PotlatchDeltic Corporation (NASDAQ:PCH) Q1 2023 Earnings Call Transcript

PotlatchDeltic Corporation (NASDAQ:PCH) Q1 2023 Earnings Call Transcript April 25, 2023

PotlatchDeltic Corporation beats earnings expectations. Reported EPS is $0.2, expectations were $0.11.

Operator: Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic First Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session . I would now like to turn the call over to Mr. Wayne Wasechek, Interim Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Wayne Wasechek: Thank you, Lisa. Good morning. And welcome to PotlatchDeltic’s first quarter 2023 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic’s President and Chief Executive 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 regarding the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our Web site at www.potlatchdeltic.com. I will turn the call over to Eric for some comments, and then I will review our first quarter results and our outlook.

Eric Cremers: Thank you, Wayne. I’ll start with a few comments about the press release we issued last week indicating that Jerry Richards is leaving the company to pursue another opportunity. It’s with a larger company in a different industry. Jerry was our CFO for 10 years and did a terrific job. Our press release also stated that Wayne Wasechek, our current Principal Accounting Officer, is now our Interim CFO. Wayne has been with the company for five years, having joined us from Vail Resorts. Thankfully, we have a deep bench of talent in our finance and accounting departments. We have a search underway and envision filling the CFO position over the coming months. Turning to the first quarter. We reported total adjusted EBITDA of $58 million after the market closed yesterday.

Our Wood Products segment had breakeven adjusted EBITDA in the first quarter. Lumber prices found a bottom in January. We are encouraged by the upward trend in lumber prices as we head into a spring building season that has been delayed by winter weather in the Northern tier of the country. Also, I am pleased with the team’s strong safety performance in the first quarter. As we have discussed on the last two calls, we successfully completed our Ola, Arkansas sawmill rebuild and restarted the large log line in the third quarter of 2022. While the start-up phase has taken a bit longer than we had anticipated, we are very happy with the new equipment. The mill’s operating run rate has reached its expected annual capacity of 100 million board feet per year.

As a reminder, Ola’s rebuild significantly lowers the mill’s cash cost structure. Last year, we announced a $131 million project to modernize and expand our Waldo, Arkansas sawmill. Activity is currently focused on site prep with the majority of equipment delivery and installation to come in 2024. The project will increase the mill’s annual capacity by 85 million board feet and significantly reduce the mill’s cash cost. The existing mill will continue to operate during the project with approximately three weeks of downtime expected in 2024 to tie in the new equipment. Project completion is expected by the end of 2024. Our Timberlands segment generated adjusted EBITDA of $47 million in the first quarter. We harvested 2.1 million tons, which is higher than planned and is also a company record.

Both our teams in the north and in the south contributed to that result. Our harvest plan remains unchanged for the full year. Speaking of our Southern team, we completed the process of insourcing the management of CatchMark’s timberlands in the first quarter. As a much larger company, we can conduct these same types of activities internally at a much lower cost. In this case, in-sourcing resulted in a synergy of $3 million per year. Our Real Estate segment had another solid quarter with adjusted EBITDA of $19 million. On the rural side of the business, we sold 6,900 acres at nearly $2,600 an acre. In development, we sold 24 lots at an average price of $116,000 per lot in our Chenal Valley master plan community in Little Rock. Our team continues to make progress on natural climate solutions opportunities.

We are working on a carbon credit project. We are also exploring opportunities to supply mill residuals and/or pulpwood to pellet manufacturers. Finally, we have over $100 million of potential future solar land deals and leases in the pipeline. We expect solar opportunities will increase as the team finishes stratifying CatchMark’s acres in the second quarter. As a reminder, we completed our first solar related rural land sale a year ago. While it will take time for the carbon and pellet efforts to pay off, we are optimistic about overall growth tied to providing natural climate solutions, and we believe these efforts will result in higher returns as well as higher timberland values. Shifting to housing. We continue to believe there are strong positive tailwinds over the long term.

Our view is based on a fundamental shortage of housing stock due largely to the combination of under building after the great financial crisis and favorable demographics in the form of millennials who have reached prime home buying ages. In our view, the final element needed for housing construction to rebound is lower interest rates. To that end, we are encouraged by the recent easing in mortgage rates. Acknowledging it will take time, we continue to expect that US housing starts will return to levels above the long term average of 1.5 million units per year once mortgage rates ease further making homes more affordable. There’s also a near record low inventory of existing homes for sale in the US, forcing buyers to look at purchasing a new home versus an existing home.

New home sales data released just this morning was also favorable. Turning to repair and remodel, which is the largest market segment for lumber demand. The underlying fundamentals continue to be favorable for a variety of reasons. Existing US housing stock remains the oldest in the history of this statistic at 42 years on average. This is important because older homes are significantly smaller than new homes on average. Remote work means people need more space, older homes typically need more repairs and higher mortgage rates mean that people are much more likely to stay in their existing homes. Remodeling is a very attractive option for homeowners given the strong levels of home equity across the US and robust job market and the fact that consumer balance sheets remain in good shape.

Our home center customer takeaway remains strong, and we continue to be optimistic about lumber demand in the repair and remodel market segment. Moving to capital allocation. Our top priority is to grow our regular dividend sustainably. The key to doing so is by increasing our stable cash flows through accretive acquisitions, such as the CatchMark merger and the bolt-on timberland transactions that we completed in 2022. We increased our regular dividend 2.3% last December. We also remain committed to repurchasing our shares only when they trade at a significant discount as part of our overall focus on growing shareholder value over time. To that end, we have an active 10b5-1 share repurchase plan in place. In total, we have 150 million remaining on our 200 million repurchase authorization.

We will also continue to carefully balance share repurchases against other capital allocation options like M&A. At the end of the quarter, we had $326 million of cash on the balance sheet and liquidity of $625 million. Our leverage remains low and our financial strength provides a solid platform to continue growing shareholder value. Regarding environmental, social and governance, our reporting team is hard at work preparing our fourth annual ESG report, which we plan to publish in May. Recently, we are also one of six finalists for IR Magazine’s Best Mid-Cap ESG reporting board. PotlatchDeltic has a strong ESG story and we are committed to doing our part to mitigate climate change and continue our legacy responsibility across the ESG spectrum.

To wrap up my comments, PotlatchDeltic remains very well positioned with a strong balance sheet and liquidity to continue increasing shareholder value. I will now turn it over to Wayne to discuss our first quarter results and our outlook.

Photo by Karsten Winegeart on Unsplash

Wayne Wasechek: Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $58 million in the first quarter compared to $52 million in the fourth quarter. EBITDA increased quarter-over-quarter as the sale of more rural acres in the first quarter more than offset the effect of lower lumber and index sawlog prices. I will now review each of our operating segments and provide more color on our first quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment’s adjusted EBITDA decreased from $51 million in the fourth quarter to $47 million in the first quarter. Our Idaho team leveraged favorable logging conditions and strong mill demand to harvest 471,000 tons of sawlogs in the first quarter.

The first quarter harvest volume was higher than planned and the team is off to a good start in 2023. Our Idaho sawlog prices were 19% lower on a per ton basis in the first quarter compared to the fourth quarter. The decline in sawlog prices reflects lower index prices and seasonally heavier sawlogs. In the South, we harvested 1.6 million tons in the first quarter, which is a record. This reflects our successful completion of the CatchMark merger, along with $101 million of bolt-on timberland acquisitions in the South last year. Also, solid execution and flexibility by our Southern timberlands team, coupled with strong demand in Arkansas and Mississippi were key to achieving the record harvest. Our Southern sawlog prices were 3% lower in the first quarter compared to the fourth quarter.

The decrease was due to 2% lower pine sawlog prices and a seasonally lower mix of hardwood sawlogs. Moving to Wood Products on Slides 8 and 9. Adjusted EBITDA declined from $2 million in the fourth quarter to breakeven in the first quarter. Our average lumber price realization decreased 8% compared to a 10% decline in random lengths framing lumber composite price in the first quarter compared to the fourth quarter. As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite, which is a close to real-time indication of price. Our lumber price realizations increased each month in the first quarter. Specifically, our average lumber price realizations per 1,000 board feet were $413 in January, $439 in February and $453 in March.

Lumber shipments increased 2% to 262 million board feet in the first quarter. As Eric mentioned, the team has made good progress at Ola. During the quarter, higher Ola lumber shipments more than offset the effect of planned maintenance at our other two Arkansas sawmills. Shifting to Real Estate on Slides 10 and 11. The segment’s adjusted EBITDA was $19 million in the first quarter compared to $7 million in the fourth quarter. EBITDA generated by rural sales increased sequentially due to the sale of more acres. EBITDA generated by our Chenal Valley master plan community declined primarily due to the absence of commercial lot sales this quarter. Commercial sales tend to be lumpy and our pipeline of future transactions remains attractive. We closed on the sale of 24 residential lots in the first quarter at a lower average price in the fourth quarter due to a different mix of price points.

Turning to financial items, which are summarized on Slide 12. Our total liquidity was $625 million. This amount includes $326 million of cash as well as availability on our undrawn revolver. We have $40 million of debt that is scheduled to mature in December. The decision to repay or refinance this debt will occur later this year. We still have $250 million of forward starting interest rate swaps on our balance sheet that provide the opportunity to issue debt at well below market rates. We did not repurchase any shares in the first quarter. We put another 10b5-1 share repurchase plan in place in connection with our ongoing commitment to repurchase our shares opportunistically at a significant discount to NAV. Capital expenditures were $13 million in the first quarter.

That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement. For the full year, we are planning to spend $135 million to $145 million, excluding any potential acquisitions. That estimate includes $74 million for Waldo, Arkansas sawmill modernization and expansion. 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 lower in the second quarter at a level comparable with the second quarter of 2022. We expect Northern sawlog prices to decline 5% in the second quarter compared to the first quarter. In the south, we plan to harvest approximately 1.3 million tons in the second quarter.

We expect our Southern sawlog prices to decrease modestly. We plan to ship 270 million to 280 million board feet of lumber in the second quarter. Our average lumber price thus far in the second quarter is approximately 6% higher than our first quarter average lumber price. This is based on approximately 100 million board feet of lumber. Our lumber prices have been modestly increasing and our spot price is currently about 7% higher than our first 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. Shifting to Real Estate. We expect to sell approximately 2,600 acres of rural land and 35 Chenal Valley residential lots in the second quarter.

Additional real estate details are provided on the slide. Overall, we expect our total adjusted EBITDA will be lower in the second quarter due to seasonally lower harvest volume and fewer rural land sales. Having said that, we are encouraged by the recent improvement in lumber prices. We are well positioned to continue growing shareholder value over the long term. That concludes our prepared remarks. Lisa, I would like to now turn the call over to Q&A.

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Q&A Session

Operator: And we’ll take our first question from Anthony Pettinari with Citi.

Anthony Pettinari: On Southern log prices, I guess, on a year-over-year basis, they were flattish. And I’m just wondering if it’s possible to kind of parse out 1Q price performance between the legacy Southern lands and acquired CatchMark lands, or maybe just directionally? And if you can comment on those two submarkets?

Eric Cremers: So I think I would characterize it this way. The legacy markets for PotlatchDeltic are relatively flat kind of year-over-year. And I would say the newer CatchMark markets, so we’re talking about Georgia, South Carolina, Southeastern Alabama. We’re seeing a little bit more price decline in those markets. Not dramatic, it’s modestly more. So just to give you a sense of it, in the fourth quarter, we were down 3% in the CatchMark markets and we were down just 1% in Arkansas quarter-over-quarter. And as I reflect on it, what I think is going on here is that those more tensioned log markets, you’re going to see log prices fall faster and further when you’re in a down market — down lumber market like we’re in today. And it kind of makes sense if you step back and you think about it, it’s harder for mills to make a margin in those higher priced log markets like a Georgia, like a South Carolina, where you’ve got weak log markets like in Arkansas and Mississippi, mills can still make an adequate margin.

And so they’re going to continue to run hard whereas in those higher-priced log markets, mills aren’t going to run quite as hard. So I guess that’s the way I would characterize log price movements from the various regions in the South. Does that make sense?

Anthony Pettinari: Yes, that’s very helpful. And you reiterated the full year harvest guidance, I think 1Q was a bit higher than expected on harvest volumes. You referenced weather. I’m just wondering if there’s anything else that was driving that in terms of labor availability or hauling, or in terms of maybe pulling forward some volume in some regions. I’m just wondering if you could give any color there.

Eric Cremers: So the old expression, you got to make hay while the sun is shining, is applicable when it comes to harvesting timber. We had an extended winter here in Idaho and it allowed our resource team, timberlands team in Idaho to harvest longer into Q1 than normal. So in Idaho, we got roughly 100,000 tons ahead of plan for the year. And that’s advantageous when you think about how our volumes tend to really peak as you get out into Q3. It really stresses the contractor pool in Q3 when that happens. But when you can get more volume in Q1, effectively you’re taking out volume from Q3. Now this particular year, that incremental 100,000 tons we got in Q1 is going to come out pro rata of volume that we were planning for Q2, Q3 and Q4.

So again, make hay while the sun is shining in Idaho. Now in the South, the spring generally has really wet weather and April has been just terrible. So our Southern team similarly got ahead of plan, they’re about 130,000 tons ahead of plan. And we expect to give much of that outperformance right back in Q2 since we’re having such a wet April. So really, this is all about managing through weather and also making sure that you’re utilizing your contractors as best as you can, particularly in Idaho.

Operator: We’ll take our next question from Ketan Mamtora with BMO Capital Markets.

Ketan Mamtora: First question, maybe a little more near term oriented, either Wayne or Eric. Is there a way to ballpark log cost relief in Q2 in the book product side from Idaho log prices easing?

Eric Cremers: So yes, we had lower log costs both in Q1 as well as we expect to have lower log costs in Q2. So going from Q4 to Q1, we estimate that our mills in total were favorably impacted by about $2 million. So St. Maries was favorably impacted by about $3 million and the other mills actually went the other way down about $1 million. So net, we were favorably impacted about $2 million. Now going from Q1 to Q2, we think other mills are going to be flat and St. Maries is going to see an additional, I don’t know, perhaps $3 million benefit in Q2.

Ketan Mamtora: And then I was wondering, Eric, you mentioned in your prepared remarks about some of the alternative streams of revenue in timberlands, whether it’s solar or carbon. As you think about the back half of the year ’24, what are the mile markers that we should be thinking about as we look at how this opportunity pans out over the next two to three years?

Eric Cremers: I would say — so the two most logical opportunities here — well, I’ll start with the first one, which is solar. We’ve already done a solar deal. We did one last year in Mississippi. We have a number of tracks that are under option right now with the solar developers. They make option payments to us each and every year. And so they can pull the trigger on one of those solar developments whenever they want. So it’s hard to predict exactly when those are going to happen but there are several properties that are under option right now. So that’s hard to predict. The other one, the carbon deal that we’re working on, we want to do this the right way. There was a lot of greenwashing that’s going on in the world right now.

We want to avoid being one of those companies. We want to keep our reputation intact. And so we’re very careful with the project that we’re working on. And it all starts with verifying the particular track that you’re talking about, how much carbon is there today and put yourself in a position so that you can turn around and measure that carbon each and every year thereafter. So that project is taking some time. We also need to get a private letter ruling from the IRS that this is good REIT income. The IRS takes its time. I think the key milestone for that carbon deal will be late this year or early next year, that’s our current guesstimate as the time line. And I think we can just update you on each of these calls with our expected timing for that particular project.

Ketan Mamtora: And just final question from my side. You all did not repurchase any shares in Q1. I’m just curious kind of how do you approach in 2023, especially related to kind of share repurchases, given some of the uncertainty in the market, obviously, cash flows this year are going to be lower, but the stock is also trading below NAV. So how do you approach that, and also keeping in mind that you’ve got the Waldo project that’s ongoing?