts and we're -- our sales team is working it harder. That's about $1.5 million of synergies.

Broadly speaking, our log and haul costs 2018 versus 2017 in the South are going to be down anywhere from 4% to 5% per ton. That 4% to 5% per ton is about a bucket ton across 4 million tons, call it, that's about $4 million. So we're very optimistic about all these -- individually, they're relatively small synergies, but collectively; they do total that $8 million to $10 million. So we're very happy.

Collin Mings

Okay. And then maybe tying that together with just an opportunity you've identified, maybe just on capital allocation. I know it's early yet to be talking too much about 2019, but just as you think about capital expenditures and, kind of, referencing that earlier in terms of the capital allocation strategy looking at high return projects, any early sense on how we should maybe think about CapEx next year relative to this year?

Michael Covey

We'll go through our budgets here in the month of December reviewing with our Board and provide guidance on that on the Q4 earnings call.

Collin Mings

Okay, fair enough. Moving back to lumber pricing, I know that we've discussed this in the past. But maybe just walk us a little bit through, just the pricing recognized in the quarter. And obviously, that was materially better than Random Lengths tracked during in the quarter. How much of that was just the timing of, kind of, what was shipped in the order files versus product mix? Any sense you can give us on that front?

Eric Cremers

Yes, so Collin, what I'd tell you that Random Lengths in the quarter dropped, I don't know, 13%, 14%. Our reported prices, GAAP basis, dropped about 6%. So we did much better than Random Lengths. But as you know, Random Lengths is spot pricing. And our pricing, we're always selling anywhere from one to four weeks out into the future. So there's a lag effect there.

I think, virtually, all of that delta between us and Random Lengths in the quarter was due to this lag effect. There is a mix effect, but the mix effect is across all kinds of different product categories, wides, narrows, Southern Yellow Pine, studs, MSR. It's really hard to isolate what is the mix effect. So I would just say together, we're going to go up and down with Random Lengths, but we're going to tend to lag Random Lengths by several weeks.

Collin Mings

Okay. No, appreciate the color there. And then Jerry, I may have missed it, but just pretty healthy pricing on the HBU development acreage in the quarter. What was driving that?

Jerry Richards

Yes, so in terms of, Collin, in the script to mention, that there was -- we had closed our first few sales off of former Deltic timberlands. So we had -- it's kind of a small acres, but it sold at $9,000 an acre. So just an indication again that we have some great opportunities there.

Collin Mings

Okay. I'll turn it over. Thanks guys.

Operator

And your next question is from Ketan Mamtora with BMO Capital Markets.

Ketan Mamtora

Good morning.

Michael Covey

Good morning.

Ketan Mamtora

First question. I want to come back to this capital allocation again. Just one clarification, so on the debt that's maturing next year, would it be fair to say that refi is probably more likely than permanently paying off at this point? Or it is too early to say?

Jerry Richards

Yes, Ketan, this is Jerry. So I think, over time, we've talked about either paying a portion or all of that debt or refinancing. And I think as you step back and you look at where we're trading, as Mike mentioned a couple of times now, our share repurchase looks pretty attractive.

So, I think, given where interest rates are at, a chance to lock them in for the long-term as well as other capital allocation priorities, we would lean towards refinancing at this point. And that's one of the capital allocation points we'll discuss with our Board here in the fourth quarter.

Ketan Mamtora

Got it. That's very helpful. And then turning to lumber prices, I've noticed that the wider grades of Southern Yellow Pine have come under much more pressure than the benchmark 2x4 grades. What in your view is driving that because the difference now is quite wide?

Michael Covey

Well, that's to -- Eric can add color to it. But it's -- those wider product widths, the 2x8s and others, a lot of that goes into the treated market more than trusses or other things, and it's just seasonal issues. Eric, anymore color?

Eric Cremers

Yes, no, I would say that's exactly, those larger wides, they also compete with things like I-joist, so their upside is limited. But it's really, at this time of the year, is just due to normal seasonality with wides not being in demand.

Ketan Mamtora

Got it. And then what are you seeing in terms of cedar prices right now?

Eric Cremers

Well, cedar prices have rolled over a little bit compared to where they we're last year. We had record prices last year, really high levels. That incremental pricing stimulated incremental supply to come out of the woods, so to speak. So we are seeing cedar come down a little bit, but still we're at really healthy levels for cedar sawlogs.

Ketan Mamtora

Okay. That's very helpful. I will turn it over. Good luck next quarter and into 2019.

Michael Covey

Thank you.

Eric Cremers

Thank you.

Operator

Your next question is from Chip Dillon with Vertical Research Partners.

Salvator Tiano

Hi. This is Salvator Tiano filling in for Chip. How are you?

Michael Covey

Good morning.

Salvator Tiano

Hi. So my first question, if you can a little bit elaborate in more detail how should we expect sawlog prices in the North to move in relationship to the index -- to the lumber Index you're tracking? I think you mentioned many times, it's not the Random Length's index, but as we see this index going down 20%, 30% on the quarter, how should we think about the average Northern sawlog price moving in Q4?

Eric Cremers

Yes, we're really -- our Northern sawlogs are tied to WWPA and to some extent, Random Lengths. It's a very, very complicated formula. But I think as you see WWPA or Random Lengths, which those two together will move up and down over time. As you see those prices roll over, there's about a month and a half lag from when it shows up in our sawlog prices. So that's the simplest way to think of it. If prices stop falling today, you wouldn't see it show up in the lower sawlog price for about month and a half.

Salvator Tiano

Yes, so assuming we are kind of adjusting a little bit for that and we see a 20% decline, 20% decline in the average sawlog price would be also in the ballpark as a correct assumption?

Eric Cremers

Yes, I think in general, if you see Random Lengths drop 20%, eventually that 20% will show up in Northern sawlog prices with a lag of about month and a half.

Salvator Tiano

Okay, perfect. The second question is -- we saw a little bit on Friday from one of your competitors; I mentioned on their Western timberlands, there was some softness in pricing and harvest. I know you're not in the same area, but on the margin some areas could be supplied by both regions. And are you seeing any pressure coming from that dynamic? Or could that happen in Q4?

Eric Cremers

We're in the inland region here and they're really -- we're separate from the west side. I mean, we're influenced by Western lumber prices for sure. But what happens on the West Coast, particularly as it relates to export markets, will not impact us here in Idaho.

Salvator Tiano

Perfect, okay. And one last question. You spoke a little bit about the lumber market. I just wanted to get a little bit of your thoughts, given what has happened, are you seeing, first of all, the potential for some of this new lumber mills, these projects to not come online, first of all?

And secondly, as we talk about your lumber footprint, what is approximately -- if you have and if can disclose your breakeven lumber price across your mill system?

Michael Covey

Well, regarding the announced capacity additions in the industry, I don't expect that any of those are going to be canceled. Certainly, lumber prices have rolled over, but Southern log prices have not gone up. So margins in the south are still quite strong. So in most -- almost all of the capacity additions here in the U.S. South. So I'd be very surprised if we see any kind of cancellations.

And further to that, our view is we've got a very seasonally weak fourth quarter due to lots of different factors, but we're still very bullish on the long-term outlook for lumber here as we move into first quarter of 2019 and beyond. And in terms of breakeven prices, that's something that we don't disclose.

Salvator Tiano

Okay. Thank you very much.

Michael Covey

Yes. That's good. Thanks.

Salvator Tiano

Yes.

Operator

And your next question is from Steve Chercover with Davidson.

Steve Chercover

Thanks. Good morning everyone. So also a couple of questions on Wood Products. First of all, it's about freight actually. I don't know whether you guys operate or own your own rolling stock, but are you aware of any increased investment or supply of center beams by the railroads? And is there any reason to believe that absent hope or weather, we shouldn't see a third straight year of rail and transportation snafus?

Eric Cremers

Yes, see, we do not own our own rolling stock. I think transportation is going to continue to be an issue over time, particularly, on the trucking side. And as it relates to rail, we are working with Union Pacific, who is our carrier in the South and that's where we've had the bulk of our rail issues, working closely with them to increase supply of cars and we're exploring the possibility of a new spur at our Waldo mill, which could help ease things quite a bit. We've not vetted that project yet, so it's premature, but we're doing what we can to ease some of these transportation pressures.

Steve Chercover

But I mean it would great if you had the spur, but unless they've got the rolling stock, then it really doesn't change things?

Eric Cremers

Yes, correct. But if we have another spur, they'll deliver us more cars.

Steve Chercover

All right. Okay. And then I wanted to clarify with -- again at Waldo and Ola, both of those are now running with their second shifts?

Eric Cremers

Yes, they're running with their second shifts and we're very happy with their performance. They're expected to beat their budgets for the year by $10 million. Budget for the year was what we had established for synergies. So we're very happy with the performance of those mills.

Steve Chercover

So should we think of your nameplate capacity, I guess, for 2019 at about 1.1 billion to 1.2 billion board feet?

Eric Cremers

Well, it's still early. We haven't gone through the budgeting process yet. But I would expect roughly 4%, 5% increase over 2018 levels to be a reasonable assumption, which would put you up at around 1.1 billion board feet.

Steve Chercover

Okay. Thanks for that. And then we don't really talk much about the plywood or the OSB -- sorry, the MDF, but can you just give us maybe run rates of contribution for those two businesses? I think at one stage I had Del-Tin had an annual EBITDA of about $8 million?

Eric Cremers

Well, we don't break out those results separately, but what I would tell you is our plywood mill is a great mill. It produces industrial plywood, as you know. Those are high performance, high margin products sold into the boat industry, the RV industry, furniture frame, that sort of thing. And we have got a great industrial plywood business.

Our MDF business, although, we do produce some thin board with our MDF mill, it's a little bit more of a commodity. But yet margins are relatively stable in that industry. It doesn't have near the volatility that we find in lumber. So we're happy with both those mills.

Steve Chercover

Okay. Thank you.

Operator

And your last question is from Paul Quinn with RBC Capital.

Paul Quinn

Yes. Thanks very much. Just a question. You mentioned the log and haul was down $1 a ton. Just wondering how you're able to achieve that? Is that just scale or I suspect there is annual inflation on the employment side?

Eric Cremers

Well, yes, you raised a good point, Paul. It's not just typical inflation, it's also diesel costs are up $0.50 a gallon year-over-year. So we're fighting both inflation and wages and equipment and what not, but also in fuel costs. What I'd tell you how we're able to get it is by optimizing route structures for the most part.

So let me give the simple example. So Bradley County, where our Warren mill sits, Deltic owned a significant amount of timber ground. Deltic was harvesting off their own ground and with their vertical integration strategy, they were hauling those logs across the state to the Waldo mill.

While we have that Warren mill right in Bradley County, so rather than haul, I don't know, 80 miles to get to the Waldo mill, haul at 10 miles to get to the Warren mill. That's a simple example of how we're able to capture log and haul synergies.

I would also tell you that, in general, each organization seemed like specialized in long-haul versus short-haul contracts. So we're comparing each other's contracts and we're implementing best practices, if you will, to capture those haul synergies. Is that helpful?

Paul Quinn

Yes, that's pretty helpful. Maybe just moving on to timber, we've seen interest rates coming up. What have you seen in the timber market, especially in the U.S. South?

Eric Cremers

Well, we just closed on a couple of thousand acre acquisition here a couple of weeks ago, and what I'd tell you, discount rates are -- we got -- we think we got a very attractive transaction here. It was a 6% discount rate, but with some 1031 like -- kind exchange tax benefits, it turns out to be a 9% discount rate.

So I don't know that anything is materially changed though if you compare to where we were a year or two ago. We also lost a transaction a couple of months ago that had what we think was a discount rate of 3.5%. So timber is still a highly sought-after asset in the South, in particular.

Paul Quinn

What is driving that strong demand in the U.S. South? I mean, it's obviously got to be disappointing over the last decade, we haven't seen any material increase in sawlog prices on the Southern Yellow Pine side. So what is driving that demand?

Eric Cremers

Well, you're right. There haven't been any price increases over the last decade. It has disappointed industry observers. But we talked about a little bit earlier. There's a lot of mill capacity that's going to be coming online in the next, who knows, two, three, four years.

Our estimates that sawlog demand is going to go up anywhere from 15 million to 20 million tons per year. That should put the South back into supply/demand balance. And when that does, you'll see price movements. The same opportunity isn't there on the West Coast or in other parts of the country. I think that's where the opportunity is in the U.S. South.

Paul Quinn

Okay. And then just lastly, just on the lumber, just trying to understand its lag. What's your -- is your current order file like more than a week right now or--?

Eric Cremers

Well, it varies a lot by mill. I mean we've got -- our one mill I know has got prompt deliveries. You call today, we'll put it on truck, will be out the door later in the afternoon. I'd tell you that our Southern mills are more out one to two weeks. So it varies by mill.

Paul Quinn

So that lag that we saw in Q3, I mean that should be a shorter lag in Q4? Is that the way to think about it?

Eric Cremers

I'm not sure I understand your question.

Paul Quinn

Well, I suspect that lag is because of your order file and you probably had a longer order file in Q3 than you might have in Q4. So, I'm just trying to understand that?

Eric Cremers

Yes, that's correct.

Paul Quinn

All right. That's all I had. Best of luck guys. Thanks.

Michael Covey

Thanks Paul.

Operator

And we have no further questions.

Jerry Richards

All right, thank you, Angela and I appreciate everybody's interest in PotlatchDeltic. I will be available for detailed modeling questions rest of the day and that's a wrap for our third quarter earnings call.

Operator

This does conclude today's conference. You may now disconnect.