Executive Q&A With Deltic Timber CEO Ray Dillon

The intertwined timber and real estate industries have been embattled since the depths of the recession. Deltic Timber Corp. CEO Ray Dillon is bullish on the future.  Talk Business Arkansas executive editor Roby Brock sat down with Dillon recently to discuss economic conditions.

Roby Brock: How would you characterize market conditions that you’re dealing with right now at Deltic Timber and Chenal Properties – more generally the timber and real estate markets?

Ray Dillon: Nationally, as the statistics show, housing starts are improving throughout the country. That’s true here in Arkansas also. But as we ship lumber throughout the country, we see lumber shipments are up. What that means is operating rates at the sawmill – not only for ours, but for other producers – are up also.

What has not shown up yet is that being translated back into demand for pine trees in the forest from private landowners in the form of increased prices. But with weather conditions and with a normal winter, we would expect to see stumpage prices begin to improve, which is consistent with operating rates at saw mills going up and lumber demand for housing starts going up. So, we’re expecting to see improvements as far as stumpage price is concerned as we go forward.

As far as residentially, as far as dirt or lot sales for builders, we see builders today are beginning to venture into the spec home building market again. We also see that they’re willing to inventory dirt or lots where they’re planning their next spec home because they have a belief that they’ll be able to move the one that they’re building or they want to build two or three simultaneously to take advantage of the economies of scale that they can get with their various subs that they work with.

Brock: How significant is that to you that you’re seeing spec home construction making a comeback?

Dillon: In the end, it backs up into lumber demand whether it’s here in central Arkansas or it’s in Texas, or quite frankly, if it’s in Idaho or Illinois. It’s all additive and accretive, which is very important.

Brock: What are you dealing with from a regulatory perspective at the national level and state level?

Dillon: We’ve been dealing with forest roads litigation as far as them becoming point sources. We had what I’ve called a ‘disappointing’ ruling out of the Ninth Circuit, which has been appealed to the Supreme Court and we’re currently waiting for a ruling. Legislatively, the industry is also working on a legislative solution to that issue.

From an operating facility standpoint, Boiler MACT is the buzzword today as far as the EPA and regulatory environment. It costs not only the forest products industry but also pulp and paper industries an estimated billions of dollars. So, we’re working our way through those regulatory processes and, quite frankly, trying to assess and plan for what we think the eventual outcomes will be.

Brock: What is Boiler MACT?

Dillon: It’s a tighter regulation around emissions from boilers that are producing steam. The regulatory environment is such that the belief from an industry standpoint is that the standards they have proposed are so tight that they’re not attainable. The cost to attain those standards would put businesses out of business. So from a regulatory standpoint, it would be regulating us out of business. We hope to be able to achieve a balance to where we’re able to maintain proper environmental regulatory standards and be able to operate.

Brock: So stay in the timber realm here, for several years because of the recession, because of economic conditions you’ve really run lean operations. Have you squeezed all of the efficiencies that you can? Is there more that you can do at this point in time or are you benefiting from a lot of what you did over the last couple of years?

Dillon: In an operating environment, you wake up each and every day wanting to improve both from a productivity standpoint, from an efficiency standpoint, from a yield standpoint, and overall a cost standpoint. So there’s always something to be done and it’s our job to find that. It’s the way we approach operations at Deltic Timber Corporation.

We’ve been fortunate to improve our productivity consistently and lower our cost to manufacturing consistently, and that has resulted in Deltic Timber being profitable throughout this entire recession. Our diverse portfolio of assets is the foundation that allows us to be able to move to the areas that are able to produce profits for the corporation. But to be profitable in this environment, in this segment of the economy, we are very proud of and we believe it to be an outstanding achievement.

Brock: Let’s talk about what you see on the horizon. Give me some prognostication of what you see happening six months, twelve months from now.

Dillon: From a macro-economy standpoint, we’re thinking the macro-economy will continue to improve, albeit slower than what all of us would probably like. Nevertheless, we think it will continue to expand. We think unemployment will continue to decline, albeit slower than all of us would like to see. We think what I would characterize as family unit housing, we think that will continue to increase. And as family units are increased, that will lead to the demand for housing to continue to improve. At the present time, the availability of vacant residential housing is near, it’s not, one can call it a record low, but it’s certainly in the lower quartile of availability. So, there’s some pressure in demand for housing today. And as family units are created, that would just improve.

We probably look at the glass being more than half full. We’re looking for opportunities and we’ve got our operations geared up to be able to serve the markets as demand improves and to be able to capitalize on that from a financial and economic standpoint for Deltic Timber shareholders. I’m confident in our ability to adjust to whatever environment we have to operate within and make the most from it and excel at it.