Eric Cremers: Paul, that’s the million dollar question here. So this first project that we’re going to do, it’s exploratory. It will be meaningful, but it will be exploratory. We’re taking our time to make sure that we do it right. We think the carbon value that we’re going to get is, I don’t know, somewhere between 50% and 100% higher than what the value would be had we harvested these trees. So it’s meaningful. But we still have several quarters to go to get it across the goal line. I still don’t think carbon values are high enough in the forestry sector to cause us to change our harvesting practices on our plantations. So basically, Southern Yellow Pine sawlog is worth far more to a lumber mill than it is to somebody looking to buy carbon offsets.
It’s in these weaker timber markets where suddenly the opportunity for carbon, those values are higher than what stumpage is worth to a mill. So it’s going to take time to prove this out. We’ve got our start growing trees for mills so we like plantation forestry. And so there will be a subset of our acres, I think, that in time, we’re going to have more value in carbon versus producing logs for mills, but that’s totally dependent upon what the carbon price is.
Paul Quinn: And then just lastly, I was kind of surprised with the no share repurchases in Q1. Given some of the things you’re seeing late last year on the ability that you’ve had to increase your net asset value. Just wondering if you were fully restricted in Q1 from buying that back, especially early in the quarter?
Eric Cremers: No, we were not fully restricted. There was a period of time where we could step in and buy, but it wasn’t a very long period of time. But you’ve known us for many years, Paul, we’re cautious. We’re looking for deep discounts and there’s a lot of uncertainty that’s in the market right now. And so we’re looking for those big dislocations to step in and buy.
Operator: We’ll take our next question from George Staphos with Bank of America.
George Staphos: Just a couple of quick ones for me. So I want to go back to home center demand and what you’re seeing. I think, Eric, you mentioned that demand was more or less as you expected in the first quarter. But what were your expectations? You put a bit more guardrail or two around that. And when you talk to your customers and you outlined what the secular trends are in terms of why you’re optimistic on, first, to new construction as well as repair remodel. What concerns you the most or what concerns your customers the most about the repair remodel outlook when you talk to them? What would — if we saw it in the journal tomorrow what would cause us to maybe start to lower our forecast there?
Eric Cremers: I would say we never — you go back over the last couple of quarters, we could all see that the Fed was jacking up interest rates, and there was a little bit more economic uncertainty. We never expected our repair/remodel business to fall off. Other pundits had been expecting it to fall off and we never thought that it would. And in fact, it hasn’t or it didn’t. So it kind of met our plan. If you look at the home center comp store sales numbers, they haven’t fallen off a cliff either. They’re like, I don’t know, zero to minus 1 or something like that. But remember, all along the way, lumber has gone from $1,400 a 1,000 to $400 a 1,000. So yes, prices have come off and their comp stores are flat to slightly negative, but lumber prices have just completely collapsed.
And so from a volume standpoint, that means their volumes across the store are hanging in there. And I listened to what the home centers say, they don’t have a dire outlook, they just talk about businesses kind of flat, and that’s kind of how we see it. But I think flat in a market where housing is in a recession, generally speaking, flat is good on the repair and remodel side. So what would cause R&R to go backwards here? I don’t know, maybe credit availability for some of these larger projects. I mean, certainly, you see banking stress across the country, Silicon Valley Bank and Signature Bank and whatnot. Does that feed into limited credit availability for large remodeling projects? I suppose it’s possible. But there’s so much home equity that’s been built up over the past couple of years, and there’s so much demand for labor in this country.
Unemployment rate is still at last I saw. It’s hard for me to see that being an issue, but it’s certainly a possibility.
George Staphos: But it sounds like — and I appreciate all of that. It sounds like the risks are skewed to the upside from what you see. We kind of bump along here unless there’s some sort of other credit issues that arise and hopefully not. But otherwise, we’re flat to up over time from what you’re seeing over the next couple of quarters. I’m not trying to put words in your mouth and obviously, no guarantees in life.
Eric Cremers: Yes, I would say my expectation is we kind of just keep bouncing along here, steady demand in R&R. And I think we’ve got probably two or three quarters to go of kind of a little bit of rough sledding here on the new residential construction. But we get out to 2024, almost every report I read says lumber demand is going right back up for new residential construction as housing starts come back. D.R. Horton had very favorable things to say in their recent earnings release, Pulte, just said some great things. I think home sales or home starts were up, some data released by the government this morning showing month-over-month, I think, starts — no sales, new home sales were up 10%. So I think to summarize, I think R&R is stable and I think the opportunity is for new residential construction to really pick up the pace as we get out a year from now.
George Staphos: You showed in your waterfall obviously, manufacturing costs in wood, I think, benefited results overall by about a couple of million dollars. From where you sit and given what you can lay, what would you, if you were in our seat, be building into our waterfalls over the next two, three quarters on the manufacturing side for the Wood segment?
Eric Cremers: Well, I think what you’re going to find, George, is we’ll continue to ramp up our volumes at our Ola sawmill. And as we ramp up that volume at Ola in that sawmill, we’ll get better fixed cost absorption. And inflation was a huge deal for us last year. I would tell you that inflation — those inflationary pressures are rolling over a little bit. So processing costs for us for the full year, we expect them on a per thousand basis with the higher volumes coming out of Ola to be up just 1% full year over full year. Log costs are going to be down in total roughly 12% full year over full year and total cash costs for our mills, we expect to be down around 7% full year over full year. So we’re going to get a lot of benefit from that Ola sawmill running harder.
George Staphos: And then last one for me and I’ll turn it over. And recognizing that you said it earlier, I mean, land sales are lumpy and all that. But when I look at the rural realization that you’re targeting, a slight erosion from current trend to the end of the year or the average, what’s driving that, if anything, recognizing it’s mix? But if you had any points that you want to relate to us, we take it.
Eric Cremers: On the rural side, we definitely plan probably two larger tracks in ’23 and so they just happen to fall in Q1. So it’s really no change in our 18,000 acres for the year, it’s just timing and definitely the lumpiness of rural sales so.
Operator: We’ll take our next question from Mike Roxland with Truist Securities.
Mike Roxland: Just two quick ones here. Eric, going back to your question, your comment on the home center customer takeaways. You mentioned the homebuilders obviously see improved activity, there’s better optimism. You have the home centers that are doing where activities picked up again. Lumber inventories still seem to be tight. You have the BC issues that’s curtailing lumber into the US. If all that’s true, why do you think we haven’t seen a more pronounced improvement in lumber prices? I realize that they’re up versus earlier in the year. But given all these issues, given more , given some of the builders and talking about increased contracting activity, given BC, not producing as much. What’s constraining a breakout in lumber pricing right now?
Eric Cremers: So I think it’s two things. One, it’s — so demand for new residential construction has softened considerably. I mean we’re off, I don’t know, 300,000 starts, 400,000 starts per year. So you’re right, there’s been a lot of curtailments, mostly up in BC that’s taken supply off the market, but demand has also dropped here. So that’s the first thing is that demand has, in fact, come down quite a bit. But the second thing, and this is really important, is imports coming in from Europe are at a really high run rate right now. I think I read somewhere, they’re approaching 10% of US consumption. So Europe has got the spruce beetle issue, they got dead trees, dead and dying trees, they got really cheap logs to their mills.
And so we’ve had a really strong dollar here over much of the past year due to rising interest rates. And Europe has been relatively weak. So they’ve been — a lot of lumber they’ve been producing with these really cheap logs has been on a boat headed to the US. Typically, that would only finds its way into like the Northeastern seaboard. But recently, we’ve seen it in markets like as far away as Houston. So we’ve seen a ton of imports coming into the US from Europe. We’re expecting that to be flat full year over full year. And then we expect it to come back down again as we get out to 2024 as European demand comes back. Basically, it’s because less Russian, Ukrainian and Belarussian lumber finds its way into Europe, that European wood will tend to stay home and not come to the US.
So another favorable thing coming our way next year is less European imports.
